An economy rising from the ashes

Just a quarter back when nations around the world entered a new decade of the 21st century, who knew that they would be in a complete lock down mode to avoid the loss of lives caused by a pandemic named Covid-19. The world came to know about Covid-19 only in January when Chinese officials first informed the World Health Organization (WHO) about the illness caused due to unknown sources, and later mapped the source of this virus to the Corona family and finally accepted the first death from this virus on 9th of January. However, it was too late to inform the world about this deadly virus and its consequences. Millions of people were already carrying it to different parts of this world. It is important to state here that the Chinese officials tried their best to hide news about this deadly virus initially, evidence of which has now emerged in the public domain. The first case has now been traced to the Chinese city of Wuhan back in Novemberof 2019. When some of the Chinese doctors started discussing the symptoms of the new disease in December, they were officially reprimanded by the Chinese government. Once the number of infected people in China became too high to hide, the Chinese government was left with no option, but to break this news to the officials of World Health Organization (WHO).As Wuhan went into lockdown, commercial activities crashed and the world felt its tremor. Wuhan is an integrated transportation, logistics, automobile, optics industry, and a major education hub for China. Out of the top 500 companies of the world, more than 300 have their presence in Wuhan and that indicates the importance of Wuhan in the world’s economy. With the lockdown, the transportation and communication link disrupted and with it Chinese exports and imports. 

With the announcement of a lockdown, the trade and commerce of non-essential commodities are being shutdown. The Economic Survey had estimated the contribution of Trade, Hotels, Transport, Communications & Services related to broadcasting for the year 2019-20 to be 18.3%. It should also be noted that these sectors are labor intensive in India and therefore provide huge employment opportunities. Shutdown will impact this sector the most and therefore, is expected to reduce the GDP and employment significantly in short and medium run. 

Health of aviation sector needs a special mention. The Aviation sector has been one of the focus area of the NDA government in order to increase connectivity between tier 2 cities. Due to dedicated policies like UDAN, the aviation sector had shown healthy growth. However, the balance sheet of the air carriers have been under stress due to high operational expenses, which includes high fuel taxes. With the shutdown, the aviation sector is going to witness its sharpest decline in many decades. With cancellation of tickets and flights due to lockdown, and citizens avoiding airports in fear of contamination by international tourists, losses are expected to run in the billions. Indigo had already announced salary cuts for its employees to fight the Covid-19 financial stress. The salary cut in this sector will further reduce the purchasing power and therefore, will ultimately reduce demand. The impact of such demand reduction will be felt by other industries and the Indian economy will slowly drift towards aggregate demand crisis leading to economic recession. 

Banking sector is another sector infected from Covid-19. All businesses hit by shutdown will have immediate repercussion on regular EMI payment. For example, hotels and restaurant owners will find it very difficult to manage their operational cost and pay their scheduled EMI. It will take a long time before hotels and restaurants can run to their full capacity even after the containment of this pandemic. The Aviation sector similarly will find it difficult to service their financial obligations to the bank. Other trades and businesses will also face demand curtailment and therefore, reduced revenue. In such scenarios, Banks will see their asset quality deteriorate and increased Non-Performing Assets (NPA) will further erode the financial health of the banking sector. Though the RBI providing relief to banks and customers on term loans EMIs through moratorium is expected to provide time, the stress is difficult to mitigate due to recessionary impact on the overall business environment, which is predicted to stay beyond three months.  

As with the disease that it impacts the lowest income group the most, the infected economy will also hit the unorganized sector the most. With the shutdown, the people engaged in the unorganized sector working as street vendors, daily wage earners, auto/ taxi drivers, domestic helps, self-employed in non-essential services, and other such categories have become jobless from day one and will be for the entire period of the lockdown. Many people from these categories are migrants and have been returning to their home with the announcement of the lockdown. The primary challenge is to provide food and shelter. The government initiative to provide free rations, cash transfers, and free cooking gas are few basic steps to ensure that no resident dies due to hunger. However, the adverse impact of the disruption in the unorganized sector on the aggregate demand of Indian economy is certain. 

Finally, the net exports i.e. exports less imports is the only lever that can lift the aggregate demand and Indian economy in the short run. However, all developed economies have shut their doors for external economies for two reasons. One, the nations are going into lockdown and therefore, means of transportation are disrupted. Two, the nations want to divert their resources to fight this pandemic.

The central government needs to prioritize public spending in sectors strategic to its national interests. The experience of world trade disruption has necessitated that India invest in its health care to become self-reliant in the pharmaceutical industry and health care equipment. Central government also needs to spend on digital infrastructure to enable last mile connectivity in finance and communication. The lockdown has necessitated people to be at home, yet connected efficiently to the rest of world for information. Employees need to work from home which can only be possible with robust digital connectivity. Essential services can remain uninterrupted only if we have a strong digital economy to support  minimum physical movement.

The private sector also needs to contribute in the way forward. Indian entrepreneurs will have to take this opportunity to invest in the manufacturing industry, which will become an engine of growth by providing huge employment opportunities, increased demand and supply and increased exports to the rest of world. The successful fight against this Corona pandemic by India has the capacity to attract world attention and will be part of our soft power in foreign diplomacy. Many Multi-National Companies (MNCs) will be happy to shift their manufacturing base from China to India. Indian private industry is already competitive in many fields such as automobiles, pharmaceuticals, agro-based products, and aero-space. The easing of monetary policy and world recession has provided the Indian industry a once in a life time opportunity to identify the area of growth and invest heavily to arrive at a win-win situation for everyone. 

With all of this being said , the TN government's decision to open two new wholesale markets to decongest the koyembedu market may be a good move and the closure of liquor shops by the Madras HC can also be a way to stop the spread , but living in a country where there is a 700 crore turnover by only liquor shops of the country and with every TASMAC running contributing about 15%-25% of the revenue of the state only time will answer the question as to how will the TN state run without its liquor shops being opened .....