In a very crucial step towards ensuring the food and financial security of the most vulnerable section of the society amid the lockdown, the Government has come up with the Rs. 1.7 lakh crore Pradhan Mantri Garib Kalyan Package.
The announcement of the 21-day lockout beginning March 25 and ending April 14 is well-intentioned, absolutely essential and well-timed as 10 days either fall on holidays or are on weekends. This will mitigate people’s hardships and help us navigate through the most difficult times in perhaps India’s history, possibly much more than the global financial crisis.
Corona trajectory so far shows that only 4 countries have been able to flatten the curve till now: South Korea, Japan, Singapore & Hong Kong. Theses counties either did a lot of testing or followed social distancing norms ultra-strictly. As of now, the number of positive cases in India is rising and is at 665. This will go up substantially in the next few days now that more testing will be done across different states.
One positive sign, as far as fatalities are concerned, is the fact that India has started the process of lockdown pretty early as far as the number of positive Corona cases is concerned. Till date, India has recorded 11 deaths. A study shows that China started its lockdown after around 30 deaths, Spain locked down after around 200 deaths and France after around 175 deaths. So far, Italy has recorded the highest number of deaths, with 800 people losing their lives before lockdowns started.
However, while the economic impact caused by the epidemic looks likely to be large, the long-run effects on the economy can only be less severe as long as the Government and Central Bank act quickly and decisively to contain the fallout. Why the impact on India will be large?
Once the epidemic is over, there will be some catch-up in growth as businesses restock inventories and consumers make up for forgone spending. But there will be a difference between the shape of the post-epidemic recovery in manufacturing, which will probably experience a sharp rebound, and the services sector, which may struggle for a longer period of time, as consumers will not be able to make up for “Social Consumption’ – such as meals out, concerts or travel – that has been foregone now.
Hence a properly defined fiscal support / forbearance is an absolute necessity for sectors like Aviation, Hotels, Automobiles, Food Processing, Textiles, Gems & Jewellery, Pharma and Ports where the impact is hardest. Such forbearance package should be uniform and for all segments, and not just SME. That would also encourage banks to extend credit to these businesses, knowing that they will have higher revenues once the epidemic ends.
What would be impact on India’s GDP because of such a lockdown? An estimate shows that over a 60-year period, global GDP declined only once annually in 2009 by 1.7%. Even if we assume on a most conservative basis that global GDP declines at nearly similar rate in 2020 (although independent estimates suggest a significant contraction of as much as 4%) and given India’s share in global GDP currently at 3.5% implies a contraction of 2% of real GDP in FY21 purely because of India’s integration with the global economy through trade channel and social consumption channel.
We estimate another 1.7% impact on real GDP because of 21 day lockdown in FY21 resulting in at least 70% of the economy at a standstill. We thus peg our FY21 GDP estimate at 2.6%, with a clear downward bias, with Q1FY21 GDP numbers witnessing a contraction. FY20 GDP estimates could also see a downward revision from 5% to 4.5% with Q4GDP growth at 2.5%.
The total cost of the lockdown is at least Rs. 8.03 lakh crore in nominal terms / output loss of at least 4%, an income loss of Rs. 1.77 lakh crores and a loss in capital income of Rs. 1.69 lakh crores. The income loss is maximum in Agriculture, Transport, Hotels, Trade and Education and these sectors will have job losses (see inoperability table). However, the economy could recover potentially faster the quickly the stimulus programme is in place. With US unemployment projected to be 32%, an astonishing number even if temporary, the implementation of a stimulus package on a priority basis is of the highest importance.