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 ofnearly15,000bigandsmallunits just outside Delhi.

Micro,smallandmediumenterprises(msmes)businessesusually rely on month-to-month operationsforrevenuesandprofits,with littlereservesandstayingpower.it is yet uncertain when economic activitycanreturntopre-covidlevelsbecausesocialdistancingrules meanonly33%oftheworkforceat a unit can work at any time.

The lockdown enforced from the intervening midnight of March 24 and 25 triggered the distressexodusofmillionsofworkers and daily wage workers from the citiesbacktotheirhomesinthevillages 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 beforethepandemichit.although itincludedjustoneweekofthelockdown, economic growth in the quarter ended March slumped to 3.1%,officialdatareleasedonmay 30 showed.

To spur growth, PM Narendra Modi on May 12 announced a ~20 lakh-crore relief and stimulus package on national television thatincludedpastfiscalandmonetary measures taken by the government and the Reserve Bank of India. He also spelt out a new economic stance of self-reliance. Businesses,however,arepreparingfor 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’searningsandspending,forfy20stoodat4.59%ofgross 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,whichaccountfor 29% of India’s GDP and employ over 120 million workers.

Thesectorisuniformlyworried about capital and labour. “These reforms (announced by the government) are more medium-term in nature, and we therefore do not expectthesetohaveanimmediate impactonrevivinggrowth,”goldman Sachs economists Prachi Mishra and Andrew Tilton wrote in a research note on May 17.

India’s growth woes began much beforecovid-19struck.inseptember 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 crisisinthecountry’sfinancialservices market. Borrowing costs rose sharply. Private demand began collapsing too.

Economist Hetal Gandhi of Crisil research said people’s investmentswerelockedinstalled real-estate projects, squeezing their spending ability on other goods.sheciteddatafromthereal 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 lockdownwasgrim.totalaverage earnings of farm households, accordingtocrisildata,fromagricultural related income, which includesrurallabourwages,registered growth of 0% in 2018 at ~65,000 compared to an 8% increase in 2017.

Urban income growth from the formalsector,asreflectedincostof employees for 750 listed companies,whichwasaveraging10-12%, 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. Mostexpectauorlshapedtrajectory: the former represents a long dragandthelatterasustainedlow.

The projections may not be out of place. At the Wagle industrial estateinthane,hometo900manufacturingunits,nonehasbeenable to start operations because of a liquidity and labour crunch, says Sandeepparikhofthechamberof 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 shrink5%intheyearthroughnext March, Goldman Sachs said in a reportinthelastweekofmay.the Internationalmonetaryfundhas 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 massivesupplyshock,whichisan 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, whichimpactedbetween50to55% oftheeconomy,potentiallyledtoa weeklylossofaround~2lakhcrore 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,thirstyandtired,setting off an unprecedented crisis.

Aijazhassan,theproprietorofa unit that makes scissors in Meerut’sfamouskainchimarket, saysheishurtingbecausethegovernment did not allow MSMES to open in April when the lockdown was first eased. Doing so would haveavertedamassreversemigration never seen since India’s Independence, he says. “That would havepreventedthelabourersfrom fleeing the city. We would have beenabletoemploythem,”hesaid.

Not surprisingly, the country’s unemployment rate quickened to historichighs,costingwellover114 million jobs, mostly of small tradersanddailywagers,datafromthe 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 labourmarkets.asilverlininghas been that an unlocking economy has now begun adding new jobs. Latest data from the Centre for Monitoring of Indian Economy showedurbanunemploymentfell 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 monetarypolicycommittee’smay 20-22meeting,whichdiscussedthe impactoftheshutdown.theybore grimmilestones.thecentralbank indicated India could see its economy shrink for the first time in 40 years.rbideputygovernor,michael Patra, said the lockdown’s damagewassodeepthatthecountry’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 easyaccesstoalltheinputsneeded for the ensuing kharif or summersown 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 ofmiddle-menwhotakebigcutsof 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 pricesalbeitwillletfarmersdown.

Whatworrieseconomistsmore is that India’s Covid-19 cases continuetorise.“increasedeconomic activity will come at the cost of elevated risk of higher infection rate...,”saidsonalvarma,aneconomist at Nomura Securities Ltd. “Orchestratinganeconomicrecovery without a health recovery will remain challenging,” she said.