Coronavirus will test the India's fiscal health

Source : SIFY
Author : Varun Sukumar
Last Updated: Tue, Mar 17th, 2020, 18:15:41hrs



As the Covid-19 coronavirus continues to spread across the world, the effects of the pandemic will have consequences for economies in the short and medium term. India is not immune to it, as RBI Governor Shaktikanta Das stated in a press conference on Monday. As states across the country have ordered precautionary measures including restrictions on travel and social gatherings; the number of cases had increased to over 120.

Impact on the economy and stock markets

The Indian economy over the past year had been in relatively rough territory with slowdown in growth and jobs numbers. While the pace has picked up slightly, the effect of the coronavirus will have an effect on growth for the next year. The reason being – closure of malls, theatres, minimal travel and curtailed consumption will have a compounded effect on the economy.

With consumption likely to slow down over the next few weeks, the role of the government is crucial in terms of fiscal policies. Public funds will be needed most by the healthcare systems across states. A scenario like this will require governments to divert funds towards these systems. A takeaway from countries like Japan and South Korea in dealing with the outbreak are the shortcomings of federal agencies in times of crisis due to bureaucracy. Sachchidanand Shukla, Chief Economist, Mahindra Group, in a column for Moneycontrol offers some solutions –

The government and businesses must brace for a longer and steeper pandemic-triggered hit than the single-quarter event as expected earlier. The government could enhance and expedite transfers and cover, especially for vulnerable groups and households. There can also be targeted sectoral incentives/ tax breaks/ deferrals for directly affected sectors especially the services sectors such as aviation, retail or leisure sectors”.

The United States, while seeing steady growth over the past few years, will likely see a significant slowdown in the economy over the coming year as the effects of the coronavirus continue to reverberate. The fact that China had to take drastic measures in the past couple of months regarding its manufacturing; the effects are now being felt as companies might have t look for alternatives or delay production of goods. Domestically, things needn’t get drastic. While the number of cases is relatively low, further testing might push that number higher in the coming weeks. Deepanshu Mohan, Assistant Professor of Economics, Jindal School of International Affairs, in a column for The Wire, writes on the economic impact –

“It is important to see the COVID-19 disruptive shock on the global economy – unlike the 2008-09 financial crisis – as both a supply and demand-side shock. My own view is that the composition of growth in India across sectors might significantly change if the global containment of virus doesn’t happen on expected lines. A few more months of lockdown in travel, restricted mobility of goods, and retail business shutdowns in the US, across Europe and parts of China, might inhibit many of India’s key sectors”.

Moody’s has forecasted that the pandemic will likely depress global economic growth to below 2.5%. The stock market in India and in many other countries has fallen by record numbers. The Economic Times editorial gives its view on the stock market forecasts –

There can be little doubt that the India growth story is intact in the medium term. Developments in the oil market, too, suggest continued nervousness among economic agents. Therefore, if the current wave of global panic has served to blow some froth off the prices of good Indian companies, rendering them relatively more attractive and affordable, long-term investors should choose this as an opportunity to buy”.

Role of the RBI

One of the main concerns is the banking sector and liquidity. As a result, the RBI announced Rs. 1 lakh crore infusion through a long-term REPO operation. Governor Das, unlike his American counterpart, did not announce a change in interest rates. The US Federal Reserve, earlier this month announced a rate cut of 50 bps, and another on Sunday to effectively zero.

This, after US markets had their worst week in decades with trading being halted on a couple of occasions. The RBI, instead of a rate cut, which will be revisited at its policy meeting early next month, as used other fiscal tools at its disposal. Sushant Hede, Associate Economist at CARE Ratings, in a column for The Wire, writes on whether there needs to be a policy cut by the RBI –

The pertinent question which remains is whether the central bank should lower rates amidst this novel pandemic challenge or maintain status quo while continuing its focus on retail inflation. The monetary policy committee of the RBI will have an interesting problem to chew on. It should note the transient nature of the supply shock and adopt a status quo in the April policy meeting. Rate cuts can perhaps wait, but RBI’s continued liquidity support and easing credit requirements to rebuild supply chains is indispensable for now”.

In his press conference, Das stated in part, “Sectors such as tourism, airlines, hospitality industry and transport are suffering a loss of activity”. A major impact will be on the macro-economic aspects of trade. With China having the largest number of cases and large manufacturing provinces effectively under lockdown, India’s export earnings will take a hit. According to the United Nations Conference on Trade and Development (UNCTAD), India will be the 10th most impacted economy due to supply chain disruptions in China.

What a pandemic such as this has shown is just how interdependent economies are. When a country such as China experiences any shocks to the system, the effects are felt globally. With India being the second most populous country, and a major economic player in the continent, it feels the effects to varying degrees. The Hindustan Times editorial offers a look ahead –

On a somewhat longer time horizon, India must contemplate a new age of constrained globalisation. The international political economy has been geared to ever-closer integration and the lowering of barriers since World War II. In a post-pandemic world, many companies and governments will seek security from diversity and will put India back in the investment spotlight. India, long a reluctant globaliser, will find this new environment less disconcerting than others, and should plan means to leverage this advantage”.

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