Navigating Negative Slopes: Recession and the Indian Economy During Pandemic

Hundreds queued up, one after the other, a few more privileged (or lucky) ones donning masks and covering their faces with their gamchas and saree pallus. A lone bike-rider delivers medicines to an elderly couple living alone at the end of a dark street, showing his engineering college identity card to the police on duty for verification of his essential services pass. Thousands on LinkedIn typing in ‘commenting for better reach’, to assist their peers struggling with keeping their jobs and internships. A commonality between all these instances? They are all linked to the economic fallout of the ongoing coronavirus pandemic and the nationwide lockdown it has induced. 

On 14th April 2020, the International Monetary Fund (IMF) reported that all of the G7 nations had already entered or were entering into what was called a 'deep recession', alongside most of the western world with a significant slowdown of growth across developing and emerging economies. The IMF has stated that the economic decline is 'far worse' than the Great Recession of 2009. Besides, at that time, the Indian economy was in a much better place to be able to handle the crisis, as it had been growing steeply in the years leading up to 2008.

Situation Before the Onset of the Coronavirus Pandemic 

During the course of fiscal year 2019-20, the Reserve Bank of India had cut interest rates five times to boost growth, and to add fuel to the dwindling Indian economy, this monetary easing was complemented by fiscal measures, including $20 billion of tax cuts for companies. The economy was reeling from a breakdown owing to a series of non-performing assets (NPAs) plaguing the public sector banks. High-frequency indicators had plunged and domestic credit conditions were tight, amid weak global demand. The last quarter of 2019 marked the slowest one for the economy - with forecasts pitching expansion based on the new base year of 2012 at a mere five percent.

What Happens During the Pandemic

Business cycles are typically characterised by regular recessions and booms fuelled by speculations about, and manipulations of, the money market. Stock markets slow down, asset prices plunge, some access too much money fraudulently, some borrow and never pay back - all of these phenomena lead to economic slowdown. But this time, the situation is quite different. The coronavirus recession is one that has been caused due to a complete halt of economic activity and hence does not represent a start or stop cycle. 

Let us consider a small factory that manufactures eatables. Since it shuts down, its stocks of perishable raw materials go to waste. Factory workers are unable to come in to work and hence, their livelihood is threatened. They are able to only purchase the bare minimum necessities required by their households. The owner of the factory, on the other hand, is obligated to pay the rent, bills as well as other payments for his factors of production - despite the fact that there is no production, and hence no revenue being generated by the factory. As the owner struggles to balance his books, he resorts to borrowing working capital from banks. Similarly, the workers borrow personal credit to finance their expenses. The banks, on the other hand, are facing the brunt of the slumped supply and demand of money in the economy. The government further receives less in the form of taxes and the exchange of money takes a hit on all fronts. This phenomenon is being faced on a gigantic scale by the global economy on a manifold scale, giving rise to the worldwide recession. 

The Confederation of Indian Industry (CII) has said the country's GDP could even shrink 0.9 per cent in case the outbreak extends and spreads further. As India deals with its second round of the nation-wide lockdown and it becomes clear that this will be the norm for quite a while, whether in totality or in localised hotspots, the issues of dire poverty, loss of livelihood on a mass scale, and disruption of supply chains become tragically evident. Further, the restrictions on mobility of goods and people have resulted in domestic supply and demand disruptions on the back of weak external demand - expected to result in a sharp growth deceleration with the services sector particularly impacted. It said a revival in the domestic investment was likely to be delayed given enhanced risk aversion on a global scale and renewed concerns about financial sector resilience. In such a situation, the only silver lining is India’s Balance Of Payments (BOP) position which is expected to improve on weak domestic demand, low oil prices (owing to the initial OPEC-plus fallout and later production cuts), and COVID-related disruptions. 

India has reported double-digit unemployment rates in urban areas before, but it has never been the case in rural India. The ongoing nationwide lockdown has changed that - unemployment in rural areas has reached 13.08 percent, whereas it reached 14.53 percent in urban areas. The lockdown has an adverse economic impact on self-employed and casual workers. The closure of shops, hotels and restaurants alone will affect 11 percent of such workers in these sectors. Meanwhile, the country's economy is likely to suffer its worst quarter since the mid-1990s, hit by the ongoing lockdown, according to a poll by news agency Reuters.

Way Forward

A welfare package from the government can help poorer households cope with short-term losses. However, India set aside just over 1 percent of GDP for programmes, some economists doubt that the planned economic stimulus will be enough. 

The World Bank suggested that with central banks providing room to extend credit in the region, state-owned banks may be the best vehicle to on-lend funds. For example, governments could create bonds to lend to affected companies and step up through state-owned banks. 

Further, there is hope to see a concerted global strive to keep interest rates down in order to keep the flow of money in the economies active. Lower interests can be expected to play a catalytic role in reviving slumping supply and demand and pushing for a faster revival post the lockdown. The RBI has already announced measures to boost liquidity in NBFCs and other financial institutions. It also reduced the reverse repo by 25 basis points to 3.75 percent. Although making lending might not be the easiest for the Indian banking sector at the moment, considering its poor history with NPAs, it may be the last resort of monetary policy. This means lowering CRR and SLR to pump-up liquidity and relaxing borrowing provisions.

The pandemic has prompted global investors to seek safe-haven assets, with even foreign portfolio investors turning into net sellers in the Indian markets. Further, to put tabs on the foreign direct investments and curbing opportunistic takeovers of Indian companies, at such a time, the Department for Promotion of Industry and International Trade (DPIIT) has decreed that all such investments have to be now undertaken via the government route and after attaining the required permissions, only. 

Moves should also be made to create and maintain a conducive environment to kick-start spending and investment once the lockdown lifts, by lowering tax and nudging the process of credit creation. This will place the money in the hands of businesses and people, to induce revival. On the fiscal policy side, injecting stimulus into the economy is the only measure to hope for revival. If government spending is curtailed, it may lead to a deeper recessionary impact as other macroeconomic indicators - investment demand, net exports and individual consumption expenditure are all falling. 

Another unconventional instrument of poverty-reduction, aimed towards the daily wage earners, that can be considered is the notion of Universal Basic Income (UBI) - ‘the provision of a minimum living wage to everyone whether they are employed or otherwise, as a move to countering possible job losses, strengthening social contracts and trust in government’. Although this notion has been previously criticised as it will ‘steal resources from those truly in need for broader distribution’ and ‘cost is an obvious consideration’, in a situation of dire poverty, it can be tweaked and adopted justifiably. 

It is also essential to maintain a steady flow of supplies and resources to the states - that are slowly becoming cash-strapped, to keep the relief measures, patrolling as well as front-line staff well-stocked. 

We need to brace ourselves for an extreme down cycle and, work in tandem with government and global policies to prepare ourselves for the repercussion of this historic recession, just as ILO Director-General Guy Ryderc said in a statement, “Getting this right is predicated on social dialogue between governments and those on the front line -- the employers and workers, so that the 2020s don’t become a re-run of the 1930s.”