The long, tough road back to a new normal

The government has begun the process of unlocking the economy after the prolonged lockdown by unveiling what it is calling the Unlock 1.0 plan, where a series of relaxations has been given across the country, with the exception of containment zones. But as various state governments begin examining their own Covid-19 statuses, it is now becoming increasingly clear that Unlock 1.0 will mean various things in various states. This will have major ramifications for economic activity and, consequently, economic growth.

Already, the latest official growth figures have shown India’s FY20 GDP growth slumping to an 11-year low of 4.2%, while the fourth quarter of the last fiscal saw growth at 3.1%. And remember, this was before the real effects of the pandemic sunk in. The low consumption demand and the lack of investment activity even before the pandemic had made the government’s task difficult.

Cut to June 2020, and the numbers tell a very different story. Despite the lockdown, Covid-19 cases are continuously on the rise, hitting new highs in states like Maharashtra, Tamil Nadu, Gujarat, and Delhi despite the state governments pulling out all stops. This, most analysts reckon, will put the brakes on a smooth return to economic activity despite the easing of the lockdown. Estimates from various quarters have already started factoring this in.

Take, for instance, the latest estimates put out by Barclays. In a June 1 report titled “Staggered Re-emergence”, the bank’s Chief India Economist Rahul Bajoria says: “Accounting for the stickiness in the number of Covid-19 cases, upcoming monsoon season and limited lockdown relaxations by state governments, we revise our estimates for the associated economic losses over a longer period.”

Consequently, the bank has lowered some of its key estimates for growth. It now says the second quarter of 2020 will likely see growth contracting by a staggering 22.2%, against its own earlier estimates of a 12.4% contraction for the same period. Calendar year 2020 is now expected to see a contraction of 4% against its earlier forecast of 0% growth. As a result, estimates for FY21 have also been revised sharply downwards to -3.2% against the earlier 0.8%.

Adding to the gloomy economic forecasts and worries for the government, global ratings major Moody’s has now lowered India’s credit rating to the lowest investment grade. The ratings agency has underscored that while the downgrade was taken in the context of the pandemic, it was not driven by it. While there are other countries which have also been downgraded and experts aren’t reading too much into the latest ratings action, it does put in sharp focus the challenges before the government now that Unlock 1.0 has begun.

The long-term reforms vision unveiled by finance minister Nirmala Sitharaman as a part of the economic package will, doubtless, be a work in progress. The package also lacked an immediate trigger which could generate demand, and the government’s broad philosophy seems to be to strike a balance between entitlement or direct handouts and empowerment. Be that as it may, all these moves will not bear immediate fruit in terms of a return to growth.

Post-lockdown challenges

The lockdown has brought with it problems the extent of which the government may not have foreseen. The migrants crisis, for one, has not just shown a mirror to India’s society but also proven to be one of the most significant socio-economic challenges India has witnessed since the Partition. Hundreds of thousands of migrants leaving the cities and even attempting to walk back to their villages with hungry children in tow make for a terrible sight for policymakers. While the government has put out a package for migrant labourers, including giving them access to food, there is another aspect to this problem which is now coming to the fore. Several industries, construction in particular, are now hamstrung with a shortage of labour since migrants have chosen to return home and are refusing to come back to the cities, chastened by the terrible experiences during the lockdown. Even housing societies across the country, where mostly migrant labourers work as watchmen, are now beginning to witness a real problem as the migrants return home. Small and medium scale industries are also badly hit by a shortage of labour for similar reasons.

There are several other sectors which, most industrialists and business leaders concede, will witness a very slow re-emergence. Sectors like hospitality, tourism, entertainment, and offline retail will witness a painful and very gradual road back to quasi-recovery, with cases of Covid-19 continuously on the rise across the country. Standard operating procedures across these sectors will have to be put in place and adhered to strictly, and that is bound to impact footfall, and the number of customers. There will be no easy solutions here. Analysts like Barclays’ Bajoria point out that with the number of Covid-19 cases increasing in urban areas, even if lockdown restrictions start to be eased in the red districts, a significant amount of caution and restraint will have to be exercised by households in their daily activities, and that will have a large macro impact.

The balance between lives and livelihood will get more critical in the coming days. With around 97,500-plus active Covid-19 cases at last count (95,500-plus discharged), the battle on the lives front continues. Getting livelihoods back in such a situation will test both the central and state governments to the limit.

There’s a little silver lining, though, which is beginning to emerge. The Barclays assessment says consumption indicators have shown signs of modest improvement in May. “With the gradual easing of lockdown restrictions underway, electricity demand returned to 2019 levels in the last week of May. The return of private vehicles to roads in major parts of the country, fuel consumption is also starting to rise. Still, a rise in deposit holdings in the banking system while credit slumps points to some evidence of higher precautionary savings, along with lower recreational spending.” PMIs, or the purchasing managers’ index, which is an indicator of the health of the manufacturing and services sectors, which nosedived to record lows in April, have shown some signs of bottoming, though a full recovery is not yet in sight, Bajoria points out.

The state governments, which are fighting the battle at the ground level, are bound to remain watchful, particularly as lockdowns begin to be gradually relaxed and air travel resumes. In such a scenario, the return to a respectable level of economic growth will be one long, arduous journey. Only the first baby steps have just been taken.