The problem is companies won’t be able to repay their loans for some time, and the RBI seems to have addressed this situation through the three-month moratorium.
Pronab Sen, noted economist and the former chairman of the National Statistical Commission, says authorities must not stop at initial relief measures and must do more to address the Covid-19-related humanitarian and economic crises without bothering too much about either fiscal slippage or inflation. The economy, he says, will likely witness a contraction in H1FY21 before staging a fragile recovery in H2. Given the inability of companies and individuals to service loans and the moratorium on repayment, the RBI has to be vigilant about the stress building in the banking system. Not just state-run banks, even private lenders will need to be capitalised to be able to weather the storm. Labour-intensive sectors have been hit the hardest and they will see a protracted phase of slowdown, he cautions. Edited excerpts:
On relief measures by the govt and the RBI
These are only the initial steps, and hopefully, they don’t stop here. At this point in time, the rate cut has only the psychological benefit but no real effect. But for the moment, the RBI has done what it could. Of course, it has to be careful about potential stress building in the banking sector.
On the biggest problem facing the financial system
The economy was already going through a phase of demand slowdown. Now, thanks to the Covid-19 outbreak and the consequent lockdown, we had to move to the supply-side management. The whole approach, at the moment, is to first address human suffering, which is finally the job of the government. The finance minister has tried to address this issue through the transfer of benefits to various categories of people. The problem is companies won’t be able to repay their loans for some time, and the RBI seems to have addressed this situation through the three-month moratorium. But then, any such move shifts the stress on to the banks, which will see a massive capital erosion until a smooth resumption of repayment channels.
On likely infusion by the government
Not just state-run banks, even private banks will need adequate capital to sustain.
On FY21 growth and inflation
Even if the lockdown is lifted in mid-April, the GDP growth in the first half of FY21 could witness a contraction. We will be lucky if we settle at zero growth. Only in the second half of this fiscal, we may witness a mild recovery.
As for inflation, since the government is trying to pump in liquidity and there are supply constraints, price pressure could spike temporarily. But the main issue is not inflation at this moment because some amount of price pressure is inevitable, given the circumstances. Also, some amount of profiteering will take place as far as essential goods are concerned.
On fiscal slippage
At this moment, who cares? This is not the time to worry about fiscal balances.
On potential NPAs
There will be a fresh surge in bad loans. And the potential source of these NPAs won’t be limited to just MSMEs or small businesses; even the viability of many large units will be eroded substantially.
On the desirability of a demand stimulus
At the moment, we are witnessing a supply-side problem because of the lockdown, and a demand-based response can’t help much, simply because the supply-side is not in a position to cope with the spurt in demand. But as the lockdown is lifted and the supply chain starts recovering, the demand problem will kick in. So a demand–side response will have to be implemented, but timing of it has to be carefully calibrated.
On the nature of potential demand response
We have to wait to gauge that because we don’t yet know how badly the supply side is getting bruised due to the lockdown. In any case, the supply-side response may have to continue for some time until companies are back in a position where they can start production as well as sale. Any premature demand response won’t work.
On labour-intensive sectors
Labour-intensive sectors are going to be hit the hardest. So getting the production system back to normal in these sectors will be a herculean task. So their recovery will be much slower.
On immediate govt response
At the moment, the focus has to be on humanitarian issues so that people don’t die of hunger or lack of medical treatment.
On Jan Dhan as a framework for benefit transfer
The real issue is that the ability of the government to reach out to people to offer immediate succour without much leakage is limited. Jan Dhan is one of the few instruments it has.