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Growth outlook: Crude crash could boost growth, but corona crisis will take it away

India’s economy today is weaker than it has been during previous crises even if a few of the macro indicators — mainly forex reserves, CAD and inflation — are more robust.

the global and Indian slowdown following the corona crisis will badly hurt local demand and exports. (IE)
the global and Indian slowdown following the corona crisis will badly hurt local demand and exports. (IE)

The damage from the coronavirus epidemic to demand, and consequently to asset quality, will far outweigh the gains from the crash in crude oil prices. Lower oil prices may give our economy a kicker and the government will make some extra cash from the higher levies on auto fuels. However, the global and Indian slowdown following the corona crisis will badly hurt local demand and exports.

India’s economy today is weaker than it has been during previous crises even if a few of the macro indicators — mainly forex reserves, CAD and inflation — are more robust. Not only is growth much more sluggish — an anaemic 4.7% year-on-year in Q3FY20 — with investments having tanked, factory output is also barely growing, and consequently fewer jobs are being created. Both consumers and businessmen have lost confidence and with the epidemic almost certain to slow the economy further, that confidence will take a much longer time coming back. At this point, it looks like the economy will barely manage 5% in 2020-21.

Even without the corona crisis, consumption grew at sub-6% in the first three quarters of 2019-20. This has impacted manufacturing — which contracted in Q2 and Q3 — and also services. The effects of slower activity in transport, construction, retail, tourism, autos — which employ larger numbers — could be debilitating. The slowdown in global growth — estimates now suggest this would be about 2% in 2020 — will further add to India’s export woes. While those businesses that consume commodities will benefit from lower prices, the producers will lose; much like in the case of oil where there will be less drilling and exploration activity, this will mean a loss of jobs.

The big concern is that small vendors will not get paid for their services and supplies at a time when they are already cash-strapped; very soon this will reflect in the asset quality of banks. The credit markets are lethargic with loan growth having slumped to sub 6% levels — at a time of abundant surplus liquidity — so, injecting more liquidity may not help. Banks have not been lending because they are risk-averse; lending now to businesses that are weaker may not be prudent.

If the corona crisis lingers on for more than three months, the government will see a shortfall in its fairly modest revenue targets — a 10-15% shortfall perhaps — and it won’t be able to meet the Rs 2-lakh-crore disinvestment target either if the stock markets remain jittery. The way to minimise the shortfall is to increase the levies on auto fuels and resist requests for tax cuts — whether PIT or DDT. There isn’t too much money to spend without pressuring the fisc but with benchmark yields at around 6%, borrowing costs will be in check.

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