Can India’s Economy afford lockdown for a longer period?

India Economy-Corona lockdown

When the Congress youth icon Rahul Gandhi was interacting with the former RBI governor Raghuram Rajan to discuss the economic crisis looming over India because of on-going coronavirus pandemic, Rajan highlighted that the country’s “fiscal resources are more limited” compared to the West and hence, “India needs to open up (from the lockdown) in a measured way.”The noted economist also said that as Indian economic activity opens up after weeks, steps should be taken to isolate new cases of COVID-19 that emerge. A second lockdown will be even more devastating and will destroy people’s trust in the measures taken by the government, he warned.

While the spread of coronavirus and the lockdown takes a toll on the economy and kills businesses and jobs, there is a need to promote small and medium scale industries and the government should come forward in this regard. And thus the suggestions of former RBI Governor and noted economist, Rajan is quite important to bail out the prevailing situation even if someone disagrees his ideology.

The prevailing lockdown in our country is being regarded as one of the toughest in the world. It is fair to say that the lockdown is working to a large extent and we have saved some lives. And since lives have no price on them, all this is worth it. The logic is sound. If lives are priceless, they’re worth saving at any cost — that’s the current mantra.

Except, we Indians have never really applied this principle when it comes to saving lives from causes other than Covid-19. For instance, last year, as per a report of the UN, over 8-lakh Indian infants died. The major reasons for these deaths were poor nutrition, sanitation and healthcare. The overall infant mortality rate in India is around 3%. Remember, this fatality rate is higher than that of COVID-19. Similarly, over 1.60-lakh people die every year because of road accident in India while there is one death every four minutes due to a road accident in the country. And surprisingly, no one is talking about such human losses, but people are living with a “mental illness” in this lockdown period on the name of COVID-19.

When we talk about deaths of coronavirus and the spreading of the virus, we forget to think that the lockdown across the country would affect India’s growth severely, as the longer lockdown is causing significant disruption across a majority of the industrial sectors. Industry experts feel that there is a need for a lifting of the lockdown , may be in a phased manner, to bring economy in good shape and prevent the economic damages. Lifting of the lockdown should be materialised, taking to consider the entire supply chain, like the packaging industry, their raw materials and so on.

Besides, the government should allow producing essential goods, like food, pharma and hygiene products. And a second step, the lockdown should be lifted on non-essentials in a phased manner. And as a step three, the aviation, rail and road sectors should be opened up. This will give confidence to people that things are slowing returning normal and it would help remove fear psychosis among the common man across the country.

While doing so, the government has to take strong measures to boost liquidity in the market. The RBI has come up with some measures, but the government has to ensure these measures are actually percolating to the small and medium-sized businesses (SME) and the common man because they are the worst-hit sector of the lockdown. The National Restaurants Association of India said its members were faced with the stark prospect of failed businesses and massive job losses. If the government does not provide some interim relief now, the situation could spark social unrest, the association warned and pointed out even if these businesses were allowed to reopen now, it would take nine to 12 months before they stabilised their operations, it added. Another worst-hit sector is tourism. There are at least one dozen states, like Kerala and Goa in the country where Tourism is a key part of their economics. Presently, there is no solution to revive this industry as it would not get a boost within the coming year.

Along with the SME, the small microfinance institutions are facing an unprecedented financial crisis in this period. Every microfinance lender including the bigger ones is facing the stress since business stalled during lockdown while the smaller ones are always more vulnerable. They have also sought fresh loans from banks to keep the operation running with them face immediate risk of non-payment of salaries, property rents and bank dues. They have written to the finance ministry, seeking a financial package for them to tide over the crisis. They sought fund to meet their operational expenses and requested it to advise their lenders –banks and development finance institutions–to convert their outstanding loans into equity or long term advances with reduced interest rates. There is a need to take care of this industry as it provides huge employment across the country.

The government must also ensure that the logistic and supply chain is smoothened out immediately. However, as things stand now, there is no clarity yet on how long this lockdown will continue. And thus, there has to be a balance in dealing with the pandemic. The government has to consider a longer-term goal: it must choose between a prolonged lockdown that would bring the economy to a grinding halt with the risks of rising unemployment, spurring inflation and a phased resumption of economic activity which would ease some of the hardship. The lockdown costs need to be worked out. There is a need for a fine balancing between lives and livelihood; opting for only one course of action can be disastrous for the country.

The state should also take care of the heavy industries. Plants of heavy industries that provide huge man-power are now fallen silent. The department for the promotion of industry and internal trade has suggested that the home ministry permit limited activity in certain sectors such as heavy electrical and telecom equipment while ensuring reasonable safeguards. The Maharashtra that gets huge GST share from industries within the state would suffer a major financial setback because of lockdown. Maharashtra is India’s leading industrial state contributing 13% of national industrial output. A similar situation is also with other states. Trade pundits and economists have estimated that industries and trade would likely to incur losses of the on-going lockout with estimates ranging between Rs 10-lakh crore and Rs 12-lakh crore. A British investment and financial service company predicted that India could be lost up to Rs 9-lakh crore because of the Covid-19 impact and the lockdown. It would affect the GDP of the country and it revised India’s GDP growth forecast this fiscal to 3.5 per cent from 5.2 per cent earlier.

Not only the major, medium and small industries are suffering from the lockdown, but even transporters are also incurring huge losses. It is estimated that the accumulated losses for truckers during the first 15 days of the lockdown amounted to roughly Rs 35,200-crore, given an average Rs 2,200 loss per truck per day. The real estate sector is likely to suffer at least a loss of Rs one-lakh core. Moreover, the lockdown has left crores of people without work.

However, when there is a grey picture of Indian economy, here is also hope. Economists and industry experts feel that there is one area where India could take advantage of this situation if states heed Prime Minister Narendra Modi’s call. Modi has asked Chief Ministers to prepare well to attract investments from the global companies as they might want to exit China after a long trade war with the US and the uncertainty caused by the origination of pandemic from the country. But the foreign investors still find the country a little difficult to do business because of “bureaucratic approach.” Red tape and issues related to land, license acquisition, etc. are bottlenecks for them. Out of 56 companies that relocated their production out of China between April 2018 and August 2019, only three came to India, and two went to Indonesia. Most of those investors found Vietnam, Taiwan and Thailand as alternatives.

Meanwhile, the Centre is hoping to restart several manufacturing plants and factories after May to limit the damage to the economy and its finances even as it considers extending some restrictions on the movement of people and materials. The industries ministry has already suggested the need to reopen manufacturing plants in the automobile, textiles, defence and electronics sectors and a couple of other job-creating sectors. Let’s hope for the best and wait till May 3 when the state power would take a concrete decision that whether lockdown would continue or be lifted.