India stares at a long road to economic revival
Cash shortage, frayed supply lines, a closed export market and labour crisis are likely to pose a tall challenge for the government as it looks to spur economy
Small businesses in industrial enclaves across India are confronting the harsh new realities of a post-Covid world as they count their losses from the pandemic and the subsequent lockdown . Cash is short. Supply lines are frayed. Export markets are shut. And workers have vanished.
“How do you restart business without labour? They are all gone right now,” said Mayank Ajay Gupta, the proprietor of Olympic Zippers at Meerut’s Partapur, once a buzzing industrial enclave of nearly 15,000 big and small units just outside Delhi.
Micro, small and medium enterprises (MSMEs) businesses usually rely on month-to-month operations for revenues and profits, with little reserves and staying power. It is yet uncertain when economic activity can return to pre-Covid levels because social distancing rules mean only 33% of the workforce at a unit can work at any time.
The lockdown enforced from the intervening midnight of March 24 and 25 triggered the distress exodus of millions of workers and daily wage workers from the cities back to their homes in the villages of states such as Uttar Pradesh, Bihar, Jharkhand, Odisha and West Bengal that have traditionally been the source of labour for factories such as Gupta’s.
The Indian economy, the world’s fifth largest, had already been slowing because of a downturn in household consumption and private sector investment before the pandemic hit. Although it included just one week of the lockdown, economic growth in the quarter ended March slumped to 3.1%, official data released on May 30 showed.
To spur growth, PM Narendra Modi on May 12 announced a ₹20 lakh-crore relief and stimulus package on national television that included past fiscal and monetary measures taken by the government and the Reserve Bank of India. He also spelt out a new economic stance of self-reliance. Businesses, however ,are preparing for the country’s first potential recession in a generation despite large lending programmes announced by finance minister Nirmala Sitharaman.
The economy is precariously poised. Data from the Controller General of Accounts show the fiscal deficit, or the gap between the government’s earnings and spending, for FY20 stood at 4.59% of gross domestic product (GDP), higher than budget’s target of 3.8%. The revenue deficit stood at 3.27% of GDP. This would mean that the government will have limited space to fund bailouts.
Sitharaman on May 13 announced several measures for MSMEs, the backbone of Indian manufacturing, which account for 29% of India’s GDP and employ over 120 million workers.
The sector is uniformly worried about capital and labour. “These reforms (announced by the government) are more medium-term in nature, and we therefore do not expect these to have an immediate impact on reviving growth,” Goldman Sachs economists Prachi Mishra and Andrew Tilton wrote in a research note on May 17.
India’s growth woes began much before Covid-19 struck. In September 2018, Infrastructure Leasing and Financial Services Ltd, a major lender to all kinds of businesses, including MSMEs, defaulted on its debt obligations, triggering a rippling liquidity crisis in the country’s financial services market. Borrowing costs rose sharply. Private demand began collapsing too.
Economist Hetal Gandhi of Crisil research said people’s investments were locked in stalled real-estate projects, squeezing their spending ability on other goods. She cited data from the Real Estate Regulatory Authority to show that not just new projects, but the rate of completion of existing projects had come down too.
The economic backdrop to the lockdown was grim. Total average earnings of farm households, according to Crisil data, from agricultural related income, which includes rural labour wages, registered growth of 0% in 2018 at ₹65,000 compared to an 8% increase in 2017.
Urban income growth from the formal sector, as reflected in cost of employees for 750 listed companies, which was averaging 10-12%, fell to 5% in the last quarter of 2018-19. “If I look at six-quarter data of employee cost prior to quarter three of FY19, we saw growth rate per employee of 10-12%, which in the last quarter was 5%,” says Gandhi. An income crunch is clear, she says.
Nobody expects a V shaped recovery now, a scenario where a downswing is quickly reversed as growth scales rapidly back up. Most expect a U or L shaped trajectory: the former represents a long drag and the latter a sustained low.
The projections may not be out of place. At the Wagle industrial estate in Thane, home to 900 manufacturing units, none has been able to start operations because of a liquidity and labour crunch, says Sandeep Parikh of the Chamber of Small Industries Association.
“We don’t need fresh loans. We need a lower Goods and Services Tax for long term sustainability,” says Ajay Rathi of Rathi Fastners, a medium enterprise.
India’s economy will likely shrink 5% in the year through next March, Goldman Sachs said in a report in the last week of May. The International Monetary Fund has slashed its 2010-21 growth projection for India to 1.9% from 5.8% estimated in January. Barclays said it saw 0% growth.
The lockdown has generated a massive supply shock, which is an unexpected change in the supply of a commodity or a service. According to calculations by Pronab Sen, former chief statistician, the supply effect of the lockdown, which impacted between 50 to 55% of the economy, potentially led to a weekly loss of around ₹2 lakh crore or 1% of 2019-20 GDP at 2019-20 prices.
As the country clamped a shutdown on March 24, shutting factories, shops, and construction sites, jobless migrant workers were caught in a survival battle. Thousands began walking home hundreds of miles under harsh conditions, hungry, thirsty and tired, setting off an unprecedented crisis.
Aijaz Hassan, the proprietor of a unit that makes scissors in Meerut’s famous Kainchi market, says he is hurting because the government did not allow MSMEs to open in April when the lockdown was first eased. Doing so would have averted a mass reverse migration never seen since India’s Independence, he says. “That would have prevented the labourers from fleeing the city. We would have been able to employ them,” he said.
Not surprisingly, the country’s unemployment rate quickened to historic highs, costing well over 114 million jobs, mostly of small traders and daily wagers, data from the Centre for Monitoring Indian Economy (CMIE) showed in May.
The unemployment rate touched 27.1% in the week that ended on May 3 -- the highest ever – indicating a bloodbath in the labour markets. A silver lining has been that an unlocking economy has now begun adding new jobs. Latest data from the Centre for Monitoring of Indian Economy showed urban unemployment fell sharply since the shutdown was imposed to stand at 17.08% in the week to June 7, from a high of 25.14% in the week ended May 31.
On June 5, the Reserve Bank of India (RBI) released minutes of its monetary policy committee’s May 20-22 meeting, which discussed the impact of the shutdown. They bore grim milestones. The central bank indicated India could see its economy shrink for the first time in 40 years. RBI deputy governor, Michael Patra, said the lockdown’s damage was so deep that the country’s potential output or GDP would take “years to repair”.
Committee member Janak Raj said private consumption, which refers to everything we buy, may slow down considerably. He further added a collapse in domestic demand will pull inflation down significantly from current levels. A little inflation is necessary to keep economy activity going.
Softer prices could take the shine away from agriculture, the only sector of the Indian economy that has largely escaped the bite of the lockdown.
The government has been able to ensure the farm sector has had easy access to all the inputs needed for the ensuing kharif or summer-sown season, says KR Mani, a professor at the Tamil Nadu Agricultural University. These include loans, seeds and fertilizers. The government through an ordinance has also made markets free of middle-men who take big cuts of value from farmers.
The farm sector is poised to grow at least 3% in 2020-21, which will aid overall growth, according to the state-run think-tank Niti Aayog’s assessment in April.
Fresh indicators show the country’s farm sector has coped well with the crisis, with a larger summer crop area than last year, higher sales of fertilisers and seeds, and better prices, leading RBI governor Shaktikanta Das to call it a “beacon of hope”. A slump in overall demand and softening prices albeit will let farmers down.
What worries economists more is that India’s Covid-19 cases continue to rise. “Increased economic activity will come at the cost of elevated risk of higher infection rate...,” said Sonal Varma, an economist at Nomura Securities Ltd. “Orchestrating an economic recovery without a health recovery will remain challenging,” she said.