“We know from past financial crises that they leave a permanent scar,” said Andy Haldane, the chief economist from Bank of England post the 2008 global financial crisis. In all likelihood, this time won’t be different.
An already-slowing Indian economy has been derailed from its growth track after a stringent shutdown was imposed in March to halt the spread of Covid-19. The jury is still out on whether the lockdown dented the progress of the virus, but it has certainly damaged the economy. India’s GDP is set to contract anywhere between 5% and 10% this year – for the first time in four decades.
Obviously, some of the damage will be long-lasting. Assuming that India’s economy grows at 7% between 2022 and 2024, the permanent loss would be 10%, according to a recent report from Mumbai-based credit ratings agency CRISIL. “To catch-up would require average GDP growth to surge to 11% over the next three fiscals, something that has never happened before.”
While that enormous challenge looms, some experts and economists believe a recovery could be on the cards in the next six to nine months. It just won’t be straightforward.
With industries, transport, shops, and malls shut, economic activity came to a grinding halt in India from the end of March. Domestic consumption, which makes up around 57% of GDP, was almost wiped out. Pay cuts and layoffs, combined with the lack of shopping, completely eroded demand.
The Indian government’s decision to remove most of the restrictions has provided much-needed relief to businesses, large and small. Despite this, the demand scenario is expected to remain weak for most of the current financial year. But it could make a comeback next year. “The resumption of normal economic activity will drive much of the growth,” said Vishrut Rana, an economist at New York-headquartered S&P Global Ratings. “Households will spend more normally as opposed to cautious and limited spending amid the Covid-19 outbreak. Firms will also restart delayed investments.” And as consumption revives, credit rating agencies expect India’s economic growth to rebound.
The revival in consumption, meanwhile, will be driven by discretionary as well as non-discretionary spending. Non-discretionary spending refers to things like groceries and other essential items. Unsurprisingly, this category remained largely unscathed during the lockdown.
And as the uncertainty surrounding income and jobs reduces, economists believe that some people will be able to raise their discretionary spending on non-essential goods. ”The sale of clothing and consumer durables like refrigerators and air conditioners may revive during the December quarter of financial year 2021,”said Sunil Kumar Sinha, principal economist at India Ratings. “Automobile sales may also rebound in the festive period in the current financial year.”
Bumpy road ahead
That pent-up demand could give a much-needed boost to faltering growth. At the same time, India should be wary. The depth of the slowdown in the current financial year means that a rebound is inevitable but there are factors that could hamper the recovery process.
The weakening of businesses and the crippling of India’s informal sector are major problems. “Balance sheets in the financial sector and some corporate sectors have deteriorated during the downturn and could present a hurdle to the recovery,” Rana told Quartz. “A smooth recovery in labour markets, including in the large informal sector, is key in supporting the economic recovery.”
India has been facing jobless growth (where GDP grows but employment remains stagnant or falls) and if this trend continues, it’s another problem. “Without enough jobs, households incomes will be under strain and the economic recovery will be sluggish,” Rana added.
Small isn’t beautiful
This reduction in household expenditure is having a particularly damaging impact on smaller businesses, which have already been stung by the demonetization policy of 2016, and a new tax regime—the goods and services tax (GST)—the following year.
According to some economists, the government’s $266 billion Covid-19 package, which focuses on indirect measures like providing access to credit and infusion of equity, will provide relief but it isn’t enough to support beleaguered micro, small and medium (MSME) enterprises. “There is an assumption that MSMEs will be able to avail credit and then use it for survival” said Sinha. “Even if they are able to re-start their businesses, unless there is a revival of demand who will they sell their goods to?”
Small companies don’t want more debt. “Some of the MSMEs which were impacted by GST and demonetisation haven’t still recovered,” added Sinha. “So they might not be able to repay the debt if the demand or sales remain so tepid.” He added that in order to service debts, companies must reach 70% capacity, which can be achieved only if demand picks up. A focus on demand is missing from government policy, Sinha said.
Also, taking the credit route means relying on India’s financial system, which is still cleaning up the wreckage of past bad loans. Indian banks entered the Covid-19 battle already bruised and their condition is expected to deteriorate further as bad loans dent their profitability in the current economic conditions. “Should these conditions prevail beyond fiscal 2021, continued risk aversion, particularly from the more selective private sector banks, could stymie credit growth,” said S&P Global Ratings in a report last month. “This would put yet another brake on the economic recovery.”
Apart from MSMEs, India’s aviation and hospitality industries have been facing their own set of problems, because of high fixed costs, and these have now been aggravated. With the revival in these sectors expected to take much longer, it will have a cascading effect on the overall economy.
While businesses grapple with losses, the reopening of the economy poses fresh challenges for tackling the spread of Covid-19. The virus is gathering pace in India as economic activity limps back to normality, and the country may not able to afford further restrictions.
“The risk would emanate from the longevity of the Covid-19 and the extent of the dent caused by it to the economy,” said Harshad Borawake, head of equity research at Mumbai-based mutual fund Mirae Asset Investment Managers India. “If the lockdown gets reimposed in the key states, then it could lead to the delay or derailment of the recovery process.”