SME Times News Bureau | 25 Apr, 2020
By the time the second phase of lockdown ends on 3rdMay, it will have
extended for 40 days. Consequently, the cost to our economy has continued
to mount even as the COVID-19 curve is being flattened, said
industry body CII.
“Given the extent of the damage to the economy from the disruption to
business, the GDP growth in FY21 will likely be the lowest
in many decades”, highlighted Chandrajit Banerjee, Director General,
Confederation of Indian Industry.
The economic costs of the lockdown are rising each passing day with the
impact being felt across sectors. The situation requires immediate,
across the board intervention from the government.
Under lockdown, economic activity has slowed down significantly across
most sectors. In manufacturing, only food processing, pharmaceuticals and
medical equipment are operational, while construction and mining activities
have halted completely.
Within services, majority of trade, transportation and hospitality remains
closed, while financial, IT and government services remain partially
operational. Even in 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
utilization levels may remain suboptimal. Consumption demand is likely to
remain lacklustre as people’s incomes have been impacted.
On the external front, as economies across the globe continue to struggle
with the pandemic, global trade may decline by 13 to 32 per cent in 2020, as
estimated by the World Trade Organisation. “Given the situation,
government intervention becomes critical not only to sustain the economy but
also to prevent any humanitarian crisis,” said Banerjee.
In a paper titled ‘A plan for economic recovery’, CII has laid out its
growth expectation under three scenarios.
In the baseline scenario, GDP is expected to grow at just 0.6
per cent on an annual basis 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 optimistic scenario, which envisages a faster pick-up post
the lockdown period, GDP is forecasted to register a growth of 1.5
per cent in the best case.
In 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, GDP is
likely to decline by -0.9 per cent.
“There is no doubt that the economy is going through turbulent
times, and India will have to spend, for navigating its way out of
the current crisis. At this stage, the government must do whatever it
takes to tide over the crisis, “ said Banerjee.
The urgent fiscal interventions, as suggested by CII should include cash
transfers amounting to Rs 2 lakh crore to JAM account holders, in addition to
the Rs 1.7 lakh stimulus already announced. CII has also suggested additional
working capital limits to be provided by banks, equivalent to April-June wage
bill of the borrowers, backed by a Government guarantee, at 4-5%
interest.
In addition, the CII paper has suggested the creation of a fund or
SPV with a corpus of Rs 1.5 lakh crore which will subscribe to NCDs/Bonds of
corporates rated A and above. The fund can be seeded by the Government contributing
a corpus of Rs 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 industry.
For MSMEs, CII has suggested a credit protection scheme whereby 75-80% of
the loan should be guaranteed by RBI, i.e. if the borrower defaults, RBI should
buy the loan and repay the bank upto 75-80% of the loan, so 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.
“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”, said Mr Banerjee in
conclusion.