From The Indian Express: “It is quite difficult to assess how the economy will react when the lights, which were turned off March 24 midnight, and remain so for 40 days (almost six weeks), are switched on again,” a senior official said. There are many variables: consumer behaviour post lockdown, fear of infection, persistence of social distancing, risk aversion at firm and individual level, the pandemic curve itself, and finally the depth and breadth of government intervention through fiscal measures, and RBI support on the monetary and credit front.
It is this huge uncertainty and “hysteresis” (the unknowns going forward on how the pandemic will play out), which render the exercise of making projections irrelevant. “In the middle of a storm, it is hard to make any assessment, because the task at hand is to ride the storm. Any kind of accuracy will be misleading,” the official told The Indian Express, without wishing to be named.
[...]The impact of an almost six-week lockdown until May 3, with the persistence of social distancing thereafter, and the knock-on effect of these two, will most likely see the Indian economy decelerate in 2020-21, said another analyst with a leading global financial services group. “After the lockdown is lifted, it will definitely not be business-as-usual. A sudden stop in cash flows has put small enterprises under tremendous pressure, with many on the verge of bankruptcy,” the analyst said.
“Salary cuts and job losses in the organized sector will adversely impact discretionary spending by individuals. Consumption, which is almost 60 per cent of GDP, will be severely hit. At the consumer level, discretionary purchases, shopping in malls, eating out, movie halls, travel, and home purchases, may not be forthcoming,” said another economist with a leading investment bank.
At the firm level, proprietorships, micro, mini and small enterprises, will first want to recoup their losses (having had to endure 12 months of costs on 10 months of revenues), and build a nest egg to ensure they are not adversely hit again. This is one big income shock, the economist said.
[...]But a government official said that India, unfortunately, cannot spend like developed economies. “With a BBB- sovereign rating, we still are investment grade. And unlike 2008 when the government’s fiscal was in order and it could manage to give a massive stimulus, it doesn’t have the cushion now. One notch below BBB-, and India will slip into ‘speculative’ grade rating,” he said.
India’s Path Out of Pandemic Slump Hobbled by Shadow Bank Crisis
From Bloomberg: For India’s financial sector, the coronavirus freeze is just the latest headwind in a multi-year storm that’s dragged down consumption and seen the nation lose its crown as the world’s fastest-growing major economy. Now, if bad loans rise as many including the central bank expect, banks and shadow lenders are set to become ever more cautious just when credit is most needed to keep the economy going.
[...]“India’s financial system has had a rocky few years,” said Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets Pvt Ltd. in Mumbai. “The recognition and provisioning for high loads of bad debt at banks took a toll over 2015-2018, ending with a fallout at the shadow banks.” The seeds of stress were sown even earlier, in a debt-fueled economic boom between 2007 and 2012 when banks increased loans by 400%. When the economy began slowing, many companies struggled to repay debts, making banks reluctant to lend as bad loans piled up.
Some of the slack was then picked up by shadow banks -- lenders that don’t rely on deposits and are typically less regulated. But a default by one of the most prominent of those -- Infrastructure Leasing & Financial Services Ltd. -- in 2018 saw that lending dry up too.
The collapse triggered a credit crunch, forcing the Reserve Bank of India to step in to take control of another shadow lender, Dewan Housing Finance Corp., to contain the fallout. A smaller lender also failed in 2019 after allegedly duping investors about its exposure to a property developer. Then, in March this year, the central bank seized private-sector Yes Bank Ltd. in India’s biggest bank rescue.
[...]“Companies relying on either type of lender for funding, many of which have weak financials, will have difficulty in maintaining liquidity, which can result in defaults on loans from banks and shadow banks,” she said. “As loan losses at shadow banks increase and threaten their solvency, banks’ direct exposures to them can be at risk.” Desperate to avoid such a chain of events, the RBI has injected $6.5 billion into banks to promote lending to shadow banks and small borrowers, further relaxed bad-loan rules and barred lenders from paying dividends in the current fiscal year through March 31 so that they can preserve capital.
