Loss of GDP may continue even after lockdown as lifting of restrictions shall be gradual.
Barendra Kumar Bhoi
The war against Covid-19 pandemic is not yet over. Like many other countries, India too is fighting the war relentlessly. India’s handling of the Covid-19 crisis so far has been reasonably successful due to early lockdown and strict implementation. The corona-positive cases in India have been increasing linearly rather than exponentially. The ratio of recovery to the positive cases has been rising steadily. While the nation-wide lockdown is under progress, hotspots have been identified and containment zones demarcated, giving an opportunity for rest of the country to resume work and restore economic activities, wherever possible. The strategy has been calibrated lifting of restrictions since April 20, 2020, which may gather momentum after the lockdown expires on May 3, 2020. Nevertheless, there is no room for complacency, at least in red zones where the pandemic is still spreading rapidly.
What about livelihood? India has already suffered huge loss of income, employment and GDP due to nation-wide lockdown for 40 days since March 27, 2020. The IMF’s world economic outlook has predicted India’s real GDP growth at 1.9% in FY21, which has become doubtful. Loss of nominal GDP on 100% basis for 40 days is likely to be over ₹24 trillion, and at least ₹12 trillion on 50% basis from ₹225 trillion projected in FY21 budget. Similarly, the loss of India’s real GDP may be over ₹17 trillion on 100% basis and ₹8.5 trillion on 50% basis from the projected level of ₹156 trillion. Loss of GDP may continue even after lockdown as lifting of restrictions shall be gradual. Under an optimistic scenario i.e., 50% GDP loss during the lockdown, India’s nominal GDP growth in FY21 may be hardly 4% – equal to average CPI inflation and hence no real GDP growth.
While the supply shock (GDP loss) is permanent, the demand shock due to fall in income and employment may be temporary, which can be contained if suitable stimulus packages are implemented. Ideally, fiscal stimulus should play a more active role as it influences economic activities directly unlike monetary stimulus that operates indirectly through making adequate credit available at a reasonably low-interest rate.
International experience shows that advanced economies (AEs) have been relatively more liberal in fiscal stimulus as monetary policy space has been limited following incomplete normalization of monetary policy after the global financial crisis. Developing economies (DEs) have been cautious in both monetary and fiscal stimuli due to the high debt-GDP ratio and fear of credit rating downgrade.
Unlike AEs, India had reasonable space for monetary policy to respond quickly. The government has been more concerned about saving lives and thereby reducing the magnitude of the fiscal package necessary to safeguard livelihood. The government has announced only ₹2 trillion package so far, including ₹30000 crore relating to PM’s Garib Kalyan Yojana, mostly meant for immediate relief to the poor people. Given the magnitude of loss, the government is working to announce a comprehensive package at the earliest. In the absence of consensus, at least another ₹6 trillion package is needed, which may be shared by both RBI and the government.
Although monetary and fiscal packages are not additive, they should complement each other. The major monetary policy initiatives, announced thrice outside the policy cycle, are: a) deep cut in the repo rate by 75 basis points (bps) on March 27, 2020 (reverse repo rate by 115 bps); b) provision for enough primary liquidity, around ₹5.24 trillion (comprising ₹1.37 trillion each due to 100 bps cut in CRR and exemption of SLR of similar size, ₹1.5 trillion through targeted long-term repo operations (TLTRO1 and TLTRO2), ₹0.5 trillion special refinance to NABARD, SIDBI and NHB, and ₹0.5 trillion special liquidity facility for MFs); and c) several regulatory forbearances to protect interests of both lenders and borrowers.
The excess liquidity, measured by net reverse repo outstanding, which was as high as ₹6.9 trillion on April 15, 2020, is unlikely to be utilized by borrowers due to lack of demand for credit and the risk-averse behaviour of banks. Nevertheless, excess liquidity is expected to provide comfort to the market, at least by reducing short-term interest rates. Hopefully, about ₹2.5 trillion (₹1.5 trillion TLTRO, ₹0.5 trillion special refinance, and ₹0.5 trillion SLF-MF) may reach the borrowers as they are designed to be utilized in a time-bound manner. Besides agriculture, NBFCs and MFs, the corporate sector, including the worst-hit micro, small and medium enterprises, will benefit.
Contrary to the expectation of softening, India’s 10-year benchmark yield shot-up after RBI’s policy announcement on March 27, 2020, and currently remains at an elevated level. This is attributed to massive offloading of government securities by foreign portfolio investors due to flight to safety and market expectation about large overshooting of government borrowing programme – about ₹4 trillion (₹2 trillion shortfall of revenues/disinvestment and ₹ 2 trillion fiscal stimulus already announced).
It would be difficult to finance additional fiscal package through market borrowing without pushing up sovereign yield. Moreover, this may defeat the purpose of RBI’s easy monetary policy. Many policy experts have suggested the following soft options: a) borrowing directly from RBI i.e., monetization of deficit/debt; b) transfer of RBI’s reserves/contingency fund to the government; c) RBI opening a direct window to finance NBFCs/MFs; and d) allowing corporate debt as eligible collateral for borrowing from RBI. Some of these proposals cannot be implemented without amendment of relevant acts. It is wise to avoid these soft options as downsides going forward may outweigh benefits.
Alternatives are: a) financing deficit through extra-budgetary resources obtained from small savings by increasing income tax benefit to ₹3 lakh under Section 80c; b) sovereign borrowing from abroad in foreign currency directly or through PSUs under government guarantee; c) mobilization of resources from multilateral institutions like IMF, World Bank, ADB, etc.; and d) activation of bilateral swap wherever possible.
Barendra Kumar Bhoi is a Visiting Fellow at IGIDR and former head of the Monetary Policy Department, RBI. Views expressed are the author’s personal.