All the makings of recession

Subir Roy

Senior economic analyst

The coronavirus pandemic will lead the country into a severe recession whose impact will be made worse by the fact that it comes in the wake of a slowdown which was already adversely affecting the economy. There is a feeling among the economists that this recession is likely to be as severe as the one that hit the world in 2008-09 as a result of the financial crisis.

What makes things even worse is that India’s ability to mitigate its impact will be undermined by the fact that it is part of a global phenomenon. And the most frightening scenario is that if the coronavirus infection does not begin to abate by May, the world can be plunged into a crisis like the Great Depression of the 1930s. This is the dire apprehension articulated by Ruchir Sharma, chief of global strategy at Morgan Stanley Investment.

The earlier Indian slowdown took the growth rate down from over 7 per cent in early 2018 to below 5 per cent in 2020. Now, it looks as if it will go down further to 3 per cent and the final cruel twist is that even being able to achieve that will be sort of a ‘miracle’.

On what needs to be done to address this grim scenario, Raghuram Rajan, former Governor of the Indian central bank, the Reserve Bank of India (RBI), outlined a dilemma. The RBI needs to facilitate the flow of credit to ailing businesses but the financial system in between is troubled, laden with a huge load of non-performing assets of loans gone sour. The financial system needs to be cleaned up, the doubtful loans largely written off, before it can do a constructive job as a financial intermediary — passing on to companies what the RBI makes available and wants done. But unfortunately, a lot of time has been wasted and the cleanup is yet to be done.

To address the huge negative impact of the coronavirus disruption, the government has to offer partial guarantees to banks so that they can keep lending, foremost to small and medium enterprises, but also to large firms. But before they can do so, they have to rediscover their risk appetite which has been seriously undermined by the defaults during the slowdown.

Rajan outlines two further tasks, one by the RBI and the other by the government. The RBI has to ensure that there is enough liquidity the way in which central banks are doing across the world. Plus, the government has to come up with a temporary income transfer scheme to the poor in order to enable them to survive the economic consequences of the pandemic.

Against these high policy requirements, the Finance Minister has just come out with a range of technical easing of rules, filing deadlines and penalties to help individuals and companies tide over the present situation. She has also promised that the economic task force will announce a relief package to address the impact of the corona- virus pandemic.

Some of the measures are: last date for filing of income tax returns for 2018-19 extended till June 30, interest rates for delayed payments reduced, last dates for GST returns for March, April and May extended till June 30, deadline for Sabka Vikaas scheme to settle arrears of indirect taxes extended to June 30, and to help MSME businesses under stress, the threshold for triggering the Insolvency and Bankruptcy Code process raised from Rs 1 lakh to Rs 1 crore.

For its part, the RBI has said it has enough policy tools and is ready to take any measures needed to help the economy tide over the impact of the coronavirus pandemic. Over the next few days, the RBI will inject Rs 30,000 crore of liquidity through open market operations. It will repurchase government securities in two tranches of Rs 15,000 crore each. It acknowledges that stress in certain financial market segments is severe and financial conditions tight. Hence, its reiteration of the long-term promise that there will be enough liquidity.

The Finance Minister has also sought to allay fears of the country being in the grip of an economic emergency. This is understandable as it is her job to ensure that there is no sense of panic. But the reality is that the situation is grim.

To halt the spread of the virus, a lockdown across the country has been announced for three weeks, till mid-April. During this period, all economic activity — for that matter any activity — will come to a standstill as people have been urged not to venture out of even their houses, not to speak of going to work.

Daily wage-earners and those living by the informal economy, or even at the periphery of the formal economy, will suffer a total loss of income. The impact of this will be severe if the pandemic situation begins to turn around only from May, but if this takes longer, the consequences of it are right now too dreadful to contemplate.

Hence, there has to be a plan B. While plan A will address the impending recession likely along the lines suggested by Rajan, plan B will need to address a doomsday scenario. But the supreme irony of doomsday is that when it comes, it sweeps aside all the planning to mitigate and recover from it.