The damage was inevitable. With vaccine for controlling COVID-19 still elusive, governments across the globe had little or no option but to go for a prolonged lockdown in order to ensure social distancing, but it has taken a toll on global economies.
As per one survey from Ernst & Young, 30 percent of the companies that exist today have less than two months of cash to pay salaries. Unemployment rates are at an all-time high, and with relaxation in government orders, we may see further spike in unemployment rates and salary cuts across the sectors. Ongoing restrictions on economic activities will continue to add to the financial stress of the companies. In all likelihood, India’s GDP will contract in this financial year.
That option is still much better than the loss of lives that would have happened had there been no lockdown, but still, lives of many are bound to change as more and more people slip below the poverty line as a result of the economic slowdown.
Left with little option, the government has allowed the reopening of economic activities in a calibrated manner, first during lockdown 3.0, and later, with even more relaxations during the ongoing lockdown 4.0. Further relaxations are expected as most states are gearing-up for the opening of the economy. Barring shopping malls, movie halls and restaurants, most industries have been given permissions to resume operations.
Going by what has been observed during the initial phases of reopening the economy, buyers seem to be cutting down on non-discretionary expenses to a large extent so as to save as much as possible in these trying times, amid the clouds of uncertainty.
As a result, demand continues to remain weak. The news on the corporate front also seems to be indicating the same. Many blue chip companies have deferred their expansion plans for the time being. The story of the startup universe is also similar, in fact, a bit more troublesome even, as unicorns are resorting to large scale layoffs and pay cuts across the board.
A reboot was needed for economic activity which had come to a grinding halt during the lockdown. Aware of the situation, Prime Minister Narendra Modi promised an economic package worth Rs 20 lakh crore, equivalent to 10 percent of the economy. The contours of package were made public by Finance Minister Nirmala Sitharaman in five different tranches. It included several measures to pump liquidity into the system, which could help companies remaining afloat.
Since MSMEs – one of the largest employment generating sector – has been one of the biggest sufferers of the turmoil, the government announced measures like Rs 3 lakh crore emergency credit line guarantee scheme, as well as Rs 50,000 crores equity infusion through MSME Fund of Funds among others. The twin measures are likely to help the beleaguered sector.
Similarly, to help farmers, the government announced a Rs 1 lakh crore agri- infrastructure fund for farm-gate infrastructure, besides taking few other measures to help different verticals of agriculture sector. It has also opened up Rs 90,000 crore debt windows for ailing discoms, which is a vital claw in the entire power sector.
That’s not all. The troubled NBFC sector has too received its share of attention in form of a Rs 30,000 crore special liquidity scheme by the RBI, guaranteed by the government. Equally significant is a similar scheme – Rs 45,000 crore partial credit guarantee scheme 2.0 for liabilities of NBFCs or MFIs – under which the government will provide sovereign guarantee to public sector banks for the first 20 percent loss on lending to NBFC and MFIs.
The measures announced by the government as well as the Reserve Bank of India, which has injected liquidity to the tune of Rs 5 lakh crore in the banking sector, may help the NBFC sector a great deal. The real estate sector also stands to gain from it.
The extension of the credit linked subsidy scheme for the middle income group by a year, upto March 2021, is likely to benefit 2.5 lakhs middle income families during 2020-21. This may lead to investment of over Rs 70,000 crore in the housing sector, thereby stimulating demand for steel, cement, transport and other construction materials.
Focus on supply side and demand side completely ignored
Most of the measures announced by the government are likely to help in mitigating supply side constraints, but little has been done to instigate demand. And unless demand gathers steam, a faster recovery will remain elusive. With massive layoffs across sector, the government needs to create employment opportunities at the earliest, and this is where the revival of the real estate sector holds key.
Some of the Industries did not get required attention
The COVID-19 related lockdown has taken a toll on all sectors but some of the sectors have got it worse than the others. In addition to MSMEs, sectors like aviation, hospitality, automobile and real etate are suffering a lot. Except for MSMEs, the government has not provided any industry specific stimulus to revive these industries.
Financial institutions role will be key
The intention of all the measures announced is to make India self-reliant. However, it would depend upon the country’s banking sector, which needs to do most of the heavy-lifting. Despite ample liquidity in the system, banks have been very reluctant to lend to several sectors, hence, the benefits have remained limited. It will be interesting to see how the government ensures that banks undertake lending in a big way, without which benefits will not reach the targeted segment.
Reform measures
Also of equal significance will be the quick implementation of reforms measures which the government announced. As it is popularly said ‘government has no business to be in business’, the government needs to hasten the newly envisaged public sector enterprise policy, which aims to privatise public sector undertakings in non-strategic sectors, and consolidate PSEs even in the strategic sector.
The reform measures announced in the field of agriculture, like amendment to the Essential Commodities Act, the Agriculture Marketing Reforms so as to provide marketing choices to farmers, as well as other sectors like the increase in FDI limit in the defence sector, along with opening up of the coal sector, need to be implemented at the earliest as it will boost business confidence in those industries.
Even though we are now one of the most attractive corporate tax destination in the APAC region, in order to kick start the investment cycle it’s important for the Indian government to bring labour and land reforms, which are expected by all industry stakeholders. The government also has to improve contract enforcements, and protection of intellectual property rights to attract foreign companies.
The likely impact
The total outgo from exchequer is much below the expectation – around 1 percent 1.5 percent of the GDP in FY21 – but even if that is executed well, along with speedier implementation of reform measures, it will go a long way in resurrecting the Indian economy.
But a lot needs to be done.
Needless to say, in such a scenario, the demand may be slow for next few quarters as most industries and consumers will be cautious, and would want to see how this health crisis unfolds over the next few months. The economic activity is expected to swing back to normal by next financial year, only if there isn’t a ‘second wave’ of the virus as most virologists fear.
(Edited by Aparajita Saxena)
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
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Link : https://yourstory.com/2020/06/financial-measures-indian-economy-revival-coronavirus
Author :- Vikas Wadhawan ( )
June 19, 2020 at 03:40PM
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