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Impact of COVID-19 on Indian and Global Economy, What Next?

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Impact of COVID-19 on Indian and Global Economy, What Next?
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By, Trinath Lenka

This pandemic situation(Impact of COVID-19 on Indian and Global Economy, What Next?) took the Indian Economy and Global Economy many years on to the back foot. My lowdown on the repercussions of the virulent pandemic and the recipe needed to overcome the shocks.

GDP

Recently, few Global Rating Agencies pegged India GDP growth downward(Impact of COVID-19 on Indian and Global Economy, What Next?) such as Asian Development Bank targets for current fiscal FY 2021 to 4%, while S&P Global Ratings last week further slashed its GDP growth forecast for the country to 3.5 per cent from a previous downgrade of 5.2 per cent.

As per the projections of Fitch Ratings, India may post a two-per cent GDP growth in 2020-21, the slowest since the economy was liberalised 30 years ago.

Moody’s Investors Service(Impact of COVID-19 on Indian and Global Economy, What Next?) has also slashed its estimate of India’s GDP growth during the 2020 calendar year to 2.5 per cent from an earlier estimate of 5.3 per cent and said the coronavirus pandemic will cause an unprecedented shock to the global economy.

At the last MPC meeting, RBI has not spoken on GDP target and Inflation as well. He has worked upon how to tackle COVID-19 situation at the current juncture. 

Economic Situation

Economically, India is faced today with perhaps its greatest emergency since Independence. The global financial crisis in 2008-09 was a massive demand shock, but our workers could still go to work, our firms were coming off years of strong growth(Impact of COVID-19 on Indian and Global Economy, What Next?), our financial system was largely sound, and our government finances were healthy. None of this is true today as we fight the coronavirus pandemic.

Yet there is also no reason to despair. With the right resolve and priorities, and drawing on India’s many sources of strength, it can beat this virus back and even set the stage for a much more hopeful tomorrow. Look at the costs first.

Most of the early predictions were moderate. But the world’s much more severe policies have exploded the costs. According to JPMorgan, China’s economy will shrink by 40% in Q1 FY2020-21.

For the US, Goldman Sachs(Impact of COVID-19 on Indian and Global Economy, What Next?) now envisages a 24% Q2 GDP reduction, and Morgan Stanley a 30% drop. Ten million Americans filed for unemployment benefits over the last two weeks.

Moreover, most governments seem to have committed to draconian policies to avoid most deaths over the long term. These will cost much more. If China wants to reopen, it risks the second wave of the corona. If it doesn’t, the economic contraction could continue or get worse.

Economists(Impact of COVID-19 on Indian and Global Economy, What Next?) are now suggesting that the costs of continued extreme policies could be comparable to Germany in the 1920s or the US in the 1930s, with massive economic costs, a third of the workforce unemployed and a generational loss of opportunities.

These policies cannot realistically be sustained for many months, let alone years. Already, cell phone-tracking shows that 40% of Italians still move around, despite curfews and lockdowns.

In France, ‘virus rebels’ are defying bans and young Germans hold ‘corona parties’ while coughing at older people.

ARREST COVID-19 activity

Laying out steps the country could take to recover from the economic(Impact of COVID-19 on Indian and Global Economy, What Next?) effects of the COVID-19 outbreak, the immediate priority is to suppress the spread of the pandemic through widespread testing, rigorous quarantines and social distancing. Our Ex – RBI governor Mr Raghuram Rajan suggested in the above line. 

“The 21-day lockdown is a first step, which buys India time to improve its preparedness. The government is drawing on our courageous medical personnel and looking to all possible resources — public, private, defence, retired — for the fight, but it has to ramp up the pace manifold,” he said, adding that the country will have to significantly increase the number of COVID-19 tests to reduce the fog of uncertainty as regards where the hotspots are.

It will be hard to lock down the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities in certain low-infection regions with adequate precautions, Which is need of the hour. We should now plan for what happens after the lockdown if the virus is not defeated.

It will be hard to lock down(Impact of COVID-19 on Indian and Global Economy, What Next?) the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities in certain low infection regions with adequate precautions.

Restarting requires better data on infection levels, as well as measures to protect workers returning to work, such as temperature checks of workers (though this will not catch non-symptomatic carriers), un-crowded transport, personal protection equipment, adequate distancing at work, as well as measures to identify and contain new infections.

Many small and medium enterprises (SMEs), already weakened over the last few years, may not have the resources to survive. Not all can, or should, be saved given our limited fiscal resources.

Large firms can also be a way to channel funds to their smaller suppliers. They usually can raise money in bond markets and pass it on. Unfortunately, corporate bond markets are not very receptive to issues today.

Banks, insurance companies, and bond mutual funds should be encouraged to buy new investment-grade bond issuances, and their way eased by the RBI agreeing to lend against their high-quality bond portfolios through repo transactions.

The RBI Act will have to be changed to enable the RBI to undertake these transactions, and it will have to apply suitable haircuts to these portfolios to minimise its credit risk, but it will be much-needed support to corporate borrowing.

Start the Industry

The discussion has started within a section of the government over multiple ways to resume economic activity, particularly in manufacturing, in a limited way after the lockdown(Impact of COVID-19 on Indian and Global Economy, What Next?) ends to enable businesses to pay salaries and meet operating costs and to ensure the economy does not fold up and go into a deep freeze

While discussions are preliminary, and the outcome will depend on the coronavirus threat levels, there is loud thinking on allowing curtailed shifts with social distancing, allowing automated production like automobiles and putting in place a regimen of work passes and companies providing dedicated transport to their workers.

Safety measures will be a priority for all private and public sector Industries to kick start the economy.

Like China opened their industry and asked people to work but it may create a second-level spread of the virus if they don’t take such steps of precautions.

They have started bargaining with a country like France and other European countries to supply such material to curb COVID-19 if they do buy some other material which is not needed now for them. 

Stimulus….. Liquidity infusion into the financial market …..

Modi’s government has provided virus-relief stimulus of just 0.8% of gross domestic product (GDP), leaving the heavy lifting to the central bank, which has injected cash worth 3.2% of GDP since February.

Despite this(Impact of COVID-19 on Indian and Global Economy, What Next?), bond yields are sticky because of concerns about the budget deficit given that revenue will fall sharply due to a lockdown to combat the virus

Mr Urjit Patel Ex RBI Governor suggested banks should retain almost all profits to enhance capital buffers rather than distribute dividends.

At the initial stage, our Finance Minister allocated Rs 1.7 Lakh Crore for the immediate measure for the people who are fighting with this PANDEMIC virus CORONA.

This package will incentivize and motivate them to stay calm and work towards curbing the virus spread and cure patient those are getting affected. Definitely, it will add value to them. She has not touched anything more towards Economy directly.

In the second stage, RBI Governor came out met advanced for MPC and RBI to infuse Rs 3.74 lakh crore liquidity into the financial system.

Banks have also been given an option to borrow three-year funds up to Rs 1 lakh crore through the so-called targeted long-term repos, the first of which was conducted for Rs 25,000 crore in a single day itself.

Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 75 basis points to 4.40 per cent from 5.15 per cent with immediate effect;

• Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.65 per cent from 5.40 per cent;

• Further, consequent upon the widening of the LAF corridor as detailed in the accompanying Statement on Developmental and Regulatory Policies, the reverse repo rate under the LAF stands reduced by 90 basis points to 4.0 per cent.

• The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of coronavirus (COVID-19) on the economy while ensuring that inflation remains within the target.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent while supporting growth.

Domestic financial conditions have tightened considerably, with equity markets facing massive sell-offs by foreign portfolio investors (FPIs).

In the bond market too, yields have risen on sustained FPI selling, while redemption pressures, drop in trading activity and generalised risk aversion have pushed up yields to elevated levels in commercial paper, corporate bond and other fixed-income segments.

In the forex market, the Indian rupee (INR) has been under continuous downward pressure. Under these conditions, the Reserve Bank has endeavoured to keep financial markets liquid, stable and functioning normally.

Systemic liquidity surplus, as reflected in net absorptions under the LAF, averaged ₹ 2.86 lakh crore in March (up to March 25, 2020).

In addition, the Reserve Bank undertook unconventional operations in the form of auctions of what is called ‘operation twist’ involving the simultaneous sale of short-term government securities (of ₹ 28,276 crore) and purchase of long-term securities (of ₹ 40,000 crores), cumulatively injecting a net amount of ₹ 11,724 crores.

The Reserve Bank also conducted five long term repo auctions of 1 year and 3 years tenors of a cumulative amount of ₹ 1.25 lakh crore so far to inject liquidity and improve monetary transmission.

It also conducted two sell-buy swap auctions to inject cumulatively US dollar liquidity into the forex market to the tune of US$ 2.71 billion on March 16 and 23.

Open market purchase operations of ₹ 10,000 crores on March 20 and ₹ 15,000 crores each on March 24 and March 26 have been conducted to bolster liquidity and smoothen financial conditions.

In the external sector, merchandise exports expanded in February 2020 after posting six consecutive months of contraction. Import growth also moved into positive territory after eight months of continuous decline.

Consequently, the trade deficit widened marginally on a year-on-year basis although it was lower than its level a month ago.

On March 12, the Reserve Bank released balance of payments data which showed the current account has moved to near balance in Q3:2019-20 with a deficit of only 0.2 per cent of GDP.

On the financing side, net FDI inflows at US$ 37.8 billion during April-January 2019-20 were substantially higher than a year ago.

Portfolio investment recorded net outflows of US$ 5.2 billion during 2019-20 (up to March 25), down from US$ 6.6 billion a year ago.

India’s foreign exchange reserves reached a level of US$ 487.2 billion on March 6, 2020 – an increase of US$ 74.4 billion over their end-March 2019 level. Going forward, the interest rate will go down further to kick start the economy.

Recently, the government has slashed small savings rates by 80 basis points (bps) to 140bps in various schemes floated by Govt in small savings to keep the burden less on them.

That apart, the government has also started reducing salary in various positions started from President to MPs and MLAs which indicates severe pay cut in future both in private and public sector going forward. Hope for the best….

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