AN UNCLEAR PATH

Lockdown extension will increase economic uncertainty

The government’s decision to extend the nationwide lockdown by another two weeks is bad enough because it jeopardises the future of millions of enterprises which account for the bulk of the employment. What has made it worse is that the selective easing of commercial activity is unlikely to help restart economic activity in any meaningful way. The idea behind the lockdown was to slow the spread of Covid-19. That has happened, and it is not clear what the country will achieve by another extension. Instead of colour coding districts, containment and tracking by now should have been more focused with areas reporting higher cases better prepared to handle the situation. While restricting movement helps slow the spread of Covid-19, it is not a perfect solution, considering the damage it is inflecting on livelihoods.

The revised guidelines are vague and do not address the ground realities. Opening up production in one kind of zone will not help because of supply-chain issues — opening plants in green zones makes no sense if raw material supplies come from red zones. Districts in the red zones anyway account for a disproportionate share of economic activity. In addition, industry in recent weeks has expressed concern over the provisions of the Disaster Management Act, which can lead to harassment. It is wishful thinking for the Centre to expect state governments to follow the guidelines in letter and spirit. In any case, the district administrations will have to enforce the guidelines, and, as past experiences have shown, they can be quite arbitrary in interpreting them as the guidelines themselves are quite inconsistent. For example, while neighbourhood shops can sell non-essential items in the red zones, e-commerce companies cannot. Even in times like these, the policy focus is to restrict e-tailers and favour brick-and-mortar retail, as was done in the previous phase of the lockdown. This will affect the investment climate at a time when India would need plenty of capital to revive economic activity.

Besides, it is still not clear how the government intends to address financial stress, both at the company and state-government levels. A large number of firms would not be able to survive with zero revenue. Although the Reserve Bank of India has cut interest rates and flooded the system with liquidity, money is not reaching where it’s needed. A large number of non-banking financial companies, which cater to the funding needs of small and medium businesses, are themselves in a problem and need policy support. In this context, the government can share credit risk, which would encourage banks to lend. The government will also need to come up with a plan to save businesses, particularly in sectors such as hospitality, which would remain under pressure for an extended period. Aside from businesses, state governments are also under considerable stress and would be forced to drastically cut expenditure, which will not only disrupt their efforts to contain the virus but also impede economic recovery.

The government seems to have taken more radical steps to contain the virus than other countries have done, but has left the economic consequences of the pandemic practically unaddressed. This approach has increased uncertainty and would cause more harm. Its response to the pandemic would perhaps have been more measured if the economic implications were taken into account appropriately.