Two days after Prime Minister Narendra Modi announced a nationwide 21-day lockdown to fight COVID-19, the government has followed up with an economic plan that basically targets the poor suffering from the unprecedented measure. Union Finance Minister Nirmala Sitharaman’s presser, detailing the Rs 1.7 lakh crore economic relief package under the ‘Garib Kalyan Yojana’ tag, is good news to the poorer sections. The FM’s package that included insurance cover for health workers, 5 kg free foodgrains, 1 kg pulses per person for poorer sections of the society and direct cash transfers to farmers and other economically weaker sections including widows and migrant workers, addresses the pain of low-income groups. The minister has also announced collateral free loans up to Rs 20 lakh to the self-help groups.
According to Sitharaman, about 8.69 crore farmers will benefit from the Rs 2,000 direct cash transfer. Also, a similar amount will be given to migrant workers using the Aadhar-linked accounts. The FM also said the government will pay up the EPF installments of companies with less than 100 employees and whose salary is up to Rs 15,000 for three months.
While the package announced by the government was much awaited and will certainly be welcome news to the poorer sections of the society, the size of the stimulus is too little to tackle the impact on the economy on account of the major shutdown in industrial and manufacturing activities. The rippling effect of the 21-day lockdown will be severe across all sectors of the industry and financial sector. A closer look at the details will reveal that the package is inadequate to address the larger impact of the COVID-19 fallout, especially with respect to industries.
A total lockdown thus impacts all kinds of production, manufacturing and service sector activities. The immediate impact will be on consumption and wages as daily earners across sectors, small vendors and workers in small and medium enterprises (SMEs) stop receiving their payments, in turn, curtailing their purchasing power further. This will have a cascading effect on large companies. Shutdown in manufacturing activities will lead to a massive rise in unemployment.
According to CARE Ratings' Chief Economist Madan Sabnavis, the GDP is likely to slow down to 1.25 percent to -2.5 percent in the fourth quarter and just about 4 percent for the full fiscal. Similarly, according to a Barclays' emerging market research report, four full weeks of a complete shutdown will likely be followed by another eight weeks of partial shutdowns across the country, until the end of May, as COVID-19-related precautions will likely remain in the system.
“We estimate that the cumulative shutdown costs will be around $120 billion, or 4 percent of GDP. Of the $120 billion, the new shutdown assumptions account for roughly $90 billion of additional impact,” Barclays said. Factoring in the loss in output, it has cut its FY21 GDP forecast to 3.5 percent from 5.2 percent earlier.
An SBI research report estimates that the impact of a 5 percent inoperability shock could be 90 basis point on GDP from trade, hotel and transport, and storage and communication segments that could be spread over FY20 and FY21, with a larger impact in FY21.
Unanswered questions remain
One critical question remains, which wasn’t clear in Sitharaman’s presser. Where will the Rs 1.7 lakh crore come from to spend on the schemes announced? Will this be supported by the national budget or reallocation of the existing schemes? Remember, the government is already walking a thin fiscal line and has deviated from the earlier-decided fiscal roadmap under the FRBM Act for two consecutive years. It isn’t clear how will the government find the funds for the additional expenditure.
Secondly, the collateral-free loans up to Rs 20 lakh announced by the FM will likely put more pressure on the banks (logically state-run banks) which are already fighting the perils of accumulated NPAs. There is a high risk of these collateral loans turning bad. The banking sector is just emerging out of a painful NPA clean-up process and additional slippages could put these banks in more trouble. Will the government guarantee banks of capital support here?
Third, it is not clear what is the plan to support the industries that are caught in an indefinite lockdown. This is especially true for companies in manufacturing and service sector industries such as travel and tourism, hospitality and logistics. These firms are suffering from business losses from early this year. What does the government intend to do for these companies?
Banks under pressure
Fourth, the presser is, again, silent on what the government plans to do with the banking sector. The state-run banks are under the pressure of the mega merger. Last year, the FM announced the government’s plan to merge 10 PSBs into four. This process is still on. The banking sector is likely to see a significant rise in the NPA levels as cashflows of companies are severely hit on account of the double-whammy of a slowing economy and COVID-19 lockdown impact. Logically, the pressure to fill up the capital void of these banks will fall on the government which is the majority owner in these companies. It isn’t clear what the government plans to do to address the problem.
The bottomline is this: The economic relief package is indeed a relief to the poor who are suffering from the impact of an unprecedented lockdown on their daily income. The government’s move to ensure food security and cash transfer to these segments are welcome in that sense. But the magnitude of the problem is much more, especially the impact on industries, banks and on the broader economy. So the government must follow up this with more steps for SMEs, industry-including measures such as delayed NPA recognition through a moratorium on loan repayments.