Indian economy to slowdown in FY2021, high unemployment rate, and 1.25 billion workers at risk of losing jobs

SBI pegs FY21 growth at 2.6%, say govt must monetize deficit

From Business Standard: SBI house economists have pegged the growth forecast for January-March at 2.5 per cent and for 2020-21 at 2.6 per cent given the massive disruptions to businesses and the economy due to the COVID-19-driven lockdowns, which has upended at least 70 per cent of the economy.[...]The 21-day lockdown will cost the economy at least Rs 8 trillion, according to a report by SBI Research, which says at least 70 per cent of the economy is on a standstill because of this. 

We estimate another 1.7 per cent impact on real GDP because of the 21-day lockdown in FY21 resulting in at least 70 per cent of the economy at a standstill. We peg FY21 GDP estimate at 2.6 per cent, with a clear downward bias, with Q1 of FY21 GDP numbers witnessing a contraction. FY20 GDP estimates could also see a downward revision from 5 per cent to 4.5 per cent with Q4 growth at 2.5 percent, SBI Research said in a note, adding pegged the total cost of the 21-lockdown at Rs 8.2 lakh crore in nominal terms and output loss at 4 per cent on a conservative approach. But they are quick to add that the economy could rebound if a stronger stimulus is offered.

Given the low market appetite for borrowing, it is imperative that government uses the clause given in FRBM Act and monetize the deficit with the RBI subscribing to the primary issues of the Central government debt and fulfill the supply-demand gap in FY21, the report said. In FY2020, total borrowing by the Centre and states stood at Rs 13.5 lakh crorethe Centre at Rs 7.1 lakh crore and the states combined Rs 6.4 lakh crore.

Given at least estimated 4 per cent slippage in GDP/Rs 8 lakh crore, we expect the Centre and the states could borrow conservatively close to Rs 20 lakh crore in FY21. Thus, it is a must that RBI monetizes the deficit, using the national calamity clause given the stressed market absorption capacity, it says, adding this will add up to 2.5-3 percent of GDP and the government must show it separately as an off-balance sheet item in the budget like a 'COVID bond'.

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Covid-19 may push 400 mln Indians to poverty: ILO

From Mint: “In India, Nigeria and Brazil, the number of workers in the informal economy affected by the lockdown and other containment measures is substantial. In India, with a share of almost 90% of people working in the informal economy, about 400 million workers are at risk of falling deeper into poverty during the crisis. “Current lockdown measures in India, which are at the high end of the University of Oxford’s COVID-19 Government Response Stringency Index, have impacted these workers significantly, forcing many of them to return to rural areas," it added.

The ILO warning corroborates data from Indian think tanks, which shows how unemployment has tripled in urban India and rural hinterlands within a span of past three weeks. The Centre for Monitoring of Indian Economy has said unemployment rate in India was 23.4% in the week ended 5 April. CMIE data showed that while urban unemployment rate was 30.9%, rural unemployment rate was over 20% and economists have warned that things may only worsen in rural India due to reverse migration in last two weeks.

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ILO jobs report (COVID-19 ILO Monitor 2nd edition)

According to the new study, 1.25 billion workers are employed in the sectors identified as being at high risk of “drastic and devastating” increases in layoffs and reductions in wages and working hours. Many are in low-paid, low-skilled jobs, where a sudden loss of income is devastating. Worldwide, two billion people work in the informal sector (mostly in emerging and developing economies) and are particularly at risk. The estimates are based on ILO "nowcasting" model (uses real-time economic and labor market data to predict the loss in working hours in Q2 2020).

Large-scale, integrated, policy measures are needed, focusing on four pillars: supporting enterprises, employment and incomes; stimulating the economy and jobs; protecting workers in the workplace; and, using social dialogue between government, workers and employers to find solutions, the study says.

The most highly affected activities include accommodation and food services; real estate, business and administrative activities; manufacturing; and wholesale and retail trade. Medium to highly affected activities include arts, entertainment and recreation and other services; and transport, storage and communication. Medium affected activities include mining and quarrying; financial and insurance activities; and construction. Low affected activities include agriculture, forestry and fishing; utilities; public administration and defence; human health and social work activities; and education. 

The highly affected activities are labor intensive, and employ millions of low-paid and low-skilled workers.

Expenditure reallocation, shortage of workers in agriculture, thinking beyond the lockdown

Government to divert Rs 136 billion budget to anti-Covid-19 measures

From The Kathmandu Post: The government has decided to divert Rs 136 billion from its annual budget allocations to fund efforts to combat the effects of the coronavirus epidemic. The finance ministry last week notified government agencies that the budget allocated under 14 headings such as land and vehicle procurement and organisation of seminars has been frozen to divert funds to prevent the spread of the contagious virus and to treat the infected.

However, the entire amount may not be available to the government as revenue collection is also expected to suffer due to the epidemic, and the government is yet to ascertain the size of liabilities already created based on the original budget. [...]In its budget for FY 2019/2020, the government had allocated the Rs 136.60 billion, which it now plans to divert, under 14 titles such as recurrent contingencies (Rs 29.39 billion), programme expenses (Rs28.26 billion) and land acquisition (Rs 28 billion).

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Winter crops lie unharvested in the fields as the lockdown forces farmers indoors

From The Kathmandu Post: The nationwide lockdown, currently imposed until April 7, has forced tens of thousands of farmers indoors and away from their fields while also creating a shortage of hired labourers to work in the fields. The agriculture sector, which contributes 27 percent to the country's GDP, has already been affected by the comparatively low summer output, of paddy in particular, caused by the delayed monsoon, floods and disease.

Now, the Covid-19 pandemic has further dampened the prospects of a good spring harvest to make up for the summer months. Wheat is cultivated in over 900,000 hectares of land and it is currently harvest season. "The crops will soon wither away,” said Chaudhary. “But what else can we do but let them die? It’s not safe to go outside given the current situation.

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Raghuram Rajan on restarting the Indian economy after the lockdown

From The Economic Times: We should now plan for what happens after the lockdown, if the virus is not defeated. It will be hard to lockdown 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), uncrowded transport, personal protection equipment, adequate distancing at work, as well as measures to identify and contain new infections. Healthy youth, lodged with appropriate distancing in hostels at the workplace, may be ideal workers for restarting.

[...]In the meantime, India obviously needs to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive. Direct transfers to households may reach most but not all, as a number of commentators have pointed out. Furthermore, the quantum of transfers seems inadequate to see a household through a month.

The state and Centre have to come together to figure out quickly some combination of public and NGO provision (of food, healthcare and sometimes shelter), private participation (voluntary moratoria on debt payments and a community-enforced ban on evictions during the next few months), and direct benefit transfers (DBTs) that will allow needy households to see through the next few months. We have already seen one consequence of not doing so – the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.

Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation, as well as a contributor to the fight against the virus. This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year. [...]A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term rates in this environment, and substantial losses for our financial institutions.

So we have to prioritise, cutting back or delaying less important expenditures, while refocussing on immediate needs. At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude, backing up its intent by accepting the setting up of an independent fiscal council and setting a medium term debt target, as suggested by the NK Singh committee.

[...]We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped. SIDBI can make the terms of its credit guarantee of bank loans to SMEs even more favourable, but banks are unlikely to want to take on much more credit risk at this point. The government could accept responsibility for the first loss in incremental bank loans made to an SME, up to the quantum of income taxes paid by the SME in the past year. This recognises the likely future contribution of the SME to the government exchequer, and rewards it with easier access to funds today. Of course, this helps the SME only if the lending bank is prohibited from directing the SME to use the guaranteed loan to repay the bank’s past loans.

[...]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 a much needed support to corporate borrowing. The government should also require each of its agencies and PSUs, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity.

[...]The RBI has flooded the banking system with liquidity, but perhaps it needs to go beyond, for instance lending against high quality collateral to well managed NBFCs. However, more liquidity will not help absorb loan losses. NPAs will mount, including in retail loans as unemployment rises. The RBI should consider a moratorium on financial institution dividend payments so that they build capital reserves. Some institutions may nevertheless need more capital, and the regulator should be planning for that.

Impact of COVID-19 in East Asia and the Pacific

In its latest East Asia and Pacific Economic Monitor (April 2020), the World Bank argues that COVID-19 presents an unusual combination of disruptive and mutually reinforcing events, and that significant economic pain seems unavoidable in countries with excessive indebtedness. It presents an unusual combination of a supply and demand shock due to the preventive behavior of individuals and the transmission control policies of governments. 

Three types of activities are immediately affected: (i) collective high-density production (workers work closely together in manufacturing factories); (ii) collective high-density consumption (services activities such as sport, music, restaurant, travel, etc); and (iii) proximate production and consumption (suppliers meeting consumers activities such as personal care, health care, restaurants, retails, etc). 

The immediate effect was first on the Chinese economy, where lockdown and transmission control policies disrupted supply and froze demand, and affected other countries through flows of trade and tourists. As the virus spread beyond China, other governments took similar actions, leading to severe dent in demand and supply. This is amplifying the mutual shocks through trade and tourist flows, and finance stress. 

Under a baseline scenario, developing EAP growth is projected at 2.5% for 2020, but -0.5% under lower case scenario. PRC’s is expected to grow at 2.3% and 0.1%, respectively under the two scenarios. Baseline refers to a scenario of severe growth slowdown followed by a strong recovery. Lower case refers to a scenario of deeper contraction followed by sluggish recovery. 

The COVID-19 shock will also have impact on poverty and welfare through illness, death and lost incomes. Under the baseline scenario. About 24 million fewer people are estimated to escape poverty across developing EAP in 2020. However, under the lower-case scenario, poverty is estimated to increase by about 11 million people. Poverty rate refers to US$5.50 per person per day (2011 PPP) threshold. 

Effect on households is country-specific: households in Vietnam linked to manufacturing reliant on imported inputs will see poverty rates double but households depending on tourism income will be the hardest hit in the Pacific Islands. Developing EAP refers to Cambodia, China, Indonesia, Lao People’s Democratic Republic (PDR), Malaysia, Mongolia, Myanmar, Papua New Guinea, the Philippines, Thailand, Timor-Leste, Vietnam, and the Pacific Island Countries.

The WB recommends countries to flatten two kinds of curves: (i) flatten the pandemic curve by limiting transmission through lockdowns and travel bans, and (ii) flatten the recession curve by taking appropriate monetary, fiscal and structural measures. It also recommends augmentation of health capacity to fulfill potentially overwhelming demand. 

On macroeconomic policy, it argues that an expansionary policy is less effective given that the lockdown and social distancing limit production and employment. So, fiscal measures should initially focus on social protection to cushion against shocks, especially for the most economically vulnerable. These include subsidies for sick pay, expenditure on healthcare, expanded safety nets, cash and in-kind transfers when the informal sector is large, schooling feeding programs, and employment support to reintegrate into the economy among others. These would help to limit long-term human capital losses due to temporary deprivations. Also note that marginal propensity to consume of low-income households is reasonably high. 

On financial sector, it recommends easier access to credit for households to smooth consumption, and easier access to liquidity for firms to help them survive the disruption. However, regulators should ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially when debt levels are high. For low-income countries, debt relief will be essential. 

On trade policy, the recommendation is to stay open and not resort to export restrictions, especially export of coronavirus-related medical products. 

IMF enhances debt relief trust to support low-income countries

The IMF enhanced its Catastrophe Containment and Relief Trust (CCRT) to enable the Fund to provide debt service relief for its poorest and most vulnerable members. The CCRT enables the IMF to deliver grants for debt relief benefitting eligible low-income countries in the wake of catastrophic natural disasters and major, fast-spreading public health emergencies. 

The IMF now allows all member countries with per capita income below the World Bank’s operational threshold for concessional support to qualify for debt service relief for up to two years. This would apply when a life-threatening global pandemic is inflicting severe economic disruption across the Fund’s membership and is creating balance of payments needs on such a scale to warrant a concerted international effort to support the poorest and most vulnerable countries.

The COVID-19 pandemic is bound to create balance of payments crisis (declining exports, remittances, FDI, etc) and fiscal stress (lower revenue, higher expenditure) in some low-income countries. 

Policy response to the COVID-19 economic impact

The IMF has a note on policy steps to address the COVID-19 crisis. It underscores the critical role of monitoring and containment measures to slowdown the spread of the virus and to lower the load on health systems. It calls for decisive and coordinated policy action to ensure global economic and financial stability.

Monitoring and containment measures

• Ensuring sufficient paid sick leave will help to curb contagion
• Targeting health interventions to reach informal sectors 
• Systematic testing is essential along with ramping up public health expenditure
• Coordinated industrial response to medical supplies production and to reduce negative cross-border spillovers from excessive hoarding

Monetary policy

• Ease liquidity and funding stress through rate cuts, OMOs, expanded term lending, outright purchases and repo facilities (to also reduce borrowing costs for households and firms) 
• Forward guidance about expected path of monetary policy, and expansion of asset purchases (including risky assets)
• Temporary targeted measures to support hardest hit sectors
• Balance cushioning growth with tackling external pressures, including commodity price shocks and capital flow reversals, in emerging and developing economies. Capital flow measures may need to be deployed for a temporary period. 

Fiscal policy

• Provide sizable support for affected people and firms. These include wage subsidies for businesses to prevent bankruptcies and massive layoffs, and cash transfers to low-income households
• Broad-based fiscal stimulus to support aggregate demand. These include boosting investment and economy-wide tax cuts (depending on fiscal space). Impact of broad fiscal stimulus may be small until the COVID-19 outbreak fades because of large supply disruptions.
• A coordinated and synchronized global fiscal stimulus to enhance confidence as low-income countries with limited domestic policy options depend critically on global growth. Some LICs face multiple shocks on external demand, terms-of-trade, and financing conditions. Also, they are constrained by high debt and limited monetary or exchange rate flexibility. This calls for growth-friendly spending adjustments and financial support (especially timely concessional financing).

Regulatory and supervisory regime

• These should be geared to maintaining the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.
• Borrowers’ capacity to service loans will get affected, and banks will see earning plummet. Renegotiation of loans for stressed borrowers may be appropriate. But, easing of loan classification and provisioning rules will affect measurement of NPLs and potential losses.
• Transparent risk disclosure and clear communication of supervisory expectations on dealing with the implications of the outbreak will be important. 
• Banks should draw upon existing buffers to absorb cost of restructuring. Enhanced supervisory reporting could be introduced to monitor liquidity strains.
• Subsidies and tax relief aimed at smaller borrowers, and credit guarantees and asset purchases programs are useful. It can be done through capital injections and broad deposit guarantees. 

Global coordination and cooperation

• Determined and coordinated actions by those with greater policy strength will serve as a public good for all others
• Policy responses need to be tailored to existing administrative systems and capacity, including more attention to delivering assistance to hard-to-reach regions and communities. 

On the ongoing policy response tracker, here is one by the IMF and the OECD. 

NRB facilitates liquidity injection and unveils relief package

Nepal Rastra Bank has announced a series of measures to alleviate the impact of COVID-19 on businesses and banking sector. Here are the major highlights:

• Loan installment payments postponed till mid-July 2020. Banks cannot impose penal interest or downgrade any loans for delays in repayment. If borrower pays by mid-April, then banks need to provide 10% exemption on interest. 
• BFIs can extend repayment deadline of short-term working capital by 60 days. Application from tourism and transport sectors for short-term working capital needs to be processed within five days. They should not be charged feed exceeding 0.25% of the loan amount.
• Prioritization of refinancing facilities for MSMEs.
• Potential migrants who cannot go overseas for work and want to start own business, then loans extended to them by BFIs can be counted as deprived sector loan. 
• CRR has been reduced by 100 bps to 3%. NRB says this will add NRS35 billion liquidity into the banking sector.

Nepal government announces economic package to address the impact of COVID-19

A Cabinet meeting on 29 March 2020 took a number of decisions to alleviate the impact of COVID-19 on households. These pertain to social protection, subsidy, employment, and compliance relief. There still is not much in terms of relief to MSMEs hit by COVID-19 pandemic. 

Here are the major highlights:

Food subsidy and quarantine

• Local governments are responsible for supplying food to the needy and quarantine. For this they will have to prepare data on unorganized sector workers and establish fund to provide relief for them during the lockdown period. 
• In case of insufficient funds, they can request budget from the central government. Households have to register their names at respective ward offices to get relief.

Employment protection

• Employers are ordered to pay salaries of employees during the lockdown period. They can use welfare funds to make payments until the resumption of business. 
• Nepal government will deposit SSF contribution by both workers and employers for the month of Chaitra (mid-March to mid-April).
• Migrant workers who returned back but could not go again may register at employment service center at local level to avail employment opportunities through PM employment program.

Other measures

• Exemption of one month of house rent if landlords exempt one month’s rent for workers in unorganized sectors. 
• 10 percent discount on food items at government operated food companies
• 25 percent discount in internet and electricity up to 150 units. Deadline for utility bill payment extended till May 13. Similarly, tax payment deadline has been extended till May 7. Vehicle registration and driver’s license renewal deadline extended till May 13.
• NRs 2.5 million free insurance for medical personnel
• Private schools must exempt all fees up to secondary level except boarding for a month
• No customs duty for any government, private and community sector importing medical equipment
• Import limit to prevent rapid depletion of forex: 10kg gold import limit; bank on vehicles worth over US$50,000; bank on import of betel nut, black pepper, peas among other
• Procurement agreements and bank guarantee time extended by a month

Budget management

• Government will use existing funds from the budget and those collected by the three tiers of government under various relief funds.
• Government will accept NRs 3.48 billion concessional loan from the WB, NRs13.9 billion no-interest loan from the IMF, and US$50 million aid package from the ADB

The biggest challenge is on implementation right now. A majority of these packages are open-ended and lack ascertained budget. 

• Given the lockdown, how are affected people going to go to local governments to register to get relief. Also, how ready are local governments on this regard? Who is going to identify a particular households as needy/poor?
• Nepal’s public distribution system is in a shamble. The idea of selling lower priced goods from its stores is not going to much effective. Also, what about mobility restriction to reach the stores?
• Tax exemption on rent is not a good enough incentive to encourage landlords to exempt rent of tenants. Tax on rent is far less than the rent amount.
• The PM employment fund is not that effective. It remains to be seen how many workers will actually register for employment under the scheme.  
• Many companies do not have their own welfare funds as they are required by law to make deposits in SSF.