Six hours before Prime Minister Narendra Modi announced a 21-day nationwide lockdown to counter the coronavirus spread in Asia’s third-largest economy, Finance Minister Nirmala Sitharaman had announced a press conference.
Expectations of an economic stimulus package were running high as the economy is hurtling towards a recession due to disruptions wrought about by the novel coronavirus, or COVID-19, outbreak. Pressure on New Delhi to act was huge. Or so it seemed.
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But all that emerged from that interaction was a set of measures that could at best be deemed to help ease processes rather than resolving the problem. There were deadline extensions on various schemes and minor tweaks in the insolvency and bankruptcy (IBC) processes.
In other words, the government did an 'ease of doing', when expectations were riding high on a comprehensive economic package that should have complemented measures that PM Modi was due to announce a few hours later.
Now, the absence of an aid and stimulus package may hurt even more because of the lockdown that the government announced. A slowing economy will be paralysed in multiple ways.
First, it will break supply chains. When movement of goods stop, economic activities at the ground level come to a halt. Absence of movement of people will paralyse the services sector — the backbone of India’s economy.
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 massive job losses.
Already, all leading automakers, including cars and two-wheelers, have suspended manufacturing activity. Overall, economic ramifications of the shutdown would be huge.
But first, what did the government actually announce on March 24?
There were a few deadline extensions on income tax and GST filings from March to June.
To be sure, these are helpful steps in a lockdown, but largely ease of doing business measures. According to CARE Ratings' Chief Economist Madan Sabnavis, a single day of complete shutdown, which entails zero production of goods and services, impacts real GDP by around Rs 50,000 crore. A 10 day shutdown would translate to Rs 5 lakh crore, or 3.4 percent of GDP.
This slowdown will hobble tax collections and trigger a vicious cycle. Extension of deadlines for tax filings will not mean much when economic activity is at a standstill.
The finance minister also announced increasing the threshold for insolvency proceedings for small companies from Rs 1 lakh to Rs 1 crore. Again, this can be termed as a positive step, but won’t really help.
Firstly, banks won’t drag defaulters on loans as low as Rs 1 crore to IBC because it wouldn’t make sense for them on a cost-benefit basis. “Nothing less than, say, Rs 10 crore loans make sense to go to IBC. That way, this increase (from Rs 1 lakh to Rs 1 crore) won’t make a major difference,” said a senior banker.
IBC, the bankruptcy court, is the last resort for a banker for recovery of their loans. The intervention by the government in this process will help companies, but won’t be good news for banking sector.
Instead of minor deadline changes and tweaks to the IBC process, the FM should have announced a package offering temporary moratorium on loan repayments to small companies, at least for a few months, until cash flows improve post the lockdown. The FM could have asked banks to stop tagging non-repayments of SME loans instalments as NPAs for now, given the stalemate in the industry during the lockdown period.
This would have been helpful for both banks and companies. Under current norms, if payment is overdue beyond 90 days, loans will be tagged as non-performing assets (NPAs) and banks have to make additional provisions.
Freeing small companies from insolvency proceedings wouldn’t mean respite from being classifed as a NPA, but a temporary moratorium on repayments would have. When industry is shut and consumer demand is absent, firms are sure to take hit and stop payments to banks. A relaxation on this front would have helped.
Secondly, a fiscal stimulus package to reboot the economy is highly essential at the central level. Supply chain disruptions in manufacturing would mean that backward linkages to small producers will take a hit.
SMEs are the biggest employers in India, and closure of these firms will significantly add to job losses. An economic package to support MSMEs is thus of immense significance.
Similarly, central assistance to daily wage workers will be key as workers stuck at their work locations, post-announcement of the curfew, will be struggling for sustenance. As the lockdown progresses, this section of the society will be the biggest sufferers.
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.
Sitharaman could have also announced a reduction in GST and income tax rates to help the economy tide over the crisis. Similarly, interest rate subventions on loans to small companies would have helped.
The lockdown is in place for 21 days. The survival of the economy will depend up on how soon the government acts on an economic stimulus. Nothing less will work.