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The end of March was a time to be cheerful as far as the economy was concerned—the GST collections had swelled and it looked like that the debate on the revival was sealed in favour of the economy. However, the disturbing rise in the number of virus infections has brought in a sense of déjà vu as governments have reacted in the same way in which they did in 2020. Announce lockdowns. It does appear that the lessons have not been learnt. In 2020, it could be said that the event was a shock to the world and hence we did what everyone else did. But this time it shows lack of preparedness, which is not surprising because as the infection cases fell to less than 10,000 per day by February, every authority took credit for the same and we assumed that herd immunity had set in and that the second wave was an affliction of the West. It was typical Indian hubris speaking.
The lockdown is virtually ‘complete’ in Maharashtra, while major cities like Bangalore, Delhi, Jaipur, Ahmedabad, etc, have announced night curfews and have restricted movement of people. It is ironical that while various states had been warning the public of dire action and lockdowns, political expediency took over when it came to elections in the five states and Union territories where none of the rules of social distancing were maintained. Therefore, ambivalence in approach has caused the citizens to doubt the seriousness of such lockdowns. Hence, while in 2020, despite the hardships, there was no criticism against the act of ‘lockdown’, this time scepticism clouds the air.
Economic growth depends on consumption, and if people cannot consume, there is no need to produce. Using this thought, one can say that if Maharashtra, which accounts for 15% of GDP, decides to close down with caveats, there is a major risk of household spending coming down. This means that there is a chain reaction through backward linkages which feeds into production lines that have not been banned. But with people not allowed to buy, say, clothing in the state either through online or offline routes, the incentive to produce comes down. Therefore, it is not just a case of services being affected, but also manufacturing of non-essentials. Hence, the list starts from hotels, travel, entertainment, retail, malls, to industries like textiles, electronics, automobiles, etc. There are some anomalies in Maharashtra where garages can run, though shops selling spare parts cannot be opened!
From the business standpoint, the uncertainty is very disturbing. For business to be conducted, certainty in the rules of the game is necessary. This is a fundamental factor that defines the ‘doing business’ climate. It has been seen in Maharashtra, for example, that taxes had to be paid by the hospitality industry for the new financial year by March-end, and then in a couple of days they were told to close down. Rental lease contracts were negotiated for the year based on the premise that these enterprises could operate. The services industry will be left wondering how long this lockdown lasts, as experience shows that even last year no one knew. The initial 21 days drew a lot of appreciation as it made sense, but soon it was realised that such lockdowns had to be extended endlessly as the infection rates increased. What looks good on paper does not quite work the way it is planned.
The problem today is that while lockdowns and night curfews have been announced for a specified period of time, no one is sure about what would be the situation in the city or state or the nation on April 30. Once the elections end and the Kumbh Mela culminates, the number of infections will rise exponentially provided people are tested, and the number of 1.8 lakh new cases per day that was registered recently will seem very modest. The issue really is what do governments do then? Announce more lockdowns with more stringent measures?
Last year it was seen that while a lot of largesse was announced to look after the deprived class including migrants, the enthusiasm was lost along the way. While announcements were made on cash transfers, there were complaints that this never happened and hence even the Budget for the central government did not show all these numbers. Sure, administrative issues were there on the delivery side as several states were involved, but by November even the announcements stopped. Currently, the Centre is not involved in announcing lockdowns, but states have taken on the role of bringing in the restrictions. Maharashtra has announced a package of around Rs 5,500 crore, which is encouraging. But the critical question is whether this can be delivered to the targeted group in the next 15-20 days? Does such a list of beneficiaries exist or is this an empty announcement? This is important because once the lockdown is in place, those who are out of work will require aid immediately.
For a country that is still struggling to deliver vaccines to the public, distributing this amount will be a big challenge as beneficiaries have to be identified. Hence, this may be another loan waiver scheme where states announce large numbers but finally do not disburse more than 20-50% of the amount over a period of time.
India’s GDP for FY22 would be around Rs 145-150 lakh crore as per projections made by different agencies. This would mean approximately Rs 12-12.5 lakh crore a month. The lockdown will affect this monthly GDP quantum for sure, and even a 10% cut-back would mean a loss of Rs 1.2-1.25 lakh crore a month. GST collections are normally supposed to be 8-9% of this amount, though these had scaled up to 10% in March. A one-month semi-lockdown would also mean a loss of Rs 12,500 crore based on the 10% rule. A concern for the banking sector would once again be the asset quality because closure of business, especially for SMEs, will mean loss of income and diminishing ability to service debt. While there are still hopes that on account of the lockdown there could be another moratorium announced by RBI, one cannot be too sure. The receivables cycle of all concerned companies will take a hit once again on this score. The other issue is with employment. There are signs of migrants once again returning home as there is fear that, like last year, lockdowns could get elongated and will affect their jobs and incomes.
Therefore, the economic impact of this series of lockdowns will be significant, though not as sharp as that of last year because of the scale. Even state budgets will get affected with fall in consumption and hence we will be rewinding the clock once more, albeit not knowing when to let it run in the right direction.
The author is Chief economist, CARE Ratings, and the author of ‘Hits & Misses: The Indian Banking Story (SAGE)’. Views are personal