There is no disputing the devastation that the COVID-19 pandemic has wrought on the economies of most countries including India. The degree may vary but the damage is virtually universal given the current state of inter-dependence of economies.
The struggle now is to make the best of a very difficult situation with measures that first bring relief to those most affected by the catastrophe and then try to salvage the economy by spurring economic activity.
These are herculean tasks and while critics may look around for ways to put the government on the mat, there can be little doubt that there are serious limitations to what the government can do in the circumstances. The problem in India is accentuated by the fact that the private sector, hit hard by the impact of the freefall in the stock markets which has severely eroded their stock, is fighting shy of lending a generous helping hand as in some other economies.
The Reserve Bank’s measures to stem the rot on Friday have come close on the heels of the Modi government’s announcement of a Rs 1.7-lakh-crore relief package for poor, workers and those who need immediate help amid the nationwide lockdown to combat the virus. They are half-steps by a government that is already starved of resources.
The central bank has cut lending rates by a dramatic 75 basis points and propped this up with other measures to infuse liquidity. The measures announced on Friday will hopefully encourage banks to lend more and ease the pressure on banks’ finances to some extent. To that extent, the measures are per se good.
The RBI has also allowed a three-month moratorium on existing EMIs and on other sorts of term loans, whether availed by businesses or individuals. Indeed, for those looking for new home loans or a new loan to buy a car, the interest rates now will be mercifully low, with the latest rate cut. If one already has a loan, one can sit back and defer the monthly repayment for the next three months without attracting any adverse impact.
An almost similar provision has been made for businesses which are indebted from loans for working capital and other needs: these companies can also defer repayments for three months without a black mark on their credit score. As for banks, their operations have been eased, since they are now required to park less money with the RBI and consequently have more money available for lending.
Also, small businesses which need an overdraft on working capital limits can now avail of this facility. Significantly, however, there is no waiver of loans, only a three-month moratorium which may not lend much succour. A longer moratorium may be the growing clamour, but a lot would depend on how long the COVID-19 crisis lasts.
The government’s and the Central bank’s projected steps may come in handy, but the crucial question is how long the battle against coronavirus would continue and in what state it would leave the finances of countries like India.
The palliatives that are in place are insufficient even for the short term in reviving meaningful economic activity but if the virus effects last longer than the currently-expected three months, would the economies be in a position to stave off widespread starvation and misery in much of the world.
Economists are already predicting that a worldwide recession is around the corner. There is a measure of hope from the fact that though the economy is strapped by acute lack of resources there is a silver lining that the oil import bill has shrunk, saving sizeably on foreign exchange. While the price of imported crude has fallen sharply, the dip in consumption of over a fifth of the total import earlier has come as a breather.
But the demand is bound to pick up after the lockdown ends and normal economic activity resumes, unless the government takes a conscious step to curb oil imports through some form of rationing.
Hard steps by the government and an accommodative spirit on the part of the consumer may need to go hand in hand. We are currently virtually in a blind alley, oblivious of whether we are moving towards an end to this terrible phase or towards a harsh accentuation of grinding times.
