COVID-19: What Should Be India's Exit Strategy and Minimum Size of Fiscal Package
To stop the spread of coronavirus (COVID-19), the Indian government has enforced a lock-down in the country till 14 April 2020. A very long period of shutdown can, however, lead to other problems including social unrest and India would need to have in place an exit strategy as well as fiscal package, says a research note.
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI) says, "Keeping this in mind prime minister Narendra Modi has recently urged states and centre to formulate a common exit strategy to ensure staggered re-emergence of population once lock-down ends. We believe a staggered exit could be the best option from the lock-down that ends on 14 April 2020. Such an exit strategy should encompass a demographic and economic strategy."
According to the report, the current lock-down due to the outbreak of COVID-19 and consequent social distancing measures have taken a serious toll on the economy, across sectors. Though the actual affect is uncertain at the point but it will have severe impact on GDP growth with an estimated loss of Rs8 lakh crore or 4% of the gross domestic product (GDP) if the economy is in lock-down mode till 14th April, it added.
SBI says the overall sectoral risk based on key parameters, such as credit ratio, leverage, stress and COVID-19 impact depict sectors such as automobiles, hotel, aviation, gems and jewellery, NBFCs, power, real estate and construction and engineering could be affected severely with combined impact.
"It is imperative we unveil a comprehensive set of packages for all such sectors, including goods and services tax (GST) rate rationalisation, tax moratorium, payroll support among others. This apart, the states have to handhold in this time of crisis with a potential shortfall in GST revenue looming large," it added.
Apart from Rs1.75 lakh crore package announced by finance minister (FM, Nirmal Sitharaman, of which Rs73,000 crore is only new and rest is from current budget, the government needs to announce a large fiscal package for the affected industries and sectors which are on high and medium risk.
"Our calculation suggests that credit to GDP ratio of these sectors is around 12%. We believe that to enable these sectors to grow at the same pace as they would have grown in normal times, a fiscal package of at least Rs3.5 lakh crore is needed. Our estimates also suggest that given labour and capital income loss of around Rs3.60 lakh crore, the minimum subsistence fiscal package must be scaled up by Rs3 lakh crore, over and above the incremental Rs73,000 crore that was unleashed in the first phase. Such package also should include payroll support for impacted industries and budgetary support for states."
During this lock-down, non-essential stores, restaurants, public spaces including malls, public transport and manufacturing units, everything is closed. On the top of it with work from home been adopted, offices too have been largely closed. It is obvious, SBI says that commercial real estate is one of the biggest casualties of COVID-19 and recovery will not be quick.
Talking about demographic exit strategy, the report says, it may be advisable to divide the population into four groups like COVID-positive cases, those hospitalised, immunity compromised, and healthy individuals and have well defined strategy for each group because there is no herd immunity in the population for COVID-19. However, for geographical areas that have been identified as hotspots, quarantine and containment zones, the above classification needs to be customised as required at the local level, it added.
SBI says, "The district wise spread of the disease shows that there are large pockets where no case has been registered and 60% of the districts shows no spread. Nevertheless, developed states, Western India have suffered the most due to COVID-19 than Eastern India. Interestingly, mapping the COVID-19 affected districts with credit outstanding reveals that 284 districts (40% of 736 districts) amounted for almost 98% of outstanding bank credit. Thus, it is imperative to unclog the banking system post COVID-19."
The data on demographic of Indian population suggests that since it is predominantly young in age-group 25-30 years, the overall risk of mortality is low. However, a large section of the population has high prevalence of other comorbidity factors, namely diabetes and cardiovascular diseases in 30-50 age groups. Further, there is also high number of elderly people, which are immune compromised.
As per SBI, among the sectors, small and medium industries (up to Rs100 crore), which constitute 19.3% of the total credit in bank credit are more vulnerable and will be worse affected. "We expect immediately that companies will draw more from their sanctioned working capital limits for couple of months but it will be difficult for them if it persists for long," it says.
During second half of FY19-20, it has been observed that credit ratio deteriorated across sectors, the report says, adding, "Some of the sectors which were having better credit ratio in H2FY2019 have also been hit hard. The good thing is that banks have witnessed good traction in credit (term and working capital requirements) in the last seven-days of the year ending 31 March 2020. It seems companies and corporates are preparing themselves for a surge in demand after the lock-down period."
"As per our estimate, the incremental credit offtake would have been Rs2,100 billion in March of which agri Rs100 billion, Industry Rs1,200 billion, services Rs600 billion and personal loans Rs200 billion. Clearly, the tide seemed to have turned as far as bank credit is concerned in March," SBI says.
Commenting on economic strategy, Dr Ghosh from SBI says, the economic exit strategy must account for how erosion in demand be restored in quick time. "For this some measures may be implemented. This includes giving first preference to agriculture and procurement, some relaxation in inland transport, extending time limits for retail trades, allowing hoteling services to open for limited duration, permitting construction activities on districts where there are no or low COVID cases, and pushing digital infrastructure for enhancing mass communication and education," Dr Ghosh from SBI says.