Indian economy: There is a compelling case for a massive intervention

Coronavirus impact on Indian economy
The coronavirus outbreak will have a debilitating impact on the economy in Q4 2019–20 and for the entire 2020–21.

By Manoranjan Sharma

The Covid-19 pandemic has truly been a game-changer across the development spectrum in terms of the impact on the global economy, domestic economies and their several segments and sectors. The UNCTAD estimates a $1 trillion hit to the global economy. There have also been extremely disconcerting parallels drawn with the global financial meltdown of October 2008 and even with the Great Depression of 1929.

In the case of India, the economy has been in the midst of a marked macro-economic slowdown with the impact being pronounced on MSMEs, the unorganized sector, exports, and manufacturing. This global crisis is estimated by the UNCTAD to set the Indian economy back by $348 million because of the devastation to not just firms but also to industries across the development spectrum such as airlines, road and rail transport, automobiles, hospitality, meat and poultry, films, music, sports, advertising, media, retail and tourism, as well as supply chain disruptions. There has also been a bloodbath on the bourses.

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There is a compelling case for massive intervention by all stake-holders and extending the reach of the state, particularly when there is little risk of spiralling inflation.

There is a debilitating impact on the GDP growth for Q4 19–20 and FY 20–21, weakening of aggregate demand and uncertain and negative future outlook. The RBI acted decisively by reducing the repo rate by 75 basis points to 4.4% and the reverse repo rate by 90 bps to 4%, announcing a three-month moratorium on payment of instalments of term loans and deferment of interest on WC facilities by 3 months. This deferment will not be considered for computation of NPAs and revised DP calculations will be done by reassessing the credit history of the borrowers.

The CRR has been slashed by 100 basis points to 3% to release Rs 1.37 lakh crore into the banking system. The requirement of minimum daily CRR balance has been reduced from 90% to 80% till June 30, 2020. Thus, liquidity of Rs 3.74 lakh crore has been injected into the system. The total liquidity injection works out to 3.4% of India’s gross domestic product.

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These measures are of considerable contextual significance not just for leveraged sectors and companies, but also for the larger macroeconomy. What makes this set of measures remarkable is that historically, the RBI is known for taking gradual, calibrated measures. But this time, by going the whole hog and thereby redeeming its promise to do whatever it takes, the RBI is ahead of the curve. There would now be a renewed thrust on banks to ensure much greater transmission of the rate cuts than in the past. Further, banks need to be prudent; otherwise, at the end of the three-month moratorium, there could be a surge in NPAs.

This combination of moratoriums, liquidity enhancing measures and the steep repo rate cuts would prevent a freeze in credit/debt market as well as a crisis of confidence. Governor Shaktikanta Das has taken the right call in these difficult times.

(Dr Manoranjan Sharma is Chief Economist, Infomerics Ratings)