Expect another round of conventional and unconventional easing for cushioning the ongoing economic crisis
In a TV address on April 14, Prime Minister Narendra Modi declared that the 3-week national lockdown, which was to end today, will be extended to May 3, ie, by almost three more weeks. This step has been taken to bend India’s COVID-19 proliferation curve. PM Modi stressed that monitoring of the lockdown will be heightened over the next seven days, but gradually, from April 20 onwards, select economic activity may be allowed to restart in areas where there is no COVID-19 proliferation, or where the proliferation has been contained. The good news is that Indian citizens have been following the lockdown orders so far (as per Google mobility and air quality data). However, the economic costs are mounting.
Economic woes to rise
We estimate that 65% of economic activity, more than 50% of consumption and arguably all of the investment will be impacted. We combine the share of each sector in gross value added (GVA) with the proportion likely to be locked down and calculate that every month of lockdown leads to a loss of 5.4% of GVA (see graphic). Six-weeks of national lockdown (as prescribed by PM Modi) followed by (say) about six-weeks of partial lockdown (in areas where proliferation takes longer to contain), could lead to ~12% of GVA loss. A substantial portion of this would get made up once activity restarts. We believe postponed consumption, inventory restocking demand, and the natural buoyancy in economic activity can make up some of the lost output. And, even in the recovery phase, manufacturing (which can be stored) is likely to do better than services (which can’t be stored).
More policy balm expected
The authorities have already announced several stimulus measures in March. The government announced social welfare spending of 0.8% of GDP; RBI cut rates (by 75bps), infused liquidity, eased regulatory requirements and announced steps towards financial reforms. We expect more easing—more social welfare outlays and a stimulus plan for small businesses, and more rate cuts and liquidity infusion by RBI. To be specific, we expect 40bps more in repo rate cuts, taking the terminal rate to 4%. This would mean real rates of 0%. We expect the government to increase health spending outlays, pay-up lingering dues to SMEs, reprioritise fiscal spending, pay-off tax refunds quickly and provide more direct cash transfers to Jan Dhan Account holders. In terms of new steps, we expect some partial credit guarantees for small businesses and more outlays to help small businesses via Mudra loans. Alongside, we expect some new ‘unconventional’ steps such as RBI lending directly to some sectors (like NBFCs) and perhaps even considering accepting more instruments at the LAF window (like corporate bonds). The fiscal cost is likely to rise rapidly. Several new measures may be needed to fund it—further enhancement in ways-and-means-advances (temporary loans to state and central government), forbearance on mark-to-market accounting in order to incentivise banks to hold g-secs, and more open market operation (bond purchases in the secondary market). If the funding gap remains wide after all resources have been fully utilised, RBI could eventually resort to some direct monetisation of the fiscal deficit, as a one-off, although we don’t expect an announcement on this in the near future.
Author is chief economist, India, HSBC Global Research. Views are personal
Co-authored with Aayushi Chaudhury, economist, HSBC Global Research
Edited excerpts from HSBC Global Research’s India: National lockdown extended (dated April 14, 2020)