Covid Exposures

It is not difficult to see that the economy is in bad shape. Most Indians know this, experience it, and can feel it in their bones. In a way, all reference points have disappeared like they do in a tsunami. We don’t know if the sea is on the land or the land is in the sea. Marooned in such a situation, official economic yardsticks have little meaning.

Yet, some indicators are available on the extent of the collapse, though the government has cautioned against any comparisons with the past. Factory output as measured in the Index of Industrial Production (IIP), which tracks manufacturing, mining and electricity, is in free fall. The IIP for April and May, the first two months of the pandemic and the lockdown, reports a 45% fall from the period last year. The collapse, not unexpected, comes on the back of negative numbers that began showing up pre-pandemic in fiscal 2019-20. For example, the IIP was down 4.3% in September 2019, with mining down 8.5%, manufacturing down 3.9% and electricity down 2.6%.

The Indian economy is hit hard by the pandemic at a time it was already weak. The numbers quantify one part but they also point to what can’t be measured – the yet-to-come cascading impact on investments, spending patterns and overall attitudes and behaviour that could dramatically alter some basic constructs.

Take the example of cement, in which India has the second highest installed capacity in the world with some one million people employed. The industry, of course, shut shop during the lockdown and then opened up as the lockdown eased but it still has unused stocks, that reflect the weak off take in construction, which of course, reflects the collapse of demand, which is likely to get worse as more companies in the IT services space take to working from home and dramatically lower their office space usage. This will further dampen prospects in a sector that is even today known for its poor standards and exploitative relationship with customers, despite a law like RERA. So even if there is a pick up in the IIP, it will run into show stoppers of the kind that will emerge from several quarters as businesses and citizens adjust to the changing paradigms. Clearly, it is too early to read “green shoots” (a term used five times in the government’s Macroeconomic Report, June2020) into numbers even when they indicate a pick up.

Consider then the “crucial cushion to external shocks” in the nature of forex reserves at USD 475.64 billion as on July 10. This looks robust by itself till one appreciates that total external debt stood at 558.5 billion (March-end 2020 figures). Total reserves can finance only about 85% of external debt; and short-term residual maturity (maturing in less than 12 months) of external debt accounts for some 50% of total reserves. This was fine in a stable world. In a geopolitical climate brimming with volatile hotspots, this should not offer comfort. Accretion to reserves was high in 2019-20 at USD 59.3 billion but as the economist Dr. R K Pattnaik has noted, it contains an unusually high “other capital receipts” portion of USD 18.4 billion, which includes forex that came in but was in likelihood not deployed as the market turned and the Sars-Cov-2 pandemic spread across the globe. This tells us of the huge gaps that now stand between plans, investments and execution, again an indication of uncertainty that points to dangers in the external sector in a world where globalisation is in retreat. India’s current account balance may generate a small surplus in the first quarter of this fiscal but this will be because the economy has stalled, leading to a collapse in imports. That isn’t good news either.

India weathered the 2008 financial crisis rather well but that came at a time the nation had recorded a five-year period of growth in the region of 8%. For a crisis like the pandemic that is far worse, India enters with an economy that is far weaker than we have known for a long time. In the Jan-March quarter of 2019-20, growth was down to 3.1 per cent – taking India back to the so-called Hindu rate of growth of the pre liberalisation days. For the full year, growth was 4.1 per cent, the lowest recorded in 11 years. At the same time, inflation is up and has crossed the upper limit of 6% in the April-May-June quarter, telling us that prices have risen beyond tolerance just when incomes have fallen drastically. The RBI has lowered rates repeatedly (cumulatively 225 basis points from Feb. 2019 to date), but the classical argument that this would lower rates to retail borrowers and businesses, making it easier to buy and invest more and so drive growth, remained the mythical story that it is in India.

There is clearly an immediate crisis but the Indian economy also faces a larger crisis of vision, direction and integrity. Numbers can’t tell us about this crisis and indeed a crisis like COVID-19 conceals inherent weaknesses because it can all be attributed to the nasty pandemic. But it is the inherent weaknesses that do not allow the nation to look up almost three decades after liberalisation promised to unshackle India and unlock its entrepreneurial energies.

Instead, we have had one worse – an unresponsive public sector of the past replaced by a post-liberalisation private sector that continues to pull privilege, comfort and support of public institutions and stay far less answerable to the people and to Parliament.  The story of rising NPAs that have led to a fall in trust in the banking sector tells us not only of the collusion between crooked bankers and business but also of the failure of the banking sector to regulate, appraise and take a call on what should be its fundamental activity – whetting ideas and proposals, giving out loans and monitoring their use. It tells us of the cover that the system offers to those who take public money and misuse it or divert it with impunity, and of a regulatory system that holds none of this to account. In the midst of the pandemic, on July 19, it was the All India Bank Employees Association that released a list of willful defaulters – the term itself is an oxymoron but it is so legitimised that we don’t stop to think how it might look if the crime were a little different – like willful murderers, or willful dacoits. Yet, it is the AIBEA that wants an ordinance to go after these people, not the government. All of this is pre-COVID stash but it will determine how we respond to COVID.

It is said that a time of crisis tests mettle, resilience and character. The Indian economy and its key drivers are likely to come out poor on these fronts. The way businesses pushed or coerced the government while a majority of the “leaders” and Twitterati CEOs fell silent when labour laws were suspended by many State governments tells us again that India may have opened up and liberalised three decades ago but the license-quota-permit Raj did not go away. The ‘yes-man’ culture lives on. The loot continued. The looters changed.

In a vibrant economy, downturns can come and go. Disruptive change opens opportunities for new players who drive innovation, new products and services as some of the entrenched struggle and vacate space. In an economy oiled by high order graft, downturns expose the grimy layers. Nothing happens. The poor suffer even more.

(Jagdish Rattanani is a journalist and faculty member at SPJIMR) (Syndicate: The Billion Press) (e-mail: editor@thebillionpress.org)