The lockdown in force across the country could be virtually for a period of 6 weeks. It could get longer, but even if it does end on 3rd May, practically speaking it would take at least 3-6 months for any semblance of normalcy to return. We may look at ten major economic damages that would be witnessed on this score.
First, the overall GDP growth would be a new low. The IMF has put it at 1.9%, while some private forecasts are not ruling out a negative growth rate, too. Any which way a low growth rate will prevail as loss of output for around 33 days in this financial year means that GDP of over a month is lost. Given that we clock in around Rs 18 lakh crore every month, assuming that only ¾ is operational (government, agriculture, pharma, FMCG and finance), at least Rs 13-14 lakh cr of nominal GDP would be lost.
Second, the major collateral damage has been in terms of labour. For the last three years, the economy has been impacted by low demand due to limited job creation. Now the fear of job losses is even more palpable with several companies invoking salary cuts, reduction in headcount, skipping of wage payment and layoffs when it comes to casual workers. This is probably the biggest blow because getting labour back will be slow and can cause a lot of pain.
Third, bringing back labour has to go with restoration of the transport system, which probably is the most vulnerable piece in the cake. Once normalcy sets in, the challenge is to get this system working which involves people getting close to one another. Social distancing pursued so far has mitigated such possibilities but the fear of travel will be there going ahead.
Fourth, industries like tourism, entertainment, aviation, hotels, restaurants, etc. would be the ones most affected in terms of output as it is unlikely that there can be compensation of use of such services once normalcy is restored. A car purchase can be deferred for later, but a holiday given up will be lost forever.
Fifth, the SMEs face the wrath of this backlash as a shutdown involving closing down of production activity will necessarily mean non-payment to vendors which has already been witnessed in the last three weeks. The auto components industry for example has been affected sharply by such non-payments which affects their viability in future. Employment is another casualty here and this would be the third successive blow following demonetisation, GST and now the virus.
Sixth, a lockdown for this month also means that the government GST collections would be affected sharply. The thumb rule of Rs 1 lakh cr a month will not be achieved as only a part of this amount would come under essential commodities. At best not more than 20-30% of the target would be achieved for this month, and would also only increase gradually once the lockdown is rolled back gradually. Services in particular would provide virtually nil GST.
Seventh, the government has already announced a fiscal package of Rs 1.7 lakh crore which would have to be accommodated this year. This means that the fiscal deficit targets will be breached further. Low revenue from GST, corporate and income tax, customs and inability to get through the disinvestment programme can mean the deficit overshooting by 2-2.5%. The same holds for states.
Eight, India Inc faces a challenge of getting under the weight of debt this year as non-production means that income is not earned and hence while there is a moratorium given, at the end of the day, money has to be repaid and this can be a big challenge for the companies.
Nine, the banking system which had just been getting out of the mess of NPAs, would have to face this new challenge of reconciling all these debtors once the moratorium ends even after an extension. NPAs will increase at all levels and even retail will not be insulated as job losses and salary cuts has hit individuals quite hard.
Last foreign trade would be a laggard as the pace of growth is dependent on how soon other countries are able to get out of this struggle. Presently it looks like that countries which witnessed this pandemic before India have still not shown any sign of the spread abating which means that exports in particular would be bearing the brunt of this pandemic and all the industries like gems, textiles, electronics, engineering, etc. will have to be more dependent on domestic recovery as trade will be a barrier this year.
Therefore, the shutdown impact will be severe and show more once the shutdown is withdrawn. Today the concern is on the spread of the virus, but after it is behind us, the challenges will be immense.
The writer is chief economist, CARE Ratings. Views are personal.
