Face of Economy during Covid-19

Covid -19: Global overview and response

Coronavirus disease is having a high human and economic cost affecting countries worldwide. 

What is unique about The Great Lockdown crisis?

• On one hand to protect the human damage from Covid-19 spread, many countries are observing complete and partial lockdowns which in turn is damaging the economy. 
• Unlike any other crisis, the great lockdown is affecting both supply and demand side. 

What has been the response to deal with the economic crisis?

Many countries have come up with various monetary and fiscal measures ranging from 2% to 50% to contain the economic damage. These measures amount to more than $14 trillion as on 21st Apr. Fiscal measures worth $8 trillion and monetary measures worth $6 trillion have been made globally.

• U.S govt has committed a response worth $6 trillion which is approximately 25% of its GDP to fight the crisis.
• Germany has committed a response worth $2.2 trillion, amounting to approximately 50% of its GDP.
• India has committed $57.6 billion, amounting to 1.8% of its GDP.

These responses are as on 21st Apr 2020. The countries are expected to come up with more economic relief packages in near future. 

Face of Indian economy in times of Covid-19

Covid 19 has been an unprecedented event in the global economy to the effect that IMF has come up with a forecast of global economy shrinking by 3% in 2020 However, at the same time IMF has forecasted India’s growth rate to be 1.9% in 2020 which is the highest in the list of G-20 countries.

What are the expected possible scenarios?

During these uncertain times one of the below mentioned three scenarios are expected to pan out.

Scenario 1: Effective medical and economic response would lead to a sharp V shaped recovery, first half of 2020 would grapple with medical and economic crisis and second half of 2020 would witness a rapid exit from the crisis.

Scenario 2: Medical and economic damage would continue till 3rd quarter of 2020. The economy might start recovering from the 4th quarter with the support of monetary and fiscal measures. We would see a U shaped recovery in this scenario, this seems most likely scenario to happen in real world.

Scenario 3: Covid 19 health and economic crisis would prolong, it may return in waves making the crisis to continue till 2021, leading to an L shaped recovery. Scenario III seems least likely scenario to happen in real world.

What are the steps taken by India to tackle the crisis?

India is on its path to be fully equipped to fight the great lockdown battle.

• As on 19th April, approximately 25% of GDP in India was functional, the same is expected to grow to 50% post 20th April as certain aspects of lockdown are relaxed. The sectors expected to partially reopen are Agriculture, Minerals, Logistics, IT services, Rural Manufacturing and Construction, these efforts would help a lot of rural unorganised workforce, who are the most affected by the lockdown. Manufacturing companies will be able to start working with limited capacity utilisation in turn increasing exports.
• The sharp fall in oil prices would reduce the imports value and narrow the trade deficit. However, the exports are expected to reduce as well due to low global economic activity but the effect of lower exports would be lesser than the effect of lower import value.
• Foreign investors can now invest in certain govt securities via fully accessible route, easing the pressure on INR. This policy change is expected to bring in $320 bn over the year. FDI is expected to increase as foreign companies would prefer investing in India over China. India is leaving no stone unturned to make this happen. China was a global manufacturing hub, the great lockdown has created supply chain issues and U.S China trade war has inconvenienced investors, making them to avoid depending upon one country for their sourcing needs. Past reforms has improved India’s ease of doing business. Also, many state governments are planning to offer incentives to foreign manufacturers and have written to foreign political and business authorities to shift their commercial units to India.
• Monetary measures: Massive steps were taken by RBI to increase liquidity and credit flow. The same were well accepted by the market, nifty gained 274 points post RBI announcement.

1. Special refinance facilities of INR 50000 crore to NABARD, SIDBI and NHB will help reduce the pain in small scale industries, in agriculture sector, home loan lending, MFIs and NBFCs.
2. Liquidity coverage ratio reduced to 80% from 100%, giving more liquidity to banks.
3. Reverse repo rate reduced to 3.75%
4. NBFC can grant relaxed NPA classification to their borrowers, 3 months moratorium earlier allowed by RBI will not be considered in declaring the firms NPA.

These measures would push banks to lend further and not keep cash idle. Currently NBFC capital market borrowing maturing in next 3-4 months are of INR 150000 crores, around 50000 crores repayment is through market linked instruments, which are under a lot of pressure. Hence these monetary measures have come at an opportune time and would help reduce the damage. More such measures would continue to come in near future.

• Fiscal measures: Ministry of Finance announced fiscal measures of Inr 1.7 lakh crores by rearranging the previous planned expenditures and with the support of state govt. These measures target lower economic households, to ensure access to basic goods. Some of the major measures are listed below.

1. Food security worth INR 450 bn to be provided.
2. Transfer of INR 2000 to 8.69 crores farmers under PM kisan yojna.
3. Nrega wage rate would increase by Rs. 20 per day, expected to benefit 13.63 crore people.
4. Inr 500 to be provided to senior citizens, widows and handicapped.
5. Free cooking gas cylinders to be provided to Ujjwala beneficiaries, helping 8.3 crore families.
6. 24% contribution due for PF for next 3 months to be borne by government; all firms with up to 100 employees and employees whose salary is <Rs.15000/month 

Further fiscal measures are expected to be announced this week by the government. Fiscal stimulus of 5% of GDP is expected which would benefit Investment and consumption side of the economy.