The Confederation of Indian Industry on Thursday said it expected India’s economy to slow down considerably, with its estimate ranging from a contraction of 0.9% to a growth of 1.5%, in the current financial year due to the COVID-19 outbreak and the subsequent lockdown.
“Given the extent of damage to the economy from disruption to business, GDP growth in FY21 will likely be the lowest in many decades,” said Chandrajit Banerjee, director general, CII.
Noting that by the time the second phase of lockdown ends on May 3, it would have extended for 40 days, the industry body said the economic costs of the lockdown are rising with each passing day, with the impact being felt across sectors. “The situation requires immediate, across-the-board intervention from the government,” it added.
It pointed out that under lockdown, in the manufacturing sector, only food processing, pharmaceuticals and medical equipment units were operational while construction and mining activities had halted completely.
Similarly, within services, the majority of trade, transportation and hospitality units remain closed while financial, IT and government services remain partially operational. Even in the power sector, which can operate, significant reduction in demand owing to lockdown is having an adverse impact.
“Any significant revival in investment activity is unlikely as capacity utilisation levels may remain sub-optimal. Consumption demand is likely to remain lacklustre as people’s incomes have been impacted,” it said, adding that on the external front, as economies across the globe continue to struggle with the pandemic, global trade may decline by 13-32% in 2020, as estimated by the World Trade Organisation..
Mr. Banerjee said that given the situation, government intervention becomes critical not only to sustain the economy but also to prevent any humanitarian crisis.
Best-case scenario
In a new paper titled ‘A plan for economic recovery,’ the CII said, in an optimistic scenario, wherein a faster pick-up post the lockdown period is envisaged, the GDP forecast is for growth of 1.5% ‘in the best case.’ In the ‘baseline scenario,’ the GDP is expected to grow at 0.6% as economic activity is expected to remain constrained due to continuing restrictions on the free movement of goods and people beyond the lockdown period. “This will lead to disruption in supply chains, slow pick-up in investment activity, labour shortages in the short-run and muted consumption demand on account of reduced household incomes.” In the case of a more prolonged outbreak, where the restrictions in existing hot-spot regions get extended, while new regions are identified as ‘hot-spots’ leading to intermittent stop and start in economic activity, the GDP is likely to contract by 0.9%, the CII added.
The CII had earlier suggested urgent fiscal interventions, including cash transfers amounting to ₹2 lakh crore to JAM account holders, in addition to the ₹1.7 lakh stimulus already announced. It had also recommended additional working capital limits to be provided by banks, equivalent to the April-June wage bill of the borrowers, backed by a government guarantee, at 4-5% interest.
Additionally, the industry body has suggested that a fund or SPV be formed with a corpus of ₹1.5 lakh crore that will subscribe to NCDs/bonds of corporates rated A and above. “The fund can be seeded by the government contributing a corpus of ₹10,000-20,000 crore, with further investments from banks and financial institutions such as LIC, PFC, EPF, NIIF, IIFCL et. al. This will limit government exposure while providing adequate liquidity to the industry,” the CII paper said.
Further, for MSMEs, the CII has suggested a credit protection scheme whereby 75-80% of the loan should be guaranteed by the RBI, i.e. if the borrower defaults, the RBI should buy the loan and repay the bank up to 75-80% of the loan so that the risk to the lender is limited.
SIDBI could provide the guarantee for loans to industry and trade while NABARD could provide the guarantee for loans to agro-processing sectors, the CII said.
“Without an increase in government spending in the near-term to drive an economic recovery, government revenue will dwindle, and high deficits will continue to be a problem in future,” Mr. Banerjee said.
