SARS-CoV-2 (COVID -19): Policy Challenges and Future Roadmap for the Indian Economy

As India continues its battle to contain the black swan risks posed by the SARS-CoV-2 (COVID-19) pandemic, a serious trade-off being faced by union and state governments is that of ‘life vs Livelihood’. Starting initially with measures in varying intensity across the country, the unprecedented nationwide lockdown which came into effect from March 25th is having a detrimental impact on the social and economic networks, people experiencing suffering, economy already tail- spinning into chaos has been further hit hard with millions of jobs and livelihoods at stake.

With postponed non-essential expenditures which also account for nearly 80 percent share in GST revenues, the aggregate demand continues to remain depressed. The supply chain disruptions both globally and domestically have brought production activity to halt in almost all industries. While in the service sector travel and tourism remains the worst hit so far, the effect will translate to primary and secondary sectors as well with falling investment, rising unemployment, and depressed consumption resulting in low real output. The macroeconomic outlook looks gloomy with World Bank estimates projecting GDP growth at 1.5-2.8 percent for FY21. At the same time, the global output is expected to shrink by 5-8 percent. Per day estimates for the cost of lockdown to the Indian Economy according to Acute Ratings & Research Ltd are 35,000 crores (USD 4.64 billion), implying the resulting loss in GDP till April 15 at 12.5 Lakh crore (USD 98 billion). As per the latest projections by Nomura and Goldman Sachs, the Indian economy may contract by 0.4% in the next fiscal year. The recent Centre for Monitoring Indian Economy(CMIE) figures reports that the unemployment rate has climbed to 24.6 percent (as on May 8, 2020) with more than 122 million labor force out of work.

The fiscal position of the state governments to meet their expenditure needs is also not in very good shape. As per RBI data on state finances, 67 percent revenues are expected to come from non-GST sources like sales tax and value-added tax (VAT), excise duties, stamp duties, vehicular and electricity charges, etc. and with constrained interstate transportation of raw materials and production activity at the halt, the lockdown has further deteriorated the revenue prospects. For the rest 43 percent share which comes from the union government, it is financed via GST collections and 80 percent of that comes from non-essential expenditures.

The halt to economic activity has resulted in mass migration accounting for more than 50 million workers moving back to their native villages or staying at the relief camps provided by the government. International Labor Organisation(ILO) in April warned that about 400 million workers constituting daily wage earners and migrant labor face the risk of being pushed into poverty which outnumbers the gains made in the last decade in poverty alleviation programs, pulling out almost 270 million from poverty. The condition of the informal sector which was still recovering from the previous two shocks of demonetization in 2016 and the GST in 2017 stands most vulnerable. The stress also lies with the micro-finance sector that provides support to innumerable micro and small enterprises throughout the country.

In terms of constraints, the government faces revenue shortage along with day by day mounting opportunity cost of lockdown and at the same time, the challenge to ensure provisioning of necessary goods across the country, the rising vulnerability of informal sector, small businesses fearing financial crunch, banks fearing credit defaults, borrowers having uncertainty about repayment, growing concerns of formal sector fearing mass layoffs, etc. all of which underscore the livelihood constraints were addressed by series of fiscal, monetary and macro-prudential measures.

On 26th March, the ministry of finance announced a stimulus package valuing approximately 0.8 percent of GDP with special attention to food –cooking gas, cash transfers to lower-income households, insurance cover to workers in the healthcare sector, and wage support to low wage workers. Prior to these 150 billion rupees were allocated to ramp up the infrastructure for healthcare and testing facility for COVID-19 which accounts for 0.1 percent of GDP. To address the concerns of borrowers, tax-filing, and other compliance burdens across various sectors were postponed. State governments also intervened with measures to support via direct transfers (cash and food rations) with varying magnitudes.

On the monetary and Macro-financial front, the RBI came all guns blazing on March 27 with a cut in repo rate by 75 bps and reverse repo by 90 bps to 4.4 and 4.0 percent respectively and injected liquidity of 3.7 trillion rupees (1.8 percent of GDP) tuned across CRR cut of 100 bps, increasing MSF to 3 percent of Statutory Liquidity Ratio (SLR) and Long Term Repo Operations (LTRO). Prior to this intervention, the Cash Reserve Ratio (CRR) exemption was provided to lower funding costs. With three month-moratorium on all retail loans to provide relief to both lenders and borrowers though there are varying opinions highlighting increasing cost for long term borrowings. Securities and Exchange Board of India (SEBI) announced relaxation in norms related to debt default on rated instruments. The RBI created a facility to cater to the state government’s liquidity needs on a term, with relaxed expatriation limits. Further, regulatory measures to ensure smooth flow of credit to micro, small and medium enterprises (MSMEs) sector were proposed. In the external sector to maintain exchange rate stability and keep the balance of payment under check, auction-based FX swaps worth USD 2 billion with a tenor of 6 months were announced on March 16. Foreign Portfolio Investment limit in corporate bonds has been increased to 15 percent of outstanding stock for FY 2020-21. Restrictions on the NRI investment in specified securities issued by the union government have also been removed. Further, the central bank is expected to go for a rate cut of 100bps.

A more severe trade-off in the process i.e. saving the lives of citizens is being faced in the healthcare sector. With growing cases day by day, an assessment by Brookings institution using data from national health profile- 2019 shows that there are 7,13,986 total government hospital beds available in India with an average of 0.55 per 1000 population (till 2019). For the elderly, who are more vulnerable to COVID-19, the average availability of beds is 5.18 per 1000 population. Many states do not even meet the national average i.e. 0.55 beds per 1000 population including Bihar, Jharkhand, Gujarat, Uttar Pradesh, Andhra Pradesh, Chattisgarh, Madhya Pradesh, Haryana, Maharashtra, Odisha, Assam, and Manipur. These states together constitute approximately 70 percent of the total Indian population. Bihar has acute shortage with just 0.11 beds per 1000 population while states like West Bengal and Sikkim fair better with 2.25 and 2.34 beds per 1000 population respectively. The national capital New Delhi has 1.05 beds per 1000 of population and for south Indian states; Kerala (1.05 per 1000population) and Tamil Nadu (1.1 beds per 1000) have better availability as compared to the national average. Total ICU beds are 5-8 percent of total government beds i.e. 35,699 to 57,119 beds. With the assumption that at least 50 percent of the ICU beds have ventilators, the ICU beds with ventilators are estimated in the range of 17,850 to 25,556 in the country. In the best-case scenario, a maximum of 57,000 ventilators is available to cater to the growing number of patients. To address these bottlenecks the government imposed a ban on essential drugs and medical equipment, ramping up the healthcare facility with the intervention of the army and other civil bodies.

CONCLUSION AND POLICY SUGGESTIONS

Working in coordination with the union government, state governments have laid plans to restore production activities in a phased manner by opening some industries, especially which serve as a means of earning a livelihood to daily wagers and the vast majority of informal sector labor force. Further extension of lockdown till May 17 (and beyond) by most state governments means further deterioration of states’ fiscal position and an overall increase in the opportunity cost of lockdown. With social distancing like measures, while the demand for healthcare services is being contained to an extent by limiting the pace of spread, the challenge still remains giving rise to a trade-off between life and livelihood with the disruption for all the sectors in the economy. Ensuring strict health protocols for each sector is important before heading for relaxation. Technological solutions can play a key role in ensuring such checks but the privacy issues must be taken into account. Also, while planning to open the economy in a phase-wise manner with the prime purpose to provide livelihood opportunity to daily wagers and other informal sector employees especially in construction and allied sectors and start to keep the economy moving, the challenge remains that scientists are still not ready with the silver bullet for COVID-19 and without a cure, the spread can only be limited with continued efforts. With significant ongoing transmission, restarting economic activity will only lead to more transmission. A resilient system in place for detecting, managing, preventing new cases is also important to consider.

The policy response made so far warrant an extension to buy time while the businesses continue to take a blow, informal sector labor remains involuntarily unemployed, credit growth remaining depressed due to uncertainty among investors even after the monetary expansion and fiscal stimulus. The banks with poor balance sheets will not help by any means in reducing the risks and measures like rate cut for credit expansion do not warrant revival in investment demand or safe lending. With businesses getting more prone to default risks, their creditworthiness is also limited, serving as a constraint to credit expansion measures being taken. Adequately recapitalizing the banks such that they can make provision for mounting NPAs will ensure better credit off-take is a risk averting scenario.

The proponents of cutting interest rates further, highlighting the scope of flexible inflation targeting (as inflation remained well within the band limits this month) along with low oil prices, should take into account that historically the differential in oil price has not been transferred by more than Rs.4 cut in the domestic markets and the recent OPEC decision to limit production will shoot the prices in the near term. Also, the transmission lag can offshoot the band in the future if interest rates are cut beyond a limit. The central bank should keep track of that.

For the direct benefit transfers being announced, studies have suggested MNREGA and Jhan Dhan, PM-Kisan card as means to provide finance for the immediate consumption needs of the non-earning population. In the process, the challenge remains how the social distance would be maintained if one has to visit the branch for withdrawal, increasing the risk for transmission.

Local bodies should be empowered more with financial provisioning as well as ensuring access to all basic necessities especially to urban laborers and the village farm community. While the efforts continue to identify the districts with a very little number of cases and brought to normalcy, the public authorities should plan for the second round effect also as worst-case scenario (both for districts and the nation).

The policy space remains limited in the current scenario, FRBM being already breached with escape clause provision, is bound to shoot far beyond the target. Securing the supply chain of agriculture especially in this harvest season is important. With restrictions on agriculture exports, many farmers are facing negative externality in governments’ pursuit of ensuring food security. With phased relaxation, this should also be addressed critically as it has implications for the macro-economy on net exports. A study by Khera (2020) has shown that NEFT is a better platform than the Aadhar Payment Bridge. The liquidity constraints of MSMEs should be addressed immediately along with the provision of deferral of payment to micro-financial institutions.

Global concentration on supply chains in China has taught a lesson to businesses and policy practitioners across the globe that diversification in manufacturing bases is also important to limit systemic exposures. The central government should take a proactive approach along with actors from state governments to explore what can be potentially offered to migrating businesses from China. In the process countries like Vietnam and other South Asian economies stand as potential competitors.

Fundamentally the macroeconomic problem that will remain for a while is a depressed economic activity, so consumption will also go down. The recent PMI numbers as reported by Bloomberg are also not welcoming with services purchasing managers index (PMI) shrinking by 43.9 points to 5.4 in April. Some people whose livelihood has already disappeared, others busier than ever and rest living as it is. The concern remains, how to share the risk burden of fallout in GDP, increasing unemployment. Any absolute amount of decline (say 5%) in growth will imply 5 percent of people not being paid. Whatever measures which are being taken right now are more of rescue or crisis control measures. It would be wrong to call it a push or stabilization measure. That will be the second phase when the SARS-CoV-2 (COVID-19) settles. Planning for stabilization is also crucial as we head for phased relaxation. The past episodes of major economic crises ranging from great depression till the Global Financial Crises(GFC) have highlighted that fault-lines in the economy always appeared with a lag to the crisis. Greater depth of crisis will require prolonged recovery. So, the benevolent state must ensure that along with monetary and other benefits must reach the ones who are at the frontlines and exposed to maximum risk. In the process crucial infrastructure should not be lost with work structures have been destroyed, banks running into turmoil (the recent policy measures and instruments by the RBI show its proactive approach in ensuring that fundamentals of the financial system remain resilient), firms going out of business. In the final phase after the rescue and stabilization are ensured, then we can work on measures to bring the economy humming back to normal as it used to be prior to SARS-CoV-2. In the third phase, we can expect traditional macroeconomic stimulus measures like what the Keynesian approach suggests.

Overall the continued response from the policy front has to be scaled up taking long term perspective into account while designing any stimulus package or proposing any intervention.