As we entered into the Lockdown with an Economy that had been growing below par for several years there was initially a view that we could possibly emerge out of this stronger and India as an Economy and one contributing towards a possible replacement of global supply chains as people shift out from China as a tool of diversification. There was also an expectation of a faster economic bounce back driven by a less impacted economy due to Covid and a swift return to normalcy. However all this entire thesis has unfortunately fallen flat as it seems and India could be turning out to be one of the most impacted economies from the entire crisis.
The Indian Banking sector has been under stress for several years with the high NPA Cycle playing out over 4-5 years which ultimately combined with the high interest rates and tight liquidity strategy of first Raghuram Rajan and the Urjit Patel led to the crisis at ILFS then to DHFL, Yes Bank, the NBFC sector in general etc. Obviously there were elements of fraud involved in many cases however some part of the NPA upcycle was also due to the slow economy and high interest rates.
While the economy was already in the slowdown mode we had Demonetization which stopped the entire economy like a brake is applied on a fast moving car. Demonetization was a death knell for many small companies and businesses as the entire cash cycle got broken down. All this came in the midst of GST implementation a much needed reform which came inbetween the entire banking crisis and demonetization.
The first part of the Narendra Modi government started off during 2014 as a potential reformist government which would focus on reviving the economy. They did try during the first few years, however the high NPA cycle of the banking industry stymied most of these moves. Consumer demand did hold up for a long time but eventually even that got hit. As such just before the #Covid19 crisis hit us we had an economy where the entire investment as well as consumption cycle was in doldrums. There was an expectation that with interest rates coming down, government regaining focus on investments and improving capacity utilizations we would again see the economy start to recover from the current Financial Year 2020-21.
The Lockdown in India has been much more severe than any other country. This has stopped the Economy on its heels with an estimate of the economic activity today at just around 35% of normal. As such we are losing nearly 65% of the GDP on a daily basis today. The RBI on its part has done a lot but RBI can only provide a facility for smooth operations once the economy opens up but cannot really help the real growth of NPA’s or shutdown of investment and consumption.
As I have written in some of my earlier articles we do not have any Social Security system in India. The government has done some things for the bottom of the pyramid by paying some amounts into the accounts, providing free gas and food grains etc. However this is not adequate by any stretch of imagination. Job losses are huge in the country right now. The USA has lost nearly several million jobs, in India with a huge informal work force and large number of contract workers the state is even worse. Today the aspiration of people is not Rs 500, gas or free food. Most plumbers, electricians etc also earn nearly Rs 25000-30000 per month. Daily wages range between Rs 500-800 per day i.e. Rs 15000-24000 per month. The loss of livelihood is real. The entire cycle of supply as well as demand is badly disrupted.
The advantage of the crisis will go to countries like South Korea which handled the crisis well without closing down the economy fully. Many other economies like Japan also had a partial closure. The USA the most impacted economy has also a lockdown which is nothing compared to India’s. Except for most impacted states like New York all shops, malls are open businesses are working and they have had a Fiscal Stimulus already of over 10% of GDP like many other countries. Germany which got impacted late and closed down late also has stared opening up much before others.
At this stage besides some help from bottom of the pyramid people there is no Fiscal Response from the government. Even fuel prices have not been cut subsequent to the crash in global crude prices. For example on an average in India now Diesel prices are Rs 65 per litre. These rates in China as well as the USA are around Rs 50 per litre today. As such on logistic costs also we become extremely uncompetitive to other countries as the cost of transportation which was already high due to poor infrastructure increases further. Both Central and State governments have announced salary freezes, LTA suspensions etc. Again these are good moves in the sense that governments don’t have the money however this is again a Fiscal Constraint and not a Fiscal Stimulus which the economy needs the most.
I will write on this later too however I believe that India has lost a tremendous opportunity. We might have controlled Covid but the damage to the economy unfortunately is now reaching proportions where recovery now will be very slow. We needed Fiscal Stimulus as of yesterday. There is need for interest cost support, we need to realize that nominal interest rates in India are very high and makes us uncompetitive in most capital intensive industries. In terms of automation we are far behind most of the world. Our productivity levels are low relative to global standards and labour laws quite strict. Is it possible that Narendra Modi unleashes 1991 phase 2 reforms, however I am not betting on it now. I am surprised to see the paranoia in India about Coronavirus which is not seen even in the most impacted European Countries. As things stand we seem to have missed the bus.