Surviving the coronavirus outbreak

Just eleven-and-a- half years after that mad, scary September of 2008, when the financial markets and the global economy went into a complete tailspin, the world once again stands at the edge of a precipice of a full-blown recession, if it hasn’t already slipped into one.

“We are officially declaring that the economy has fallen into a recession—joining the rest of the world, and it is a deep plunge,’’ Bank of America said in a note to its clients on March 19. “Jobs will be lost, wealth will be destroyed and confidence depressed,’’ it added.

Bond, equity and currency markets, aviation, travel and tourism industry among others, and consumer confidence in particular, has already faced a whiplash across the globe, including India. Stay-at-home rules, clampdown of cities, hotels, malls, restaurants, and industries has hit thousands of small and big businesses, including millions of workers in the informal sector.

But the shock waves this time around are far more serious than even those of 2008. After all, the financial crisis of 2008 started in the banking sector, which finally engulfed the real economy. However, the current situation is exactly the opposite; a crisis in the real economy is driving down stock prices and bond yields and creating a bear market. Moreover, the 2008 crisis was resolved through the monetary firepower—the infusion of billions of dollars into the banks and the economy—and a coordinated effort of the various central banks to save the world.

Today, with both Japan and the European Union already in a recession, the central banks neither have the necessary firepower nor the coordination to ensure an early recovery, with interest rates at record lows in many of these countries. Thus, for many economists, the slack in the monetary policy will now have to be met through fiscal measures by various governments. Many countries in the world have announced stimulus packages like the UK with $39 billion, the U.S. with $ 1.2 trillion, France $45 billion, Canada $56 billion etc; India has yet to come out with any such stimulus package. Perhaps it is because India is still not as badly affected as many other countries of the world, both in the number of infected people and the industries impacted.

So, what can India do to limit the economic fallout of the coronavirus? The government has already set up an economic taskforce for Covid-19 under finance minister Nirmala Sitharaman, but a monetary, fiscal and a coordinated response from various ministries, especially those most impacted by the virus, is the need of the hour.

While it is true that an interest rate cut at this juncture, may not drive up demand in the system or even bring products like cars and mobiles in the market by fixing the supply chain disruptions, but it will do a number of things.

One, it will send a signal to the market participants that the government is fully behind them in their hour of gloom and doom, and that they are doing everything to keep the system lubricated with ample liquidity. The RBI has already used one of its instruments, to announce open market operations (OMO) to infuse ₹30,000 crore into the system in two tranches in March 2020 with a tenure of between two and nine years. The other arrow in its quiver is long-term repo operations (LTRO) to keep the credit expansion going. The RBI it conducted the fifth tranche of the LTRO for ₹25,000 crore on Wednesday, to secure liquidity in the troubled financial markets. It has already used it a number of times successfully and can do so again.

Secondly, any rate cut will bring down the cost of borrowings for firms already burdened with inventory build-up and continuing fixed costs and may need some help from the banks to meet their working capital needs and create raw material buffers. After all, monetary transmission has started to improve and policy rate cuts are reflected in a fall in gilt yields, money market rates and marginal cost of funds based lending rate—the internal reference rate for banks to determine the interest they can levy on loans.

Thirdly, the RBI has to keep a dollar-buying window open for companies, which may be forced to raise dollars at high cost because of the flight of foreign capital from the Indian market on account of risk aversion. The RBI has already taken the first step by announcing a $2 billion swap.

RBI can also cut the cash reserve ratio of banks so that banks can take the additional risk of lending to sectors, which are most vulnerable to the impact of the coronavirus. But more importantly, the RBI needs to create a new definition of non-performing assets (NPAs), allowing the virus-infected sector more time to pay off their debts, or re-stagger their loan repayments

For the government, the challenges are far more difficult, especially at a time when its revenue collections are dropping and likely to fall even further as the coronavirus strengthens its grip. The government is further hampered by a stiff fiscal deficit target of 3.5% of the GDP, which unfortunately, has already been crossed. However, it will have to find money to fund a stimulus package for certain sectors like pharmaceuticals, construction, small and medium- sized industries to help them tide over the on-going slump. The government will need to use its direct benefit transfer scheme to provide urgent relief to those who have lost their jobs, especially those belonging to the poorer sections of society.

Then there is a significant need to ramp up investment in public healthcare, increasing the number of testing centres and quarantine facilities and ensuring that there are enough masks and medical kits to go around. Secondly, there is an urgent need to stimulate demand in the economy and that is only possible through greater investment in infrastructure projects and in rural economy which will provide both employment and generate demand in the system.

Already, various ministries are seeking help and putting forth their demands. For instance, the MSME ministry has demanded that no loan default should be classified as NPA till December 2020. It also wants a loan moratorium repayment for six months, besides income tax and GST concessions. Similarly, the civil aviation ministry is pitching for lower taxes, apart from tax and bank loan concessions as it is facing the biggest threat for its very survival.

While the finance minister deliberates on the steps to be taken to save the economy, it is clear that higher spending can only happen if the government is willing to relax its fiscal deficit numbers. The priority for the government should be to ensure that the impact of the novel virus is not only limited but that there is also a V-shaped recovery so that it can get back to its growth trajectory once again.