Sultan M Hali
NARENDRA Modi, who in 2014 had promised a “shining India”, failed to achieve his economic targets but in 2019, he sailed through the elections, riding a crest of hate and odium against Muslims and Pakistan. Unfortunately, his worst nightmares are coming true. India suffers from the third highest number of casualties due to the pandemic COVID-19 arising due to poor handling and not enforcing preventive discipline and protocol. The country is facing a situation similar to that in the US, where each state would have its own epidemic curve of a rise, peak and fall in cases, according to the latest reports. This would prolong economic recovery, it said, projecting -11% growth for second quarter and a weak 0.7% and 1.5% recovery in the third and fourth quarters of FY21 respectively.
HDFC, India’s leading private sector bank, forecast a deeper contraction of 7.5% for growth in the current fiscal, down from – 4.8% it expected in May, as Covid-19 cases surged in non-metro areas, forcing states and local governments to re-impose lockdowns in July. According to the HDFC dispersion index, which measures the spread in new daily cases, there was a spike at the end of May, when migrants travelled back to their homes and more recently in July as mobility increased during the unlock phase. The number of cases has a strong inverse correlation with the Human Development Index (HDI) of the state, the report said, which in turn was inversely correlated to high outbound migration. This meant reverse migration would bring the infection to areas of high vulnerability. According to Abheek Barua, chief economist of HDFC Bank, “With the exception of Madhya Pradesh, both Uttar Pradesh (UP) and Bihar are net exporters of migrant labour. The dispersion also means that in these vulnerable states, which are associated with much less developed healthcare facilities than the initial hotspots, there has been a rapid escalation of cases. Including UP and Bihar, nine states have imposed lockdowns in varying forms through July.
India’s debt to GDP ratio could rise to 87.6 per cent as GDP is expected to contract, according to SBI Research Department estimates. But a silver lining could be falling yields on both state and central government bonds that will bring down government’s debt servicing costs. The country’s growth in terms of GDP is expected to contract steeply and push up the debt to GDP ratio by at least 4 percentage points in FY’21, SBI’s research team said in a report. Fiscal estimates of all economies across the globe have gone awry due to combined impact of the economic contraction and Covid-related expenditure and stimulus.
“India’s debt to GDP ratio has increased gradually from Rs 58.8 lakh crore (67.4% of GDP) in FY12 to Rs 146.9 lakh crore (72.2% of GDP) in FY20. Higher levels of borrowing this fiscal are likely to increase gross debt further to around Rs 170 lakh crore or 87.6% of GDP” the report said. This external debt is estimated at about 3.5 percent of GDP and the stage government debt about 27 per cent of GDP, with balance from the central government. This higher debt amount will push the FRBM-Fiscal Responsibility and Budget Management Act- target of combined state and central government debt to 60% of GDP by FY’ 23 by seven years to FY’30. But the debt levels are sustainable, the report said. “The current level of foreign exchange reserves are sufficient to meet any external debt obligations” said SBI’s group chief economic advisor, S K Ghosh. “On the internal debt, since most of the debt is domestically owned, the debt servicing of the same is not an issue.”
On the positive front is the falling yields. The weighted average cut off yield for States has so far reduced significantly to 6.49% compared to 7.23% in FY20. For Centre the rate has come down to 4.53% in FY21 from 6.85% in FY20. This in turn might help in significantly reducing interest costs. The report suggests a combination of OMOs by RBI and monetization of fiscal deficit through COVID perpetual bonds to manage the higher government debt. Issue of longer dated papers would bring down the cost of borrowings as interest rates are expected to fall further.
In his opinion piece published in “The Indian Express”, Dharmakirti Joshi, chief economist CRISIL Ltd., maps the risks to the Indian economy due to the COVID-19 disruption. He foresees a 25 per cent contraction in India’s GDP in the first quarter of the current financial year, and 5 per cent contraction for the entire fiscal year. In effect, he says, “over the medium run, for India, we estimate the permanent loss at 10 percent of GDP”. The problem according to him is that “the monetary measures announced after the pandemic do not have the heft to trigger a recovery because of rising financial sector stress and lack of fiscal space”. Therefore, even as economic data of the past three months signals a move from “free fall” to “uneven improvement”, caution is in order. To a large extent, it will depend on the shape the COVID-19 infection curve takes. Given India’s high population density and weak health infrastructure, the reliance so far has been on lockdown and social distancing. The longer the lockdown, the greater is the impact on livelihoods. That, in turn, necessitates income support for vulnerable households and financial support for susceptible businesses.
—The writer is retired PAF Group Captain and a TV talk show host.
