When the second phase of the lockdown ends on 3rd May, it will have been 40 days since the lockdown was announced. The economic cost continues to mount, although the lockdown has helped flatten the COVID-19 curve.
With each passing day, the economic impact of the lockdown across sectors is getting more pressing, calling for an immediate, across the board intervention from the government.
Under lockdown, economic activity has slowed down across most sectors. In manufacturing, only food processing, pharmaceuticals and medical equipment are operational, while construction and mining activities have halted completely.
Within services, the majority of trade, transportation and hospitality remains closed, while financial, IT and government services remain partially operational. Even in the power sector, which is permitted to operate, significant reduction in demand owing to lockdown is having an adverse impact.
The chance of a significant revival in investment activity is unlikely since capacity utilization levels may remain suboptimal. Consumption demand is also not likely to pick up noticeably since people’s incomes have been impacted.
On the external front, as economies across the globe continue to struggle with the pandemic, global trade may decline by 13 to 32 per cent in 2020, as estimated by the World Trade Organisation.
In a paper titled ‘A plan for economic recovery’, CII has laid out its growth expectation under three scenarios.
In the baseline scenario, GDP is expected to grow at just 0.6 per cent on an annual basis as economic activity is expected to remain constrained due to continuing restrictions on the free movement of goods and people beyond the lockdown period. This will lead to disruption in supply chains, slow pick-up in investment activity, labour shortages in the short-run and muted consumption demand on account of reduced household incomes.
In the optimistic scenario, which envisages a faster pick-up post the lockdown period, GDP is forecasted to register a growth of 1.5 per cent in the best case.
Source: CII Research estimates
But if there is a more prolonged outbreak, where the restrictions in existing hot-spot regions get extended, while new regions are identified as ‘hot-spots’ leading to intermittent stop and start in economic activity, GDP is likely to decline by -0.9 per cent.
CII has suggested urgent fiscal interventions to tackle the situation, and recommended cash transfers amounting to Rs 2 lakh crore to JAM account holders, in addition to the Rs 1.7 lakh stimulus already announced.
CII has also suggested additional working capital limits to be provided by banks, equivalent to April-June wage bill of the borrowers, backed by a Government guarantee, at 4-5% interest.
In addition, the CII paper has suggested the creation of a fund or SPV with a corpus of Rs 1.5 lakh crore which will subscribe to NCDs/Bonds of corporates rated A and above. The fund can be seeded by the Government contributing a corpus of Rs 10,000-20,000 crore, with further investments from banks and financial institutions such as LIC, PFC, EPF, NIIF, IIFCL et al. This will limit Government exposure while providing adequate liquidity to industry.
For MSMEs, CII has suggested a credit protection scheme whereby 75-80% of the loan should be guaranteed by RBI, i.e. if the borrower defaults, RBI should buy the loan and repay the bank upto 75-80% of the loan, so the risk to the lender is limited. SIDBI could provide the guarantee for loans to industry and trade while NABARD could provide the guarantee for loans to agro-processing sectors.
With these measures in place, it is hoped that decline in the GDP growth rate would be contained.
Click here to read the CII Report on – A Plan for Economic Recovery