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The economic fallout of COVID-19

Do recent indicators hint at a real economic revival?

November 06, 2020 01:28 am | Updated 10:09 am IST

New Delhi: People, flouting social distancing norms, visit a crowded Sadar Bazar market during the festive season, amid the ongoing coronavirus pandemic, in New Delhi, Monday, Nov. 2, 2020. (PTI Photo/Shahbaz Khan)(PTI02-11-2020_000095A)

New Delhi: People, flouting social distancing norms, visit a crowded Sadar Bazar market during the festive season, amid the ongoing coronavirus pandemic, in New Delhi, Monday, Nov. 2, 2020. (PTI Photo/Shahbaz Khan)(PTI02-11-2020_000095A)

After India’s economy collapsed in the first quarter of 2020-21 following the nationwide lockdown imposed to curb the COVID-19 pandemic , some economic indicators from September and October, from power consumption to GST collections , suggest that things are improving. But is this a sustainable recovery under way, or just an expression of pent-up demand combined with India’s festive-season spending? In a conversation moderated by Vikas Dhoot , Naushad Forbes and M. Govinda Rao throw light on the subject. Edited excerpts:

How has the ground situation changed for industry since March when the lockdown was imposed?

Naushad Forbes: Well, obviously, things have improved greatly. Our lockdowns were amongst the most stringent in the world, as we not only stopped most movement of people, but also of all logistics. I think we were probably unique in the world in stopping logistics as well as the movement of goods. And then, we also stopped most manufacturing, with the exception of essential supplies. Both those things were relatively unique, and it actually led to huge disruption in April. Companies across sectors saw a virtual stoppage in activity that continued into May.


Towards the end of May, things started opening up. But because of the way in which we had done the lockdowns... it took a while to get things back to a relative degree of smoothness. It was only in the middle and end of June that companies really started getting back to some degree of normalcy. And that is the reason for the first quarter numbers of -24% in the GDP. Since then, things have been recovering.

If you look at where we are now, a very different picture emerges, depending on which sector you talk of — pharmaceuticals and chemicals, food and beverages, tractors, two-wheelers, consumer durables are all reporting good performance, with many firms reporting growth on last year’s average numbers. At the other end of the scale, you have sectors like travel and tourism, which are still struggling, with capacity utilisation numbers between 10% and 30%. They are a very long way from recovery. Construction and real estate are also struggling, as is retail. In the last month, because of the run-up to Diwali in the festive season, retail has seen some improvement, but that is concentrated in high-street stores, not shopping malls, as people are still afraid to go to shopping malls and wander around.

So, we are still seeing these three very employment-intensive sectors — travel and tourism, construction and real estate, and retail — really struggling, probably at levels under half of last year on an average. There is this very differential performance between sectors...

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We still do not have a complete control on the virus, and until we do, we cannot look at the future with certainty or complete confidence. Because there is always this doubt, for example, with what is going on in Delhi just now with 6,000 to 7,000 cases a day. There is a big question [of] whether they are going to go into some form of lockdown, impose restrictions on movement, etc. And there is no transparency and clarity… that if you have this kind of increase in cases, then this is how you should lock down, and if you have this kind of improvement in the spread of infections, then this is how you open up. It is not difficult to put that together. Many countries around the world have done this … Germany has put this very transparently in place. It provides some certainty and direction to people...

How do you view the economic policy response so far?

Govinda Rao: The economy had already been slowing down when the lockdown was announced, and investments had been coming down ... Now, you have a huge problem of low investment; banks are not willing to lend as the banking crisis has not been addressed in any satisfactory manner, and, on top of it, you had a lockdown.

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The lockdown is not completely gone as you have the entire hospitality industry out; travel and tourism is not taking place and labourers are not available for construction. In this situation, it was hoped that the government would come up with a good fiscal package. But that did not happen. The Atma Nirbhar package only provided liquidity to the economy. So, investment continues to be slow, which has long-term implications, and we do have a problem of fiscal space. The entire additional spending, so far, was just about 1.5% of the GDP, and the second stimulus package basically provided white-collar workers, who were already spending, more benefits linked to their Leave Travel Concession. The total impact of this is not going to be large, even on commodities with more than 12% GST [Goods and Services Tax] rate.

Now, the GST numbers are showing a rise, not because of the economic revival, or the festival demand, or anything of the sort. My own hunch is that they were able to get some technology platform in place, and e-invoicing has begun for companies with over ₹500-crore revenue. They are talking about expanding this to firms above ₹100 crore by January 1. So, tax compliance might improve, but it may be too early to say that these increased GST collections because of compliance will continue. And you cannot call it festival demand, because most of October was considered inauspicious. Diwali is coming, and festival demand will come now in November.

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Most of the construction material — whether it is cement or steel or paint — are all subject to 28% GST, but they are not sin goods. This is the time for the government to come up and really reduce those rates to help the economy, which is picking up after the lockdown. Similarly, with the 28% GST-plus-cess levied on vehicles. You may say that low demand is not due to high tax rates. But reducing the tax rate can increase demand, and this is the time when they can really think of not just additional spending, but also relooking at the GST rates.

So, would you say that we would only have a better picture of whether we are really out of the woods after November, when the festive season is behind us?

Govinda Rao: I am not seeing any rosy picture yet because the structural issues need to be addressed quickly. You may have better GST collections, but that actually should open up the opportunity to reform the tax. When revenues are increasing, you can get States around and the GST Council can reduce rates. The second-quarter GDP growth will be substantially negative, maybe something like -9 to -10%, and we will have to see how the third quarter will work out.

Naushad Forbes: I think we will have a better idea when we get the December GST data. Because the big question on everyone’s mind is: how much of the good sales of consumer durables and so on, in September and October, is pent-up demand? The answer is that no one knows. And we will only know when we see the first month of sales after the festive season. Is it that people decided that “I haven't bought all this for so long. Let me now go ahead and buy it before Diwali”, or is it that we have indeed seen a good, solid recovery, back to consumption levels that people were more used to last year? Also, it is important [to note] that we came into the COVID-19 [pandemic] with a rapidly slowing economy, with seven quarters of successively lower GDP growth, and very sluggish industrial investment for many years now.

Also read | Economy almost at doorstep of revival: RBI Governor Shaktikanta Das

The question is: as the effect of COVID-19 goes away, which trajectory are we going to return to? Are we going to return to that earlier slowing trajectory? Or are we going to return to a trajectory that we were more used to in the 2000s and the 1990s, of significantly increasing demand, driving increased investment in more capacity?

CMIE data suggests that the unemployment rate rose again in October, while MGNREGA claims also rose in rural India. Can we expect employment to return to normalcy?

Naushad Forbes: Formal sector employment is reasonably stable. There is greater stress, as per CMIE, in the very substantial unemployment rate for salaried employees, not so much in manufacturing, but the retail sector. People who used to work in shops, hotels, restaurants — that is the biggest long-term hitch. We have seen very little in the way of support for stressed sectors by the government. The only thing that we have seen is a programme through the RBI [Reserve Bank of India] for one-time restructuring for stressed firms. But that is not a support programme. That is more about [the question that] if the company is not viable at the current level of operations, how do you restructure it to make it viable. That is not a way to actually enable employment to continue and keep that consumption running. I am more concerned about the stressed sectors and their effects in the longer run on the economy.

Also read | Worst is over, economic recovery faster than expected: Keki Mistry

The government has said it is open to another round of stimulus. What would be your wish list?

Naushad Forbes: There are three things that would trigger more substantive growth in the economy. Firstly, the government should pay its bills — there are large outstanding dues to small and large companies, including from public sector companies and State governments. This includes disputed amounts where awards have been made, and tax refunds. The government keeps saying that we have made all tax refunds up to some value, but by value of total refunds that are due, those refunds are small. So, simply paying its dues is a very direct and immediate way to put liquidity into the economy.

Secondly, investment in infrastructure, which will not show up in immediate activity on the ground, but [it] is the most productive thing that we can do to trigger long-term growth. One way this can be spurred is [by] the Union Government paying the States their GST dues upfront, because a lot of infrastructure projects are actually stagnant for want of finance from States.

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Thirdly, investment in public health systems, which would require working very closely with the States. But [its] benefits will flow to the society in the long run. The costs are not so huge and the receptiveness to doing something in this area is huge just now, because we are all suffering because of this rampant virus.

Govinda Rao: First of all, when they say they are not averse to more stimulus, I hope they really mean it. There has to be a substantial stimulus, not some pittance. Like Dr. Forbes said, they must clear their own pending bills that Union Minister Nitin Gadkari mentioned are as much as ₹5 lakh crore. That is the biggest stimulus they can give.


One reason they have not been doing it is to contain the fiscal deficit. I think they have to forget that, and they should really come out with a substantial spending plan, particularly for the stressed sectors. Generate demand through cash transfers, expedite disinvestment, and push infrastructure projects. But the fear of credit rating agencies seems to continue to weigh on policymakers. And the soundbytes that we get from the Finance Ministry are “Oh, everything is fine. There is nothing to worry [about].” And that is most worrying.

M. Govinda Rao has been a member of the Economic Advisory Council to the Prime Minister and the Fourteenth Finance Commission; Naushad Forbes is former president of the Confederation of Indian Industry and co-chairman of Forbes Marshall

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