Coronavirus pandemic | Can India spark a rebound in economic growth?

Rumki Majumdar

The revised GDP profile reveals that growth began to slow meaningfully much before than what was previously believed. Unfortunately, it does not look like slowdown has bottomed out. Hopes of a rebound for the next quarter dim as the possible spillover of the COVID-19 poses new and significant downside risks.

With China being the epicentre, the epidemic has severely affected manufacturing, trade, and tourism in India. The latest PMI indicator for manufacturing suggests the decline in activity is deeper than what took place during the global financial crisis in 2008-09. Since China is central to the global supply chains for the automotive and technology sectors, production and trade disruption can significantly impair industries and businesses globally, thereby affecting global growth.

Why should India worry?

One may argue that India’s exposure to the external world is low because of the country’s limited presence in the global supply chain. However, it is highly unlikely that India will remain immune to these headwinds.

Several Indian industries, such as automobiles, technology, pharmaceuticals, and fashion, have some exposure to imports of raw and intermediate materials from China. Several industries stocked up ahead of the Chinese new year holidays and inventories may cushion the impact of the virus for some time. However, if the virus is more protracted, Indian industrial production will eventually be hit.

Interruptions to production may add woes to the already struggling industries, which may put off their investment decisions in building capacity utilisation. Poor investments may reflect in low job creation and, thereby, affect employment and income. This will weaken consumption, which still has been holding up for a while now.

The other concern will be the stress on the financial sector. The Indian stock market has already seen a sharp fall over the past few weeks as the impact is now reverberating across capital markets around the world. The Indian banking sector may come under further pressure if it has exposure to industries with high dependence on China. The stress in the Chinese and global financial sector will also have an impact.

What can policymakers do?

If only they had known, they would have done so by now!

After five consecutive rate cuts in 2019, the Reserve Bank of India (RBI) decided not to cut policy rates further because of inflationary concerns. While the RBI will likely continue with the accommodative stance, it is hard to say whether the RBI will cut policy rates further. That said, the US Federal Reserve cut its policy rates by 50 basis points, which may prompt the RBI to follow suit as a pre-emptive measure to offset the impact of the epidemic (which is now rapidly spreading in India) on demand.

The double-digit government spending growth is a testimony to the government’s efforts to counter the slowdown. It is trying to address a few structural issues via reforms and measures as seen over the past six months and during the Union Budget 2020, which offered a plethora of immediate and long-term measures to boost the flagging economy.

With the fiscal deficit for FY2020 pegged at 3.8 percent, which is 0.5 percent higher than the earlier target, the question is how much can the government boost growth through higher spending.

However, desperate times call for desperate measures. Government capital spending can spur growth in times when private spending is weak, even if it means that the fiscal deficit increases far beyond the budget target. Several economies have done this in the past. Germany — a strong proponent of a balanced budget — incurred a strong fiscal deficit during 2008-09 to overcome the global financial crisis. So did the United States. Once the momentum picks up in India, the government can consolidate its expenses.

India’s lemonade moment?

The US-China trade conflict followed by the spread of the COVID-19 Coronavirus has led to multinationals looking for alternate manufacturing destinations to diversify their supply chains and reduce costs to regions that are not closely dependent on China. Can India seize this moment and present an opportunity to be the next emerging manufacturing hub? It is not impossible as India has done it in the past by building its reputation in service exports.

India has handled stressful situations prudently in the past. With the current political mandate, the government can turn the table and spark a rebound in economic growth through quick and effective implementation of what it has promised to do.

Rumki Majumdar is Economist with Deloitte India. Views are personal.