Mumbai: Even as the lockdown is relaxed in various parts of India, many industrialised cities such as Mumbai and Pune are still red zones, where movement of people and private business are restricted.
This phase is likely to result in a 4% permanent loss of India’s gross domestic product (GDP), according to Credit Rating Information Services of India Limited (CRISIL), a ratings agency. IndiaSpend spoke to D.K. Joshi, the chief economist at CRISIL, to understand what this means for the country, for large enterprises and for millions of small and medium enterprises across India.
Edited excerpts from the interview:
Your report says that we are looking at a permanent loss of 4% GDP. What was the GDP earlier, what is the GDP projected to be, and how have you calculated the 4% figure?
There was a pre-COVID-19 path for GDP--I am not talking of GDP growth but the path for GDP. Just to give you a reference, during the global financial crisis, the same thing happened, GDP fell to 3.9% but it recovered very sharply and continued to do so for two years. It grew at 8.2% per annum, so it caught up with the long-term value of GDP. This time around, that is unlikely. The reason is that the hit is extremely sharp. And second, you do not have the ability to push growth to the extent you did earlier for a long period of time. This is a much deeper crisis.
Even if you grow at 7% per annum from the next fiscal year, for three years, which is the trend rate of growth for India, even then you will not catch up with the pre-crisis path of GDP and the difference is going to be around 4% of GDP, which works out close to Rs 9 trillion [Rs 9 lakh crore]. If you want to catch up, then you have to grow at a humongous rate, which is 8.5% per annum, which I think is not possible. Even this is a good scenario I would say, if you get away with a 4% GDP loss.
Is this difference because of the loss of sales in March and April 2020, for small enterprises or large, compared to the prior period?
On a very broad level you can say that, but GDP computation is a little more complicated because it is not the value of the output, but it is value added by each of the sectors. So you are broadly right, that the sectors are getting hit, the services are getting hit and all those add value to the system, and the total value addition is much less than what it could have been. So that is getting reflected in the permanent loss of GDP. We are calling it a permanent loss because our calculations show that even with a V-shape recovery and close to 7% GDP growth till 2024, you are not going to touch the trend.
Conceptually, one may argue that the lockdown has already been lifted in some parts of India. By the end of May 2020, it will be lifted further in many parts, one way or the other. And everyone hypothetically could get back to their jobs. I know it is not going to be the same for hundreds and millions of migrant labour, but assuming that everyone got back to their jobs, because we have not seen any other kind of physical destruction, technically life could resume where we left off… or is that too naïve an assumption?
I think that is a naïve assumption because the enemy here is not only invisible but also something for which we do not have a cure. You can address financial sector issues by regulation etc. but for this, you need medical resolution. Unless you have a vaccine, until that time, you need to be cautious. Unless we see the disease firmly under control, we will see these downside risks play out. On top of that what also is a worry right now is the second wave or a third wave. I think overall risks are tilted to the downside of whatever outlook we take for the year 2021, which is 1.8% GDP growth.
In the report, you have said that there are many companies holding enough cash for many months of salaries. Assuming everything is shut down as it has been, why could these companies not pay salaries, which is the critical component, and that is what will bring back demand? If salaries are paid mostly and people are able to come back, with some restrictions, why is it not that we will move into recovery faster?
I think what you are talking about is the organised sector. The data is mostly on the organised sector but if you look at smaller enterprises, a large part of the services sector, I do not think these have the cash reserve. If their cash flow stops, then there is a big hit. A large part of the employment in India is in the informal sector and not in the organised sector. The organised sector too will not blow up their entire cash reserves in such an uncertain environment for just paying the salaries for an extended period of time.
Your report says that of the 465 million workforce in India, 415 million is the informal workforce, including the services sector.
That is right. Many of them are casual labourers. Even people who have regular salaries, about 38% of them do not have wage contracts and they do not have social security. So clearly, I think we have a large vulnerable population in this country.
The director general of the Association of Healthcare Providers of India told me that shutting down elective surgeries and keeping beds for COVID-19 on standby is a good thing but it also causes a severe dent to their income and profitability. What kinds of companies do you think will not be able to come out of this and which ones do you think will come out severely impaired?
It is very difficult to estimate but I think for some things the demand will disappear forever. The behaviour of people will also change--whether people will go to cinema halls for instance or will people be willing to go out to stadiums to watch football or any other sports activity--all that will also play out for sometime, unless this [COVID-19] is completely history, which is sometime away.
I think there may be pent up demand for manufactured products that can be brought back later. You cannot double the capacity later, which you can do in manufacturing, for many sectors. The dynamics vary across sectors and my sense is no matter how much stimulus you give, it is not possible to offset the impact. It is only possible to minimise the hit. That is why, despite a humongous stimulus, the world economy is expected to shrink in 2020-21.
Agriculture is a sector that employs a substantial part of our workforce and supports half our population. That is something you are saying is in a little better position, little better placed than manufacturing or services. Why is that?
The reason is that you got a good rabi harvest and agriculture activity, I think, can still continue, unlike manufacturing. Once you have done the sowing, you have to water and fertilise and crops can keep growing. It does not require the kind of human interface that is required in other parts. I am not saying that people do not work in agriculture, but it is of a different kind. That is the reason why we believe that agriculture can still do well. The kharif [crop can also do well] depending on whether labour shortage causes some supply-side issues for agriculture.
But fruits, vegetables, floriculture, etc may have to face more hardship. For some of them, the demand will shrink. For instance, for flowers, no marriages [are happening] and I think even temples etc. consume a lot of flowers, even those activities are restricted. The fruits and vegetables are perishables. So, they require a very good supply situation. So, we focus on what the producer can produce, and the consumer can consume. You cannot live without it--it is an essential item. I think all efforts will be towards preserving this part and this can also be preserved. I would say that agriculture is one segment that will grow positively for sure this year, unless supply disruptions completely overwhelm it.
To come back to that Rs 9 lakh crore figure, so now this is lost. How does this loss get distributed, and how can the government come in?
Well I think, we are baking in some fiscal stimulus into our base case, which is much more than what the government is currently giving. I think that for this number to play out, it needs some reasonable degree of fiscal stimulus beyond what is being offered. Now, distributing it, we have not gone that granular, but I would say that among different categories, it will play out differently. The vulnerable section will get hit more, there is no doubt about it. The airline industry, hotels, restaurants, they will be hit more. The production of essentials will not suffer that much, so it will vary. The stringency of norms is more towards non-essentials. In a way, what is regarded as non-essential will be hit hard. The automobile sector, the first quarter will not look good for them at all. Quite bad I would say. Similarly, some segments--pharmaceuticals, FMCG (fast moving consumer goods)--will not be hit that hard. The impact will vary depending on whether you are an essential or a non-essential [provider].