Early and Stringent Lockdown

India’s response to the Covid-19 pandemic was swift and stringent, with a complete ‘lockdown’ being imposed on the entire country when the number of cases was still relatively low at 564. Even prior to the lockdown, limitations on foreign travel were being put in place with visa suspensions and quarantine requirements. The nature of the lockdown in India was sudden and drastic, with no prior discussion or alerts, as policymakers assessed that any attempt at staggering the process would lead to non-compliance. It remains to be assessed whether this approach did indeed lead to better compliance, given the vast numbers of migrant workers that walked en masse from cities to rural areas and towns. There is a case for the argument that India’s stringent response contained the spread – the virus has spread comparatively slower in India than in other worse-affected nations. India currently has 1,01,156 confirmed cases with around 36,824 recovered patients and 3,155 deaths, with a recovery rate of 38.29% and a death rate of 3.1%.

The government policy focus is starting to shift focus now, largely driven by the economic costs of the early lockdown. In what is now called “Lockdown 4.0”, many former restrictions have been lifted, focussing on reviving the country’s economic engine. From public transport to markets, everything is starting to open up in non-containment zones. All factories, manufacturing units, and offices are now permitted to function. However, most public places where social distancing would be difficult to maintain, such as schools, colleges, cinema halls, malls, swimming pools and gyms continue to remain shut. Domestic air travel has just started resuming, and domestic trains are scheduled to start functioning in a limited manner from June 1 (this is in addition to the special trains being run for migrant workers). Recently, India’s civil aviation minister has hinted that international air travel could restart from June and July as well.

Growing Economic and Social Distress

India’s economic performance was starting to slip even before the current crisis, with GDP growth rate at 5%, down from an average of 7% over the last five years. It is now expected that economic growth may fall to its lowest level since 1991. Enforcement of the lockdown measures has been particularly difficult for the millions of migrant workers working in India’s big cities. Approximately 90% of India’s 470 million workers are employed in the informal sector, with no formal contracts and subsisting on daily wage payments. Of this figure, about 40 million are migrant workers and were hit the hardest, as they were left stranded with no livelihoods and no means to get home from the cities where they work. The shutting of workplaces has also resulted in India’s unemployment rate increasing sharply to 26% in mid-April, up from 8.7% in March. Given the high level of uncertainty and the unfolding situation, forecasts on India’s GDP growth for the year ending March 2021 are varied, ranging from a -2% to 0% , and some even a positing a mild growth of 1% – whatever the actual figure, the consensus is of a deep and sustained slowing. This level of economic stress needs to be alleviated with policy action both on the monetary and fiscal front. Some of this has been underway for the past few weeks, culminating with a series of policy announcements last week. Most recently, India’s central bank governor has conceded that India may see a flat growth trajectory in the financial year 2020-21, with the biggest blow being registered in private consumption.

The 10% and mitigation, sustenance plus reform

In early May, Prime Minister Modi announced that India would put in place a stimulus package worth 10% of GDP. The headline number, driven by growing demands from the industry, as well as most economists, was announced as Lockdown 4.0 was implemented. Having reviewed the announcements since then and as more details have come through, it is now clear that the 10% of GDP number did not refer to an expansion of the government’s balance sheet by that amount. Instead, it is a collection of various monetary, credit, and liquidity facilitative measures, sustenance measures for the worst impacted citizens, as well as specific structural reforms. Apart from providing basic support to the impoverished sections, there is a focus on improving liquidity, especially for small and medium enterprises that make up 29% of the country’s output. A breakdown of the plan shows that the actual spending of the government is only about a tenth of the package, most of it constituting loans provided by banks. The package rests mostly on boosting company credit, containing scant new public spending, tax breaks, or cash support to revive demand and or to bail out firms.

Some of the other policy announcements that we found particularly interesting are reforms in agricultural marketing, reforms in the mining sector and defence sector, and finally, the nature of conditionality for funding states’ expenditure/revenue shortfall. The reforms undertaken in agriculture marketing have been long pending – the crisis has provided a good opportunity to take them on. Mainly it is the Essential Commodities Act (ECA) of 1955 that has been changed by bringing Central legislation to allow farmers to sell their produce to anyone outside the state government set-up Agricultural Produce Marketing Committee. This will – if implemented properly – create conditions for barrier-free inter-state trade and a legal framework for contract farming. It could bring not only price stability but also reduce wastage. India may finally be on its way to having one common market for agri-produce.

Other policy announcements were in the mining sector, where allowing commercial coal mining was reiterated, and the seamless transfer of mineral mining leases was also permitted. Moreover, the novel distinction of ‘captive vs. non-captive’ mines was done away with. FDI in defence manufacturing was increased to 74% to encourage domestic defence production aided by higher FDI. The privatisation of government power distribution companies was also mooted. Although this is a state subject, the central government’s decision to link states’ additional market borrowing limit to reform in power distribution should provide a nudge. In fact, a part of the enhanced borrowing limits for the states is explicitly linked to the ability to plan and execute reforms in ease of doing business, amongst other areas. Finally, the government signalled its intent for public sector enterprise (PSE) reforms – PSEs will only be present in strategic sectors, likely to be privatised, merged, or brought under a holding company in all other sectors.

During the Prime Minister’s announcement of the economic policy support, there was an exhortation to make India self-reliant, encouraging the country to be “vocal for local.” The concept of ‘atmanirbhar’ (self-reliant) India is based on five pillars: economy, infrastructure, technology-driven systems, demography, and demand. It is not exactly clear at this point how the five pillars link up or drive self-sufficiency – however, the underlying message seems to indicate developing localised supply chains and focussing on domestic demand. Some of the subsequent policy announcements targeted local supply chains and small businesses. In fact, the entire package and the ensuing statements by the Ministry of Finance have been under the aegis of ‘atmanirbhar’ India. In the absence of clarity, the pitch for self-reliance may be misinterpreted as a campaign against foreign goods. We think that this more likely a push for the government’s older “Make in India” campaign rather than a protectionist approach – however, as always, the devil is in the lack of detail.

Second waves and the new normal

The spread of the virus remains steady and has yet to be contained – India initially had startlingly low testing rates and a public healthcare system inadequate to cope with the pandemic, with only 1.28% of its GDP allocated to healthcare. Earlier there were graded relaxations in Red, Green, and Orange zones, with the maximum restrictions applying in the Red zones but the new lockdown has no zone-wise restrictions or relaxations as the delineation of zones is to be decided by the respective state governments. The number of red zones in the country have significantly declined since, most states having just a handful of blocks or districts marked as red zones and several states even having disbanded the colour categorization. According to the Health Ministry, only districts with more than 200 positive cases should be declared a red district. The situation is returning back to some semblance of normal, however the decline in red zones may cause a potential setback due to a large percentage of economic activity being concentrated in states with the highest concentration of red zones. The public health challenge has not abated with the health infrastructure not yet been tested to the extreme. As economic activity starts to pick up, most firms are establishing standard operating procedures that ensure the safety of employees and meet the government guidelines. We have not seen any sector-specific guidelines emerge, as company-level initiatives drive each guideline.

As for the economic package, there were two distinct takeaways: it focussed on survival and sustenance with a few important structural reforms. Neither of these initiatives – while needed and welcome – is enough to alleviate the overall economic distress. With the fiscal response to date summing up to less than 1% of GDP, a further expansion is needed to make any material difference in countering output contraction. We expect to see further fiscal efforts, probably distributed over a longer term, such that macro fundamentals are managed to avoid major slippage in the country’s sovereign ratings. Over the medium term, we expect faster execution of infrastructure projects as a way to provide growth impulses to the economy with a further fiscal push to augment aggregate demand. It is also worth watching out for the forthcoming rules and regulations that will support the policy reform measures. We are enthused by this proactive policy tactic of using a crisis to push through challenging reforms and hope to see more of this.

In sum, the economic devastation has forced the government to bring about relaxations in the lockdown on the belief that the trajectory of the virus has slowed down. We remain cautious in the next phase and coming weeks, but India has decided to get back to work for now. We will watch not only the numbers for virus infection but also the economic metrics. Companies have been granted some protection in the suspension of insolvency proceedings for a year, along with the exclusion of COVID-19-related debt from the definition of ‘default’ under the Insolvency and Bankruptcy Code. However, this is mere breathing space and certain sectors – aviation, hospitality, travel & tourism – are likely to need more than this. Finally, the journey to self-sufficiency must be clarified soon since it may not sit well with India’s aspirations to be a greater part of the global value chain – which itself is an entirely separate story.