Monday’s near-4,000 point or 13 percent fall in the Sensex, marks the biggest decline ever in the Indian stock market in a day. Stock market analysts see the precipitous fall as a reflection of the lack of fiscal, monetary preparedness to tackle the economic consequences of the COVID-19 pandemic that has infected over 400 individuals and claimed seven lives so far.
Several governments across the world have announced fiscal stimulus measures to help their respective economies stay afloat.
The US Federal Reserve announced the biggest emergency measures since the 2008 global financial crisis to fight the virus scare. The US government may be planning a bigger package as the pandemic threatens wider segments of its economy.
Over 40 central banks across the world have already cut their key lending rates and announced fiscal packages.
India, with large swathes of people facing the risk of infection, has nothing significant so far to show to the world. Investors could possibly be antsy about the absence of solid stimulus measures either from the government or from the Reserve Bank of India (RBI) to provide the much-needed cushion to a battered economy.
The government announced a task force and continuing consultations with businesses. But businesses have already begun to suffer because of the lockdown introduced in several parts of the country. The shutdowns of logistic services will worsen the situation. The call from government and local bodies for social distancing as a measure to counter the coronavirus spread will mean even more bad days ahead for businesses.
An SBI Research report paints a grim picture. Aggressive social distancing policies could lead to severe economic impact, it said. “On the demand side, inoperability analysis for three sectors namely Transport, Tourism, and Hotels show significant impact on demand and hence output. On an aggregate basis, we estimate that the impact of a 5% inoperability shock could be 90 basis point on GDP from Trade, Hotel and Transport and Transport, Storage and Communication segment that could be spread over FY20 and FY21, with a larger impact in FY21," SBI economists said in the note last week.
What can the RBI do?
As the virus scare begins to have its economic consequences, the RBI is doing everything except announcing a rate cut to keep the financial system liquid enough. On March 23, it announced a Rs 1 lakh crore repo auctions in two tranches later this month to infuse liquidity in the economy.
Through the repo window, the RBI infuses short-term funds to banks against government securities. This apart, the central bank also announced that it will extend the priority sector classification for bank loans to NBFCs for on-lending for FY 2020-21. Also, bank credit to registered NBFCs (other than MFIs) and HFCs for on-lending will be allowed up to an overall limit of 5 percent of individual bank’s total priority sector lending. So we have there liquidity tools for banks.
But, will it translate to relief for existing borrowers and boost spending power? Unlikely. That’s probably why top bankers like Aditya Puri are calling for a non-scheduled rate cut and forbearance for small borrowers hit by the Corona onslaught.
“It's a cash flow problem, we need an unscheduled rate cut,” Puri said in an interview with CNBC-TV18. Puri also recommended that the government relax the terms of loan repayment for borrowers.
The banking system is already battling a pile of NPAs from corporates, SMEs and farmers. With the markets under shut down and cash flows hit further, this NPA pile is set to go up. On the other side, those engaged in temporary jobs and daily wages are running the risk of losing wages on account of the massive shutdown.
Logically, if the lockdown prolongs, there is a risk of defaults rising. That makes some relaxation on repayments inevitable.
The RBI could have offered relief to the businesses by permitting banks to restructure loan repayments of MSMEs by expanding the scope of an existing facility it announced in January this year. According to this, banks are already restructuring loans of MSMEs for loans up to Rs 25 crore. Increasing the limit of loan size to say Rs 100-Rs 500 crore could have offered relief to a large number of firms. Such a measure would help MSMEs as NPAs (non-performing assets) are likely to rise in the months ahead if the COVID-19 scare remains.
Similarly, an interest rate cut too could have added comfort to the businesses by reducing their interest payment burden. In a recent presser, RBI Governor Shaktikanta Das didn’t commit on a rate cut saying that MPC (monetary policy committee) will take a call on the matter.
The SBI Research report also said the shutdown by China and resultant supply chocks in India will also act as a double whammy. “The impact of supply perturbations in the system in terms of cost-price increase in output due to increase in prices of value-added input brought about by shutdown in China or assumed price escalation of 5 percent is maximum for - chemical and chemical products, electrical and non-electrical goods, metals and metal products, textiles, and transport equipment (7-8 percent increase in prices),” SBI said.
What can the government do?
There are calls for a government stimulus package to revitalize the economy. There are various suggestions from economists ranging from doubling the cash transfers directly to the beneficiary accounts under government schemes to targeted, sector-specific packages.
However, so far, there are only talks; no commitments to an economic stimulus, and no actions.