At this juncture, it is safe to assume that most, if not all, know about the novel coronavirus disease that is ravaging the world. In merely a span of 4 months, the disease has spread far and wide across the globe.
While previously Wuhan was the epicentre of Covid-19, since the dawn of March 2020, it has shifted to Italy and more recently to the USA and the whole of Western Europe as well. And it is only a matter of time before the spread of the virus peaks in India. India has already crossed the 2500-mark threshold and suffered nearly 75 fatalities.
Two schools of concern have surfaced since the outbreak first began in December — “epidemiology of Covid-19” and the “the global economic repercussions”. While health is the primary concern, it is difficult not to consider the economic aspect when in a capitalistic construct.
Table of contents
1. Economic Instability Due to the Outbreak
Since the outbreak began, economists and financial experts have been tirelessly speculating the economic impact the staggering Covid-19 curve could bring about. It is no telling how long the national lockdowns in most countries of the world would go on as the curve shows no signs of flattening anytime soon.
And national lockdowns mean no labour-intensive sector would be operational. Resultantly, supply chains have halted. Investors have started to panic. Stock markets are crashing. Consumer demand has fallen steeply. In other words, the world economy is limping.
Earlier, the UN had estimated the global economy to inflate by 2.5%. Recently, it updated its estimates to a 1% contraction of the world economy.
Economists and financial experts who earlier had been exploring the possibility of the current economic crisis to be equivalent in scale with the crises of 2008 and 1974 are now stating it to be greater than any economic calamity the modern world has ever seen.
Since late February the global stock markets have seen sharp drops at frequent intervals and corresponding market corrections. The situation started spiking since the beginning of March when Covid-19 tallies began peaking in Italy and Iran.
On 11th March came WHO’s announcement that Covid-19 is a pandemic.
Although the announcement attempted at prompting national governments to adopt stricter measures to prevent the virus’s spread, as collateral damage, large swaths of the investor community panicked. This anxiety amongst investors was further exacerbated with anticipations of oil price drop and a looming recession.
On 16th March, Dow Jones plunged historically by 2997 points (12.9%) and S&P 500 dropped by 12% (worst drop since 1987). This time, a market correction was on the cards.
Prior to this coronavirus outbreak in late February, India’s unemployment rate was estimated at 7.8%. In March, this shot up by 150 bps or 1.5% to reach a record high 9.3% unemployment rate. Additionally, Barclays reckons that India’s GDP growth would also take a hit due to the Covid-19 outbreak bringing down the rate from 4.5% to 2.5%.
And while national governments continue to take drastic measures to curb virus’s spread, even at a massive economic cost, it is necessary to implement adequate fiscal policies simultaneously.
These policies should enable financial institutions to effect smooth economic recovery once this pandemic subsides.
2. What Does the Future Hold?
The current situation will lead to what many economists anticipate “businesses cutting down on investments”. Due to lower demand and dwindling investors’ confidence companies, large and small, would be stopped on their tracks to prosperity and growth. They would be pushed to observe a conservative approach by cutting down on expansion costs.
It shall be noted that this is mere speculation and does not factor in measures from other components in an economy like state and financial institutions. These bodies hold the prerogative as well as the capacity to tide over such situation and bring in necessary measures to mitigate the economic impact of Covid-19.
However, these measures come into play once the situation has subsided and lockdowns are lifted liberating avenues for production, distribution, and consumption. Until such time comes, it is safe to assume that industries would continue to flounder setting back national economies, including India, by quite a margin.
3. How Can the Situation be Rectified?
· MSME crisis
Therefore, alongside measures to flatten the Covid-19 curve, the government should take appropriate steps to address the emerging economic crisis. There is a desperate need for stimulus packages as well as tax relaxations to ease the conditions for businesses. According to many reports, MSMEs employ north of 110 million individuals and therefore, forms the heart of the Indian workforce.
Several economists are positive that if the workforce remains unscathed during this period of crisis, once the situation subsides, it would be easier for businesses to get back on track. These stimulus packages would ensure that such businesses remain afloat. Simultaneously, the government should enable an easy availability of credit for these companies to prevent their untimely demise.
While there has been a slew of measures from the Union government like an extension of the tax filing deadline and increment of the threshold for insolvency proceedings to Rs.1 Crore, the aforementioned undertakings are essential to the survival MSME sector.
Hence, financial institutions have a significant role to play in the MSME scenario, including and most importantly, the Reserve Bank of India.
· Declining Consumer Demand
There is no scale to determine how much consumer demand is going down or is likely to ebb in the future.
The lower-middle-class section would suffer the most during this stagnant economic condition. While most relief measures in India are directed towards the underbelly of the society, i.e. households belonging to Below Poverty Line, a large section of the lower middle class would struggle to make ends meet.
It is the responsibility of the government to address a staggering unemployment rate and introduce relief measures like a monthly dispensation of wages.
Once the situation rests and the socio-economic conditions revert to normalcy, micro-financial institutions need to come into play. At this point, it is only reasonable to assume that consumers will spend conservatively and limit their expenses to essentials only.
Hence, except for the FMCG industry and medicine sector, the rest of the economy will witness tardy or no growth. However, micro-financial institutions could nudge consumer behaviour to be more liberal by extending short to medium range loans at low interest rates.
This measure would encourage consumers to avail such loans and inflate their purchasing power that would, in turn, increase spending steadily.
4. Role of RBI and Financial Institutions
The Reserve Bank of India plays a pivotal role in nudging the economy back to its track and neutralising the economic impact of Covid-19. While RBI works from the edges, the main players are the financial institutions that directly deal with the driving components in an economy — consumers and businesses.
· RBI Measures
Since the outbreak in India, RBI has introduced a slew of measures to mitigate the financial blow on India’s economy. A few of these measures are –
Ø 3-month Moratorium on Repayment of Credit
RBI announced a 3-month moratorium on EMIs of all term loans and credit card dues that fall within 1st March 2020 to 31st May 2020. During this period, borrowers can choose to not pay the EMIs on their loans and their credit card dues. This non-repayment would not affect their credit scores, and tenure on loans would extend accordingly.
Ø Repatriation Time Limit on Exports Lengthened
Businesses will now have more time in their hands to realise the revenues from their exports and repatriate the same. This eases the anxiety of exporters, who were worried the pandemic would result in huge losses due to unrealised revenues.
Ø Repo Rate Cuts
The Monetary Policy Committee of RBI slashed the policy repo rates by 75 basis points to bring the rate down to 4.4% (lowest ever). With the RLLR design in action, this would enable consumers and businesses to avail loans at lower rates from financial institutions and encourage spending once the threat of Covid-19 subsides.
RBI also cut the reverse repo rate by 90 bps to conclude it at 4%. This disparity in repo rate and reverse repo rate would discourage financial institutions from depositing their funds with RBI and instead lend the sum.
While most of the measures observed by RBI are short-term reliefs, it needs to take steps that would address the mid- and long-term economic impacts as well.
· Role of financial institutions
The role of large, medium, small and micro-financial institutions would begin once social conditions go back to normalcy. These bodies would need to actively engage in advancing loans to businesses and consumers to reshape their economic behaviours as it was before the Covid-19 outbreak began in February.
While, in words, it seems like a minor task, the scale of this activity is colossal in the context of a limping economy. At this point, the financial sector can only move forward based on optimistic speculations expecting that the situation would soon subside and the prevalent economic components would gravitate towards recent-past behaviours.
