Exclusive | Full economic activity may resume only by September: Mark Matthews, Julius Baer

Q. There is a line of thinking that economic impacts could last for many months, if not years, if social distancing measures need to be kept in place for protracted periods. What is your view on this? Do you foresee multiple peaks and troughs in the number of cases and losses of output, spanning several years? By when do you see economies such as India return to their pre-outbreak levels?

A. Medicine could help on multiple fronts. In the absence of a vaccine, the most important advancement is mass serological testing, which is being rolled out as we speak. Serological tests can be done not only in hospitals, but in pharmacies or in private homes, and are more accurate than the nasopharyngeal swabs in use now.

These could not only help to identify people who have the illness now, but also those who have had it and are now immune. We now know coronavirus arrived in Europe much earlier than previously thought, and a study by Oxford University estimated some 30-70 percent of the populations of the UK and Italy may already have had it.

These would mostly be younger people who had no symptoms or only mild ones. But the point is, if those who have had it can be identified, they can then return to the workforce.

There are some unique factors pertaining to India:

- India has done well in the last two weeks in terms of procuring ventilators as well as creating some healthcare capacity through make-shift care centres (hotels, railway wagons, etc.). Medical supplies and hospital care will however be seen lacking if the larger population gets affected.

- Higher relative temperature and onset of summer, which are seen to be deterrents for the virus.

- India implemented a nation-wide lock-down at a relatively early stage. The lockdown has been largely disciplined.

- Studies show countries that have had Bacillus Calmette-Guerin (TB) vaccinations in place for a very long time are less severely affected than those that introduced them more recently or don’t have them at all. India has been mass vaccinating children with BCG since 1948.

A best-effort estimate at this point of time would be that India starts lifting lockdowns in phases - between May and June. Economic activity will then slowly resume, but it may take another three months, say, September (assuming no further deterioration) for full restoration of economic activity.

International trade would, however, take time to revive; global tourism (in-bound and out-bound) would be possibly the last to revive, depending on the global recovery situation around the pandemic across countries.

The largest disruptions are in services and discretionary consumption. Small and medium-sized businesses are most vulnerable as they have less access to financing options than large ones. However, it is likely that once the lock-down ends, there will be a surge in pent-up demand.

Q. How do you see India’s growth rate falling because of the COVID-19-related disruptions? Do you believe that there is a possibility of India's GDP growth contracting and slipping into a full-blown recession?

A. The damage will depend on the duration of the lockdown as well as the manner in which the lock-down is withdrawn. It may not be in a single shot, but different activities/services could be opened in phases, over weeks.

The closure of all but essential services and industry with potential extension means a complete halt in activity to approximately 75 percent of the economy for a duration of three weeks (with potential extension). On an average, every month of lockdown results in output loss of approximately 8.5 percent of the annual total. Hence, if 75% of the economy is locked down for a month, the output loss will 6.5 percent.

This is the first economic contraction in India in over two decades.

However, it would be wrong to call this a "recession" given its unprecedented nature. I would call it an external shock instead. The duration of it depends on if it is short-lived (say six months), or extending into 2021.

Q. What are the opportunities that the government and businesses can take away from this lockdown? Do you think once the storm is behind us, it will set the stage for deeper and more accelerated economic reforms, particularly in the financial sector?

The good news is that the Indian government and the municipal authorities have taken the pandemic seriously and are fighting the virus tooth-and-nail.

On the financial stimulus front, the Reserve Bank India (RBI) has unleashed a series of liquidity-injection measures to support the economy (and it has done this upfront).

The government has so far announced an Rs 1.7 lakh crore relief package for the lower strata of the population.

A few points.

- Monetary policy may have limited impact, in such extreme cases, in reviving demand. A fiscal push from the government would be more effective and impactful (although at the cost of abandoning the fiscal discipline path – FRBM – for at least a couple of years).

- India’s fiscal situation being quite tight currently, the government will have to be innovative in raising resources for financing its relief programmes / fiscal measures.

- Economic reforms in India are a structural need for the country; now with an impending slowdown staring in the face, it is likely the government will accelerate the reforms (which have taken a backseat in the last couple of years).

Q. The lockdown’s effect is very similar to a mechanical hard stop on a device that was running. What changes do you anticipate in the way businesses behave and operate once lockdown gets lifted?

A. The thing with lockdowns is that you can announce them and overnight bring economic activity to a halt. The same is unfortunately not true when you lift the lock-downs. It takes time for factories to reignite their furnaces or restart the machines, or for skilled and unskilled labor to return from various locations to their workplace. For manufacturing to resume meaningfully, it could take a few weeks.

Services should be the first to resume, domestic help, daily wage earners, contract staff will also resume their work as soon as human activity is resumed.

Q. This hard stop in the economy, unlike other recessions caused by systemic flaws such as the debt bubble of 2008, has been brought upon by the government because of a medical emergency. It is intentional and unavoidable. When do you see the Indian and world economy turning around?

A. Prior to the lockdown, and unlike in 2007-08, the economy was actually in a long phase of bottoming out. This leads us to believe it can bounce back faster than in previous instances.

Q. What kind of systemic and cultural changes in work and organisation culture after the COVID-19 storm passes by? Do you think work from home and remote locations could turn out be a new normal?

A. Every calamity brings pain, but also lessons learned and new opportunities. The basic survival instinct of humans teaches us to adapt, innovate and discover new means of conducting activity and business.

Until a month back, work from home was limited to less than 5% of service-oriented companies. Today, a large number of companies in the services sector have made it possible for a large part of their workforce to work from home. The feedback is quite encouraging, with employees and employers doing everything possible to adapt.

It is probable that some part of this temporary arrangement could actually spill over beyond the lock-down, and become a permanent solution in some service industries. Companies may look partly at this model to create efficiencies, improve productivity and reduce costs.

Q. A lock-down brings health benefits as it contains the spread of the virus. But it hurts the economy as it disrupts economic activities. How do we strike an equilibrium?

A. When you do a lock-down, you don’t worry about the future costs; you do it because you actually worry about the present, and you live one day at a time. It is a necessary investment in the future.

Q. The fiscal policy measures already announced by governments in response to the economic disruption caused by coronavirus are unprecedented in peacetime and likely to require wartime levels of government borrowing. What is the kind of impact you foresee in government finances of India and other countries?

A. Monetary policy can't prevent demand destruction when people are told to stay at home and shops are closed, but it does keep the financial system liquid.

For fiscal stimulus, the RBI and/or large state-owned enterprises may need to subscribe to government bonds, or raise money overseas. Large scale borrowing can impact the Indian Rupee negatively, the good news is India’s forex reserves are quite adequate, and the RBI should not have too much problem in managing the situation if the Rupee depreciates.

Q. Targetted financial support versus universal open-ended support: which one will you vote for and why?

A. Unfortunately, none of the options is easy to implement, from the point of view of getting the desired result, i.e., stimulating demand.

The problem with the one-off universal payment (such as in the United States) is that after few weeks if people do not have jobs, the effect of the fiscal boost dies away very soon. It may therefore be repeated, and become a universal basic income (a stepping stone to Modern Monetary Policy).

Targeted financial support must identify the right targets. Apart from G2C (government to consumer), it may also need to be G2B (government to business), i.e., support to the financial sector which in turn supports companies through this downturn, insurance-related benefits for people negatively impacted by the downturn, etc.

Q. Do you think, there is a case for central banks, such as the Reserve Bank of India (RBI), to provide temporary liquidity through unorthodox means such as "helicopter money" directly to governments to finance their deficits?

A. The first attempt should be that the government and the RBI work out a prudent mix of fiscal and monetary measures to address the collapse in demand. And in that process, if bond yields were to go up, it would be the natural thing to expect.

However, if systemic risk starts rising, liquidity dries up, or borrowing becomes unmanageable for companies, the RBI would certainly want to step in and use unconventional measures to buy out some part of the government’s borrowing. So far, we find that the RBI’s focus is on using a variety of tools to inject sufficient liquidity, through a 75 basis point rate cut, 100 basis CRR (cash reserve ratio) cut, LTRO operations and widening of the monetary policy corridor, although one cannot rule out the possibility of RBI also stepping in, sometime in the future, to support the government directly.

Q. Are you in favour of imposing capital controls or do you think governments such as India should resist introducing capital controls to protect their financing sources?

A. India doesn't need capital controls. Its forex reserves are quite comfortable, and external debt is also manageable. When India borrowed from overseas during crises periods (through sovereign bonds or NRI deposits), the RBI had been able to manage the repayments subsequently without undue stress, while accepting some depreciation in INR. Further, with the oil prices coming down sharply, India’s current account should improve.

Q. There has been a growing chorus for special bonds in order to finance the actions needed to support economic activity. The term ‘Corona bonds’ has even been coined. What’s your view on this?

A. The immediate priority is for the Government of India and the RBI is to work out a feasible package of fiscal and monetary policy response to the expected loss in economic activity. As in most other countries, the quantum of the response will likely have to be scaled up, so the government may have to choose between various financing options – conventional market borrowing, borrowing from overseas or borrowing from the RBI or even some government-owned enterprises (such as the LIC).

Q. What’s your view about the Rs 1.7 lakh crore relief package that Indian finance minister Nirmala Sitharaman announced on March 26?

A. It was a good package, in that it was announced in a timely manner and targets the lower strata that will be most affected by the lock-down.

Having said that, these measures may not be enough, and more measures may be needed for a broader section of the society. Especially measures to support banks and finance companies in order to ensure that credit markets remain stable and accessible.

Q. What are the key management lessons that Indian industry will take away from this crisis?

A. The biggest lesson is preparedness for a pandemic, but India is not alone in this, the whole world is.

Hopefully, this will result in improved hygiene practices and healthcare systems.

Companies may find work-from home / multiple locations actually improve productivity, reduces commuting time and costs, and adopt these permanently.

Q. The Indian government has appealed to the private sector not to retrench employees, even if they may suffer adversely because of the lock down and restrictions. What is your view?

A. The intention is noble, but in reality many private companies will struggle to restore business momentum, earnings and balance sheets. Unless the government steps in to support some of these companies (as well as the banks and finance companies that lend to them), they will probably need to let people go.