Recovery could be distant as economy shrivels due to Covid-19
The Covid-19 pandemic threatens to push the global economy into recession and prolong the slowdown in India.
Barho Mandal, a daily wager in the national Capital from Bihar’s Aurangabad, made a dash to the New Delhi Railway Station early on March 21, a day ahead of a near countrywide lockdown, to catch a train back home.
He couldn’t find one. There were simply far too many people wanting to go back home. Indian Railways cancelled all passenger trains on March 22.
“I am counting the money I have. Not much. I can’t afford to stay put without work.”
Nor can millions like him.
The government approved the use of money accumulated in the Building and Other Construction Workers’ Cess Fund by state governments to make a one-off or a monthly stipend to 350 million construction workers, but Mandal -- he makes a living pulling a rickshaw -- will not benefit from this. Only workers registered with state welfare boards qualify for the stipend.
The make-work National Rural Employment Guarantee Scheme (NREGS), one of the surest ways of supporting jobs, has naturally been disrupted in many states because of social distancing and lockdowns to curb the spread of coronavirus.
“Job cards are just lying around. The scheduled work in my area is disrupted,” said Nabin Saharia, a registered NREGS contractor from Assam’s Kamrup (rural) district.
With a billion Indians under lockdown, that isn’t surprising.
The recovery (however, mild) that was being predicted for the Indian economy in 2020-21 is now off the table, say experts. Indeed, even the estimate of 5% growth in 2019-2020, may not be met now. The Covid-19 pandemic threatens to push the global economy into recession and prolong the slowdown in India.
Social distancing has begun to hurt services and consumption; and the lockdown has hit airlines, hotels, restaurants and shopping malls hard. Workers have been confined to homes, dealing a blow to wage earnings.
Few expect normal services to resume in the short-term. Analysts say the country can reliably blunt the blows if it “helicopter-drops” money, a jargon for direct financial support to the poor along with a “fairly large” stimulus for the industry.
A silver lining, analysts say, is that agriculture should be the least vulnerable sector given that it largely consists of subsistence farming – where farmers mainly grow for their own consumption. But if fertiliser imports falter, even the farm sector, which employs half of all Indians, could be hit.
Financial firms are therefore building forecast models. “Even the government will do that. Recovery looks difficult. Projections are the best tools available,” said economist Manoj Kumar Panda of the Institute of Economic Growth, Delhi University.
Economists are looking at the so-called “channels of transmission”, or the pathways that economic shocks will travel to reach various sub-sectors of the economy due to the pandemic. Broadly, these are two: external and domestic, said Dharmakirti Joshi, chief economist at credit rating agency CRISIL Ltd. For now, he added, external economic shocks are more dominant.
On the external front, India’s goods trade dependency on Coronavirus-affected countries is significant: Eurozone, China and the rest of Asia Pacific account for 48% of India’s exports and 50% of imports, according to official trade data. So, supply disruption, including of raw materials, are already straining some segments of the manufacturing sector, said Nitin Kamble, the head of marketing at Comtrade, a commodities trading firm.
Domestically, consumption demand is likely to be slow because of social distancing. Some of this is being offset by other modes of buying such as home delivery. The other downside to growth comes from the financial-sector stress that is seeping into private sector banks now.
“In any case, India has little policy firepower to give a meaningful push to growth and the pandemic is making it more difficult. While there will be a steeper deceleration in global growth and India’s trade, what is unclear is the extent of the impact on the economy through domestic channels of production (supply) and consumption (demand),” said Prasad Koparker, senior director of CRISIL Research.
India’s trade composition has undergone a marked change in recent years, with services exports showing rapid growth. “These now account for 41% of total exports,” Koparker said. “So far, services exports have been resilient but with weaker growth in major trading partners, this, too, could take a hit.”
The IT services sector provides direct employment to nearly four million people and indirect employment to more than 10 million, according to Tata Consultancy Services data.
In the past three financial years, 2016-17, 2017-18 and 2018-19, the economy was already hobbling. Analysts had widely attributed the lingering sluggishness to the Goods and Services Tax, pointed out weaknesses in manufacturing and a hit to the informal economy from demonetisation.
“I think we are going to see a deterioration in the coming quarters. What will be the magnitude (of this) is an unfair judgement to make,” said NR Bhanumurthy of the state-run National Institute of Public Finance and Policy, New Delhi.
Experts such as Koparkar said a serious threat emerges from two developments. One, if the pandemic is not contained by April-June 2020 globally and makes the global slowdown more severe. And secondly, he said, if it spreads rapidly in India, affecting domestic consumption, investment, and production. “These would further hurt confidence and financial markets.”
Depending on how the pandemic spreads, large industrial and small manufacturing clusters could face shutdowns, just like China’s Hubei province, which is the largest producer of fertilizer and the hub of that nation’s auto industry.
“We have thousands of small-scale clusters across the country, such as textile hubs in Panipat or Jalandhar or Tiruppur that employ millions. That’s why controlling the spread is key, but social distancing is in itself economically debilitating,” said Prof Vinay Vyas of the Jaipur-based India Socio-Economic Development Centre, a think-tank.
To be sure, some of these hubs are already in economic distress on account of a sudden fall in exports.
Most expect gross domestic product or GDP to drop. “We expect GDP growth to slide further to 4.0% year on year in quarter one of 2020, from 4.7% in quarter four of 2019. For 2020, we have lowered our GDP growth forecast by 0.7 percentage point to 4.7%, which would mark a slowdown from 5.3% in 2019,” said Sonal Varma, an economist with Nomura, a securities firm.
A recession across Asia-Pacific is “guaranteed” due to the deep first-quarter shock in China and the shutdown of activities across G7 economies, according to a note by Shaun Roache, chief economist, Asia-Pacific of S&P Global.
While the Union government is readying for an industrial stimulus and making internal projections, research firms have come out with their own assessments relative to how the pandemic spreads. Varma of Nomura Securities predicts three scenarios: base case, bad case, and severe case.
In the base case, the least worrying scenario, Varma said India would be the least vulnerable economy to Covid-19 in Asia excluding Japan. “It is not a part of the China-centred global value chains. These factors should limit the direct impact from an economic slowdown in China,” she said.
However, China does produce a significant share of India’s imports (14.2%) and any disruption in China’s production will reduce imports of primary and intermediate goods, disrupting domestic production.
“The disruption of these imports would adversely affect key industries such as pharmaceuticals, autos, electronics, solar and agriculture, and could add to inflationary pressures as inventories are depleted,” Varma said.
A bad case scenario for India will apply in the absence of a good early check on the spread of Covid-19. Some factories may need to halt production due to input shortages.
In the severe case, the most serious scenario, where the virus becomes a global pandemic, as is currently the case, Varma said she expected GDP growth would slump to 3.3% in the first half of 2020.
The most serious threat at this stage is to urban manual workers and disruptions in NREGS work, Delhi University’s Panda said. As joblessness and wage earnings are expected to be severely hit, amid lockdowns, several states have announced measures to directly put money into the hands of people.
Kerala announced a Rs 20,000-crore economic package to deal with the outbreak. The Delhi government has decided to give one-month free ration to nearly 7.4 million beneficiaries under the National Food Security Act, apart from doubling widows’ pensions for a month.
“So, what is needed at the federal level now is that the Union government should quickly front-load these spending measures,” Bhanumurthy of the NIPFP said.
Front-loading refers to advance payments of all centrally funded doles. According to Panda, since NREGS is likely disrupted, the government could possibly anyway pay the wages for workers registered to work this month.
“This is not the time to look at the fiscal deficit. Unfortunately, fiscal stimulus even in abnormal times has become a bad word. That needn’t be. How else do you cope?” asked Bhanumurthy.