Economists perceive more economic pain ahead
Addressing the nation on April 14, Prime Minister Narendra Modi declared that the 3-week national lockdown will be extended to May 3, ie, by almost three more weeks. This step has been taken to bend India’s COVID-19 proliferation curve. PM Modi stressed that monitoring of the lockdown will be heightened over the next seven days, but gradually, from April 20 onwards, select economic activity may be allowed to restart in areas where there is no COVID-19 proliferation, or where the proliferation has been contained. The good news is that Indian citizens have been following the lockdown orders so far. However, the economic costs are mounting.
According to economists, it is estimated that 65% of economic activity, more than 50% of consumption and arguably all of the investment will be impacted. We combine the share of each sector in gross value added (GVA) with the proportion likely to be locked down and calculate that every month of lockdown leads to a loss of 5.4% of GVA. Six-weeks of national lockdown (as prescribed by PM Modi) followed by about six-weeks of partial lockdown (in areas where proliferation takes longer to contain), could lead to ~12% of GVA loss. A substantial portion of this would get made up once activity restarts. We believe postponed consumption, inventory restocking demand, and the natural buoyancy in economic activity can make up some of the lost output. And, even in the recovery phase, manufacturing (which can be stored) is likely to do better than services (which can’t be stored).
The authorities have already announced several stimulus measures in March. The government announced social welfare spending of 0.8% of GDP; RBI cut rates (by 75bps), infused liquidity, eased regulatory requirements and announced steps towards financial reforms. Economists expect more easing more social welfare outlays and a stimulus plan for small businesses, and more rate cuts and liquidity infusion by RBI.
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