Where is the Indian Economy headed, amidst Coronavirus?

After the prime minister of India announced the 1st lockdown to check the spread of the Coronavirus, it appeared to virtually put the brakes on the Indian economy. While we will come back to the economy later, an early shutdown has helped India keep the spread of the virus under control. Check the chart below.

Data Source – World-O-Meters (26th Mar 2020)

Ironically, Europe appears to have become new epicentre of the Coronavirus with Italy and Spain overtaking China in terms of number of fatalities. On the global scale of over 192 countries affected by the virus (COVID-19), India ranks 43^rd in terms of the number of afflictions and 33^rd in terms of the number of deaths. That is actually remarkable for a country with a population of 1.30 billion, average per capita income of less than $2000 and astonishingly crowded urban jungles.

Package for the vulnerable sections

One thing that was immediately announced by the Finance Minister on 26^th March was an antidote package in the midst of the shutdown. The package includes cash transfers for rural and semi-urban housewives, direct benefit transfers to vulnerable sections for loss of jobs, health insurance for health workers, free access to LPG and food grains for the BPL families for a period of 3 months etc. In addition, the government package will also enable payment of wages during the lockdown period, sponsor the payment of EPF contributions and ensure medical relief and alternate employment for the less privileged families. This may not stave off the slowdown but will lessen the pain at the grass-root level.

How will the Coronavirus impact the GDP growth?

Fiscal deficit could spill out of control

For FY20 and FY21, the last Union Budget had already expanded the fiscal deficit target by 50 bps to 3.8% and 3.5% respectively. For FY20, the 3.8% GDP target assumed sharp spending cuts. On the contrary, the government is now doling out a Coronavirus rescue package worth Rs.175,000 crore. That would mean, the fiscal deficit could spill beyond 4% in the current and next fiscal; with serious ramifications for bond yields and for sovereign ratings. The problem of fiscal deficit gets compounded because of weaker tax revenues and also because some of the divestment candidates like LIC and Air India are likely to face a tough quarter ahead.

All is not bad; there is good news on the oil front

Chart Source: Bloomberg

Best part; it will match supply to demand

This is likely to be one unspoken benefit of the lockdown in India in the aftermath of the COVID-19 pandemic. Most sectors like capital goods, automobiles, FMCG products and aviation have seen a massive demand crunch in the last few months. Now the supply will be able to match with the demand. Hopefully, by the time the situation normalizes, the massive infusion of liquidity will open the floodgates of demand once again. That will be the trigger for economic growth, but for that we will have to wait out the pandemic.