The coronavirus pandemic has offered countries a tough choice, to either allow the disease to eat through the population before they achieve herd immunity and slow down the spread, keeping economic activity largely steady, or opt for a lockdown to lower disease incidence that can ‘flatten the curve’ and ease the burden on healthcare facilities, but at the cost of most economic activity. India’s choice of the latter, protecting lives over livelihoods, was a difficult one, as the country was already in a slowdown mode, clocking just 4.7 per cent growth in the third quarter of 2019-20. But having bitten the bullet, and effected a 21-day lockdown, what matters now is how India crafts an exit strategy for all business activity if the lockdown is lifted on April 15.
The government now faces an enormous task, to restart the economy before industrial paralysis, job losses and dried-up cash flows become another cause of death and despair. Former RBI governor Raghuram Rajan says India is facing “perhaps its greatest emergency since Independence”. He points out that even the 2008-09 global financial crisis was an extraordinary challenge, “but our workers could still go to work, firms were coming off years of strong growth, our financial system was largely sound and government finances were healthy. None of this is true today.”
THE EXIT STRATEGY
Sources say that hectic preparations are under way to chalk out an exit strategy. Since the pandemic is not over, an immediate, nationwide lifting of the lockdown might end up doing more harm than good. Nonetheless, the economic paralysis must be addressed, if only to ensure that essential items like food and medicines remain available in markets. And given the interconnected nature of modern economies, for example, food processing units cannot operate without agriculture, transport, fuel and packaging industries, this means that even if the lockdown is lifted in phases, it is crucial for interdependent industries to come online sequentially. Secondly, even ‘non-essential’ industries like automotives and textiles must get back to business soon, or else job losses and slashed salaries will lead to a massive population unable to buy essentials. Madan Sabnavis, chief economist at Care Ratings, cautions that in a worst-case scenario, this could even lead to food riots.
Prime Minister Narendra Modi has asked his ministers to prepare a list of 10 major decisions and 10 priority areas for each ministry. The government could even take a staggered approach towards lifting the lockdown, continuing it in so-called ‘hotspots’, places where the incidence of the disease has been identified in large numbers and which are vulnerable to community transmission, while opening up the rest of the country. A senior minister, speaking on condition of anonymity, says that the government is considering permitting all industries to resume operations, as long as strict adherence is maintained to sanitation and social distancing protocols.
The economic question remains this: how will the government prioritise the sectors that must be restarted immediately? The answer depends heavily on two factors, which factories produce essential items (or those necessary for their production), and if they are located in hotspots. A small note of cheer is that, as per media reports, only 146 of India’s 700-plus districts have reported five or more cases of COVID-19, accounting for 3,266 cases, 80 per cent of the national total of 4,067, and that many major industrial areas have reported very few cases. For instance, Delhi, with the third-highest number of cases as of April 6, does not figure in the top 20 manufacturing states. Gujarat, with the highest factory output, is ranked at 11 in terms of COVID-19 incidence.
The National Sample Survey Office’s Annual Survey of Industries shows there were 195,584 factories operating in India in 2017-18, employing 15.6 million people. Many industrial centres, such as Tirupur and Sriperumbudur-Oragadam in Tamil Nadu, Kutch, Jamnagar, Bharuch and Mehsana in Gujarat, Raigad and Aurangabad in Maharashtra, Bhilai, Raigarh and Korba in Chhattisgarh, Rudrapur in Uttarakhand and Baddi in Himachal Pradesh, have reported very few cases, say media reports quoting the survey. In theory, this means that a large percentage of India’s manufacturing output can come online post April 15 (if sanitation norms are well enforced), even if they do not produce essential items. This is where the private sector needs to play a big role, companies need to figure out how to make social distancing part and parcel of the way they do business. Factories that have a high level of automation will be the apt ones to immediately start business.
Maruti Suzuki, for instance, has formed cross-functional teams to plan and execute the process. These teams have daily meetings with MD & CEO Kenichi Ayukawa to take stock of the progress of the preparations. The company is benchmarking itself against the best practices adopted in countries such as China and Japan when it comes to resuming production by setting up social distancing protocols. Meanwhile, JSW Steel is preparing to start operations at its Karnataka, Maharashtra and Tamil Nadu plants that together can make 18 million tonnes of steel a year. Nonetheless, D.K. Joshi, chief economist at Crisil, says, “Restarting the economy is not simply a matter of switching it on.” Some sectors, like aviation and hospitality, where social distancing is difficult, if not impossible, will take months to resume operations and, in that time, all industries linked to them will suffer a lack of demand.
Joshi also points out that some sectors need to resume normal operations immediately, such as agriculture, which contributes around 14 per cent to the GDP and employs about 50 per cent of the population. With the rabi crop cycle approaching its end, states are pulling out all the stops to ensure a successful harvest as that will be essential for food security and to ensure income for the rural masses. Some initiatives include door-step wheat procurement, expedited curfew passes for farmers, labourers and machinery suppliers, as well as plans for staggered entry permits for farmers to local mandis.
Photo by Shekhar Ghosh
Businesses now find themselves between a rock and a hard place. A survey by CII (Confederation of Indian Industry) of 200 CEOs revealed that most expect revenues to fall by over 10 per cent, and profits by more than 5 per cent, in the two quarters from January to June 2020. More than half predict job losses. Many say that despite the appeals not to lay off workers or cut salaries, the lockdown has dried up their cash flows, leaving them with no choice. “We are requesting our members not to lay off employees,” says Vikram Kirloskar, president of CII. However, some firms are already edging toward that. For instance, SpiceJet, which has had to cancel all commercial flights, has reportedly announced a 10-30 per cent salary cut, while Air India is considering cutting salaries by 5 per cent.
A senior minister, speaking on condition of anonymity, says that between 1.5 million and 2 million jobs are at risk. Some of this is already visible: a survey by CMIE (Centre for Monitoring Indian Economy) says that the unemployment rate in the last week of March was 23.8 per cent. This metric had been on the rise even before the lockdown and stands at 8.7 per cent for the month of March. ‘This is the highest unemployment rate in [almost four years]… since September 2016,’ wrote Mahesh Vyas, the firm’s CEO, on its website.
A major issue for firms is simply a lack of cash. “If you look at the BSE 500, there are 100-odd companies that have cash, while 400 have debt,” says Nilesh Shah, MD of Kotak Mahindra Asset Management. “For every company that has a cash surplus, there are 4-5 borrowers. There is a serious cash crunch coming, [everyone] from retail companies to a power plants to steel plants will face challenges.” He says there is no option but for the government to go in for a fiscal stimulus. “This is a long battle. Many, many industries will require support, otherwise [we will see] assets being sold to foreign investors.”
A Noida-based exporter laments that all of their orders to the US and the UK, even those that are currently in transit, are on hold. Payment terms are being re-negotiated, from within 45 days to four months. “All our working capital is stuck in fabrics. Banks are not extending any fresh credit and buyers have stopped making any payments. We can only afford to pay salaries for March,” he says.
Across the board, firms are grappling with how to pay salaries and meet operating expenses. They are also unsure if labour will be available when operations resume. A staggered lift of the lockdown also raises the question of ‘deferred vs destroyed demand’. The former includes purchases that are put off until the situation improves, like consumer durables. Destroyed demand relates to expenses that consumers simply do without, like trips to restaurants or movie halls. “The 21-day lockdown could impact GDP by 4 percentage point,” explains Shah. “If this is strengthened (such as by a staggered lift of the lockdown), demand keeps getting destroyed. We have to ensure that destroyed demand is minimised, and deferred demand is not deferred for too long.”
“The government should utilise the lockdown period to identify the areas that are virus-free and those that are hotspots,” says R.C. Bhargava, chairman of Maruti Suzuki, adding that it should completely cordon off hotspots to ensure that factories elsewhere can be brought online. He also says the government should implement measures to bring buyers back to the market, such as through tax cuts on products.
Since, in all probability, businesses will reopen in a staggered manner, prioritising crucial sectors is paramount. This will also help prevent overcrowding in industrial areas and ensure that social distancing is maintained. The first priority should be to ensure smooth supplies to and from factories producing essential items, food and dairy, medicines and medical devices and so on. And as the lockdown is lifted, firms and factories will need their stocks of raw materials replenished, which means that industries that supply them will have to be brought online first. Meanwhile, state governments are pushing logistics companies to normalise their operations and assist farmers and procurement agencies in the harvest season. Sources in the transport industry say that only 30-35 per cent of India’s truck strength is operational at present, drivers are reluctant to get back to work for fear of the disease.
Sabnavis says that the period from April to September will be crucial, and that all efforts should be made to restore business confidence. The economy will be in shutdown mode for at least six months, during which the vulnerable sections of both society and industry will need support. “An income tax waiver for individuals and corporates, added to a cut in the Goods and Services Tax (GST) to give a stimulus of Rs 2 lakh crore should be considered,” he says, adding that both central and state governments should consider increasing the fiscal deficit limit up to 10 per cent. Though this will increase inflation, he argues that this is a manageable problem, as India has been going through a low inflation phase for the past few years.
Many of the worst-hit industries are in the ‘non-essential’ sectors, including aviation and tourism, hospitality, textiles, automotives, real estate, construction, retail and financial services. The problems are myriad, as are the demands for support. For instance, the automotive sector, already in dire straits, is reeling from the production lockout and the closing of dealerships. Industry leaders have asked for GST rate cuts and deferred payment deadlines and cheaper auto loans for consumers, among others. Similarly, firms in the real estate sector have asked for a six-month relaxation of RERA (Real Estate Regulatory Authority) compliance requirements and for an extension of the 90-day deadline after which financially-stressed projects must be classified as NPAs (non-performing assets) by banks. The Retailers Association of India has asked for financial support from the government for salaries to limit layoffs, else, the sector may have to cut payrolls by as much as 20 per cent. It has also asked for GST relief, as well as support in paying taxes and loans, among other things. Industry body CII has asked for a moratorium on loans for six months and lower interest rates. Also proposed is a payout to people hospitalised due to COVID-19 or in quarantine.
WANTED: A BIG STIMULUS
The government’s revival plan should be far-reaching and no-holds-barred, say experts. It should aim at getting businesses not just back on track, but flourishing, ensuring that they create employment, putting money into the hands of those at the bottom of the pyramid so that they can get through the rest of the year without worrying about going hungry. The revival plan must also build up India’s manufacturing capabilities to allow it to benefit from the global opportunities that will arise in the post-coronavirus world.
To help the poor and non-salaried lower middle class, Rajan proposes that the Centre and the states together implement a broad-based recovery plan that includes support for essentials like food, healthcare and shelter. He also suggests that small businesses be given more favourable loan terms. However, this could also be an opportunity to introduce socio-economic reforms. “It is said that India reforms only in [times of] crisis,” he says.
The clamour for the government to spend its way out of the crisis is immense. Many other countries are attempting the same, the US passed a rescue package valued at over $2 trillion (roughly 10 per cent of that country’s GDP), while the UK has announced one worth £350 billion (about $430 billion), nearly 15 per cent of its GDP. Japan has announced a package of almost $1 trillion (equivalent to 20 per cent of its GDP), while Singapore is on its third rescue package, this one worth $3.6 billion (around 12 per cent of its GDP).
Some argue the Indian government should take a line similar to its response to the 2008 financial crisis. At the time, the Reserve Bank of India had slashed policy interest rates from 7 per cent to an effective low of 3.25 per cent, with the government expanding the fiscal deficit limit from 2.5 per cent of GDP in fiscal 2008 to 6 per cent in fiscal 2009 and 6.5 per cent in fiscal 2010. ‘As a result, India’s GDP growth rose to pre-crisis levels in 2010,’ argued Ananth Narayan, associate professor at the S.P. Jain Institute of Management and Research, in a financial daily.
Shamika Ravi, senior fellow with the Brookings Institution, points out that after World War II, there was a phase of high economic growth because governments resorted to massive stimulus measures. Arguing for just such a bold stimulus, much larger than the Rs 1.7 lakh crore announced by finance minister Nirmala Sitharaman on March 26, which is less than 1 per cent of GDP—she says, “We need to be putting out a stimulus of 4-5 per cent of the GDP. The first priority should be wages and salaries.” At 5 per cent, we are talking about a stimulus package of approximately Rs 10 lakh crore. D.K. Srivastava, policy advisor with EY India, makes a similar argument, saying that the relief package needed to be doubled. “This package is not putting money in the hands of lower income groups. We need a very major package.” Ajit Ranade, economist and senior fellow at the Takshashila Institution, also argues for the same. “We need an immediate stimulus to act as a safety net for those whose income has suddenly stopped (like daily wage earners). For nearly 90 per cent of our workforce, the lockdown has meant a loss of income.” He also says that the government needs to offer the private sector a massive dose of support via fiscal incentives and economic reforms.
Vijay Kelkar, chairman, and Ajay Shah, professor, at the National Institute of Public Finance and Policy (NIPFP) in Delhi, also argue for reform, in an article in a financial daily. ‘This is a good time to liberalise capital controls, and to remove barriers faced by non-profits, so as to foster the inflow of financial and philanthropic capital,’ they write. They also advocate a ‘linked reform’ of GST and petroleum pricing, arising from the opportunity provided by plunging oil prices. This includes moving the GST into a single low rate with a universal base, and merging petroleum products and coal into the GST.
The government appears to be adopting a strategy of staggered support, based on how the crisis unfolds. Sources say its first priority was to protect the most vulnerable, which is why the stimulus announced by Sitharaman primarily addressed the lowest income earners. They say that while the government will adopt a band-aid approach for sectors that are bleeding the most, it is also working on using the crisis as an opportunity to bring in reforms. The government has also been proactively seeking inputs from leading economists and policy strategists to devise its exit strategy from the lockdown. Several of those who india today spoke with had also been contacted by the Prime Minister’s Office to get their assessment of the crisis. The government did, to be sure, take up some necessary steps with alacrity. When the lockdown was announced, Britannia Industries approached the Centre, saying that while they had the products, they didn’t have the packaging materials. Packaging materials were immediately included as part of essential supplies.
Out of gear. Photo: Getty
RBI governor Shaktikanta Das has announced a slew of measures, among them a 75 basis points (0.75 per cent) cut in the repo rate, reducing the banks’ cost of funds; a 1 percentage point cut in the cash reserve ratio (CRR), which leaves banks with more money to lend; a three-month moratorium on term loan repayments; and a deferral of interest on working capital loans. But market-watchers say the RBI acted late, and there is a trust deficit between the central bank and the market.
While the RBI has pumped in liquidity of Rs 4 lakh crore and interest rates have been cut, they have not been passed on to consumers. Meanwhile, industry is pitching for an increase in standard withdrawal limits from 20 per cent to 25 per cent. This could lead to rising NPAs, but that’s a risk India should be willing to take at this point, says a market investor. Some have advocated the RBI print more currency, but Rathin Roy, director at NIPFP, says this should be the last resort, as it can lead to hyperinflation. “There are considerable unspent balances, which can be mobilised and extended to states. A specific COVID-related ‘consol bond’ (also called perpetual bond, with no maturity date) could be considered, and, then, we may look at other options such as printing more currency,” he says.
Subhash Chandra Garg, former finance secretary, says the government should provide a fiscal package for businesses and workers. “The March 26 package targeted the elderly and widows, the unemployed and rural Indians, they need the help. But at least 100 million have lost jobs (in construction, mining, etc.), these workers can’t be supported by their employers, the government must step in.” Atanu Chakraborty, secretary, Department of Economic Affairs, adds a caveat: “Even industry has to think innovatively. We have to be in reform mode to speed up the economy.”
Chakraborty’s assertion about reforms has many adherents among watchers of the Indian economy. For example, some think a single-rate GST regime would be a far-reaching incentive for industry, others advocate bringing petroleum within the GST ambit. The RBI could possibly do more for better transmission of interest rate cuts to facilitate access to credit. And so on. Nearly every expert we spoke to said this extraordinary crisis requires extraordinary fixes. All agree this is no time for fiscal conservatism, the government must think bold and spend big, possibly in multiples of what it has done so far. It must do this to protect both livelihoods and businesses, big and small, the lifeline of our economy.