As the pandemic of coronavirus continues to grip the globe with its asymptotic rise in the number of cases, it has caused a severe impact in curtailing the growth of the world economy. The International Monetary Fund (IMF) has recently revised its global GDP forecast from an increase of 3.3% predicted just a few months ago, to a contraction of 3%. If this holds, it will be something the world has not seen ever since the Great Depression of the 1930s. The United Nations (UN) has warned that the shrinkage would be even more if the restrictions on economic activities are extended without adequate fiscal responses and taking measures to boost consumer spending.
With nearly 100 countries closing national borders during the past one month, with a lockdown on transportation and movement of people, the pandemic has resulted in significantly disrupting the global supply chain and halting international trade. Though not as severe as the USA or major European economies, India has been feeling the blow too. The lockdown’s severity on the Indian economy will majorly depend on two factors, the duration of restriction on the movement of people and commercial activities, and the actual size and efficacy of the fiscal measures undertaken by the government.
Developing countries like India, those depend highly on tourism and commodity exports, face highlighted risk of economic disruption. There is a possibility of a significant contraction in Indian manufacturing production capacity, and the plummeting number of tourists and travelling is bound to hit the tourism sector hard, which employees millions of low-skilled workers. The commodity-related revenues are experiencing a decline, and the reversal of capital flows are increasing the likelihood of debt distress in the economy. The Indian government is forced to curtail public expenditure at a time when they need to ramp up consumer spending and come up with policies to boost investment.
With investors all around the globe speculating that the coronavirus will destroy economic growth, and government measures might not be enough to stop the decline, many large-cap and mid-cap stocks are facing mayhem in the global markets. Indian Sensex too fell 25% in three months. In response to minimize the impact, central banks in many countries have slashed interest rates in order to encourage borrowing and increase consumer spending. When WHO declared COVID-19 a pandemic, apart from the financial markets, other asset categories in the country such as real estate, retail businesses, commodity market, went for a shocking downturn. The crude oil prices in the US have turned negative for the first time in history, making it a rare, completely unexpected, Black Swan event, whose impact may be more disastrous than what was estimated a few weeks ago.
India's import basket saw a dip of 16% during the first three weeks of March mainly driven by decreased imports of precious & semi-precious stones, gold and a sharp drop in crude oil prices. The exports for the same period came down by 8.2% to $16.3 billion. With major economies of the world slipping into a 'near-halt' during this period, Indian exporters are finding themselves in a situation of severe turmoil as trade in the country's top destinations is paralysed, making it imperative for the government to work on urgent relief measures for the exporting industries. The US, UAE, Germany, UK, Singapore, Italy and China, among others, are the most significant contributors to the country's basket of merchandise exports. Since trade is crippled in most of these destinations due to a near-collapse of the global supply chain because of lockdown on road transport, international shipping lines and air cargo movements, the warehousing capacity is getting overstretched and facing severe blocking of export finance. The exporters, especially those in the highly job-oriented Small and Medium Enterprises, need immediate fiscal relief and credit flow to keep their workforce and essential machinery in operations.
The outbreak has caused extreme distress in the manufacturing sector of India and industries such as electronics, automobile and pharmaceuticals have been significantly impacted that heavily rely on the procurement of raw materials from China. But since India as a manufacturer works on long term inventory planning, we are better poised to tackle this crisis better than some other big economies, though the scenario is bound to cut demand for the next three to six months. Many Indian manufacturers who have piled up stocks have started to look for ways to switch their product sales to online to mitigate their offline sales.
The government needs to step up at large to provide well managed, targeted and temporary cash flow relief to the firms that are most affected during this period. Giving wage subsidies to people and firms to help curb contagion is another way to deal with the crisis. For instance, offering sick leave to people directly affected by the virus who have to self-quarantine, accelerating payments of unemployment insurance benefits and expanding the social safety net are some of the ways to reduce the burden on people. It is also imperative to communicate to the public how emergency action and changes to original budgets are compatible with stability and sustainability. Internationally, IMF capacity development is doing its best in helping countries to strengthen their administrative emergency responses in public financial management and revenue administration.
⦁ Critical complementary reforms include fiscal restructuring, better coordination with States, strengthening corporate governance, and counter-cyclical financial sector regulation
⦁ A fiscal package to activate India’s large domestic demand can potentially help the economy insulate from global shocks and a likely prolonged shrinking of trade
⦁ Relaxing financial conditions will create an opportunity to switch from the low credit and money growth to a credit-led recovery that will also help in reducing the financial sector stress
⦁ Wage/PPF subsidies and interest rate subventions should be targeted to MSMEs and the most affected sectors, and made conditional on preserving employment in the short-run, and upskilling and re-structuring over time
⦁ States that are the source of migration should think of packages to attract FDI, thus reducing out-migration, excess labor living precariously in large cities
⦁ Accelerating payments of unemployment insurance benefits and offering sick leave to people who have been self-quarantined