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Business & Finance

Lockdown Maybe, Breakdown Already

With the economy in a breakdown mode, recovery and revival of growth, will only become more difficult and delayed and will aggravate the overall economic crisis even further.

 

The deadly covid virus refuses to go and is fast mutating and is afflicting humanity, all over again. The world faces a covid resurge and nations like France are already in a third round of lockdown as they battle the pandemic and unfortunately, India is no exception. With the daily covid cases in India, touching new highs all over again and major production states like Maharashtra and Karnataka and cities like Mumbai and Bengaluru severely afflicted, the shaky Indian economy is already facing again, a crisis of slowdown and disruption. States like Maharashtra have already imposed a citywise lockdown, with Mumbai still under wait and watch. The reality however is that with the fast ballooning healthcare crisis, even if a lockdown is not imposed, a breakdown in the economy is imminent and has already set in, in various segments of supply of goods, labour availability and consumer demand and is best reflected in the core sector growth, which contracted by 4.6% in February 2021 and continues to do so.

 

With the economy in a breakdown mode, recovery and revival of growth, will only become more difficult and delayed and will aggravate the overall economic crisis even further, for reasons discussed below.

 

  1. A slowdown and uncertainty in economic activity will mean further job losses. Last year’s jobs lost have not fully comeback and with more expected to be retrenched, the job losses could be a permanent one. Moreover corporates/employees have learnt to work with fewer workers and have tasted blood of profits through such cost cutting and thus in future, will be reluctant to rehire.
  2. Unemployment or under employment would mean a dip in household income and therefore consumer spending will remain subdued and will take much longer to revive. Household savings will dip further, despite the reluctance of households to restore discretionary consumption.
  3. With a dip in demand/consumer spend, corporates will be unwilling to invest in new projects. Forget a surge in fresh investments, a surge in business closures and downsizing is more likely.
  4. Any durable and rapid growth of the economy is ruled out. The overall recovery in the economy will be delayed by at least six months as compared with the earlier estimates, in case there is an intense return of Covid. A contraction of the economy is not a distant possibility.
  5. The government finances have been weak and will be strained even further. It will have a buoyant fiscal deficit, will resort to massive borrowings as planned and will be in no shape to give any kind of a fiscal stimulus, by way of direct financial support.
  6. While the RBI has already predicted a rise in bank NPAs, they will increase even further, depending on the disruptions caused in the economic activity, upon the return of a covid wave. Rising instances of downsizing of business, closures and bankruptcies will have an adverse impact on the financial health of banks.
  7. With the efficacy of monetary policy initiatives having run out of steam, it is the government that will need to do the heavy lifting for the survival/revival of the economy. Unlike last year, it will not be able to pass on the responsibility to the RBI this time.
  8. Individuals will need to reskill and enterprises will need to reinvent themselves, to be able to survive these tough times.
  9. There will be an overall dip in confidence and a rise in uncertainty and it is the government that will need to restore confidence and certainty, in the minds of the consumers and the producers.

 

At such times, if the government does not have the financial means to give a genuine round of fiscal stimulus and it is reluctant to borrow and spend, then it will need to improve the ground realities of the ease of doing business, ease of earning and ease of compliance, such as to encourage fresh investments in the country, that trigger the cycle of jobs, spending and investments. A breakdown/lockdown is always an opportunity to start afresh and while it may not give immediate relief such as financial stimulus does, it will however restore confidence and will put the economy on a path of recovery in the medium term.

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