The rapid spread of the novel coronavirus (Sars-Cov-2) across the world threatens to morph into a global recession now even as governments and central banks scramble to limit the shock. For India, as for most other countries, the outbreak presents twin challenges: containing the disease spread even while limiting the economic impact in an already slowing economy.
The market reaction to the outbreak has been very different from 2003, when a similar outbreak (SARS) had first originated in China.
The current market reaction is in fact closer to the crash of 2008, after Lehman Brothers filed for bankruptcy. As has happened now, prices had crashed across asset classes, as investors rushed for the exit.
The co-ordinated global response that followed the 2008 crash has not materialized yet but governments and central banks are rolling out rescue packages. From UK to Malaysia, governments across the world have already announced stimulus packages worth $240 billion even as central banks ease liquidity and capital requirements for banks. This includes $12 billion of funding pledged by the World Bank.
In addition, the International Monetary Fund (IMF) has said it could provide up to $50 billion in emergency financing to “fund emerging and developing countries’ initial response" to the crisis.
The panic and the response both spring from the unusual nature of the crisis. While Covid-19 (the disease caused by the novel coronavirus) has had a lower mortality rate compared to past epidemics such as SARS, it has spread much faster over the past two months. In terms of absolute deaths, Covid-19 has claimed many more lives than SARS did in the initial days.
As of now, India accounts for a minuscule share of Covid-19 cases globally. Its share of casualties is even lower. But given gaps in India’s health systems and low levels of testing, these numbers can’t be taken for granted. Both the case count and the death count could change rapidly.
The pace at which the disease spread would depend on mitigating steps taken by firms and governments. If more firms and state governments impose partial lockdowns to prevent gatherings, this could help lower the spread.
Such steps would inevitably hit demand. Firms with weak revenues might struggle with cash flows and repayments. Daily wage earners might struggle to put food on the table for their families.
Mitigation strategies would be required for both. Firms struggling with loan repayments might need additional time to get back on their feet. Daily wage earners would need cash or in-kind transfers till they are able to resume their livelihood.
States such as Kerala and Karnataka are already using their network of frontline child care workers to provide groceries at the doorstep of families affected by lockdowns. Other states could follow similar strategies, with support from the Union government.
The silver lining amid the turmoil has been the fall in crude prices, which has allowed the central government to raise fuel taxes and add to its revenue kitty. It must be prepared to deploy that kitty in aid of the worst-affected states.
Even if India manages to contain the spread of Covid-19 and escapes the worst of the outbreak, it would still have to deal with the effects of financial haemorrhage and trade disruptions across the world. If the rupee continues to weaken, firms dependent on foreign loans could struggle. Firms dependent on foreign supplies have already been hit, with imports declining sharply last month. Exports to key trading partners such as the EU are also likely to take a hit.
Ratings agencies have scaled back India’s growth estimates for the upcoming fiscal year, citing supply chain disruptions. The coming days could see further cuts in growth estimates even if the disease is contained in India, as the number of countries under lockdown grow, and the full impact of the global shock is factored in.
Slowing growth would in turn mean slower revenue growth for most firms, and put additional stress on their cash flows. India’s financial system, already reeling under a huge pile of bad loans, will be tested. On Monday, the RBI announced additional liquidity measures including a dollar-rupee swap but stopped short of announcing any changes in debt repayment norms.
A moratorium on debt for firms and relaxed capital requirements for banks would help. But the Reserve Bank of India (RBI) has to ensure that such steps are taken without endangering systemic stability, and are rolled back in good time.
It is worth noting that the seeds of India’s ongoing credit crisis were sown during the last bailout following the 2008 crash. The government would also do well to remember the lessons from that episode, and avoid forcing state-owned banks to lend to sectors or firms it wants to favour.
These are testing times for many people. But three individuals in particular perhaps face the defining test of their careers: Union health minister Harsh Vardhan, Union finance minister Nirmala Sitharaman, and RBI Governor Shaktikanta Das.