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'No economic activity will cost India $120 billion'

By PRASANNA D ZORE
April 07, 2020 09:33 IST
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'We believe there will be a full shutdown for four weeks and a partial shutdown for eight weeks.'
'Hence, economic activity is unlikely to normalise before the end of May.'

IMAGE: Cargo operations at Bengaluru airport, April 2, 2020. Photo: PTI Photo

"We see growth declining to 2.5 per cent in calendar year 2020, and 3.5 per cent in FY20-21," Rahul Bajoria, Chief India Economist, Barclays, tells Prasanna D Zore/Rediff.com

How will the combined effect of fiscal measures announced by Finance Minister Nirmala Sitharaman and the monetary measures announced by Reserve Bank of India Governor Shaktikanta Das help deal with the shocks imparted to the Indian economy because of the COVID-19 pandemic?

Both packages announced by the finance minister and RBI governor were pretty comprehensive and address several issues which can be foreseen given the lockdown.

Still, these steps are mitigating in nature and will not be able to offset the loss of activity, both necessary and discretionary, amid a large increase in precautionary savings.

Once the crisis is over, the government probably needs to consider announcing more steps to kickstart growth once the COVID-19 comes under some control.

Are these measures collectively enough to deal with the loss of employment and output that the economy could face in the days to come?

No, they are unlikely to offset the loss of employment and output.

There is no fiscal or monetary measure that can offset the full impact, but these steps will help in reducing the burden on companies, salaried individuals, and the vulnerable.

Further, the loss of discretionary services consumption, such as tourism, purchase of clothes, festival related spending is unlikely to be recovered, but the inventory run down being faced in several areas, including food production, etc can be increased later, so there will ultimately be a payback in activity, but it will be much smaller than the decline we see initially.

How will the RBI's moves to cut the repo rate by 75 bps and other monetary measures help the Indian banking sector?

The RBI's step to cut rates is a non-negative measure, unlikely to increase credit demand, but will certainly help in reducing burden on some borrowers who already have loans, whether corporate or individual.

Similarly, the various steps to inject liquidity, introduce the TLTRO (Targeted Long Term Repo Operations) scheme for corporates, forbearance on some types of loans, interest deferment, will help the banking sector and ensure there is no shortage of funds for any sector that is under stress.

What kind of stress on macroeconomic parameters like output, employment, interest rate, inflation and exchange rates do you foresee the Indian economy going through in the wake of the COVID-19 pandemic?

In our central scenario, we believe there will be a full shutdown for four weeks and a partial shutdown for eight weeks. Hence, (economic) activity is unlikely to normalise before end of May.

This will cost the economy close to $120 billion, or close to 4 per cent of GDP, which in real terms mean loss of close to 2 per cent growth.

This will be accompanied with material increase in unemployment, but since that is mostly in the informal sector, it is difficult to quantify the number.

Interest rates are falling given the RBI's actions, while the exchange rate may remain on a weaker trajectory given global risk aversion.

Inflation remains a bit of a mixed bag as falling discretionary pricing along with oil prices will likely be offset by higher food prices, which have risen materially as per recent data.

What more can the government and RBI do to help revive growth? How big a drop do you see in India's GDP growth?

Let me take the second question first.

We see growth declining to 2.5 per cent in calendar year 2020, and 3.5 per cent in FY20-21. Risks to these numbers are biased to the downside.

We believe the government clearly may have to increase fiscal support, both through relieving burden on other economic stakeholders, and also increasing or re-prioritising spending.

The RBI can keep its monetary policy accommodative, and we expect another 90 bps (one per cent = 100 basis points) of rate cuts in the next 3 to 4 months.

How big a measure is the three-month moratorium that the RBI announced for home loan borrowers? Could you explain how this will work out for home loans, personal loans, credit card loans, etc?

As per my understanding, the loan moratorium is an extension of duration, but not a waiver of interest costs.

A home loan which was say for 20 years will now be for 20 years and 3 months. Interest costs will still need to be paid over time.

As such, for single income families, entrepreneurs who have seen their businesses impacted by the slowdown, it will help reduce pressures on their cashflow, and also improve their ability to keep paid staff on the books.

For those who are salaried employees with little chance of facing liquidity crunch, should consider paying their dues on time, as it will reduce the extra interest burden.

How long would it take for the global economy to start firing on all its engines?

There is heightened uncertainty as things stand. COVID-19 cases are rising every day globally, and risks are it may speed up even further.

The invention of a vaccine or a full-fledged treatment can be seen as the end of this pandemic, but risk aversion, at the individual, corporate, and sovereign level may continue for some time even beyond that.

We see some normalcy coming back to the world economy by the end of 2020, and trend growth may resume only in 2021.

However, as I indicated, the heightened uncertainty is likely to remain with us for some time.

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PRASANNA D ZORE / Rediff.com
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