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What this second surge will cost India
Read more on - Polity | Economy | Schemes | S&T | Environment
- GDP forecasting: As the second wave of Covid-19 spread in India, various economists started reducing India’s expected economic growth in 2021-22. Nomura downgraded its growth projection to 12.6% from the earlier 13.5%. JPMorgan says India will grow at 11% against 13% earlier. As the disease spreads rapidly, economic activity is being negatively impacted, sending ripples across sectors as varied as auto, real estate, banking, and cinema.
- Second-order: There will be second-order effects, too, which can’t be easily measured. Government tax collections will fall. Companies will try and cut down expenditure to maintain or drive-up profits, thus impacting the overall economy negatively. What will also make things difficult is the fact that inflation has been rising.
- Warning signs are popping up all over the place. CMIE data shows that unemployment as of 31 March had stood at 6.52%. It has risen to 8.4% as of 18 April, 2021.
- HDFC Bank said that dishonoured cheques in April 2021 (as of 15 April) have gone up slightly due to medical emergencies, and the Nomura India Business Resumption Index, which tracks economic activity, as of 11 April fell to its lowest level since December 2020.
- The excess money in the banking system, or the total amount of money that banks park with the Reserve Bank of India (RBI), had stood at ?3.8 trillion as of 31 March. It rose to ?5.55 trillion as of 18 April, 2021, so lending by banks is slowing down dramatically!
- Reverse migration redux: The second round of reverse-migration of workers from cities, more so from Maharashtra, has started. Contractual labour is going back to their hometowns. Delhi has also been placed under a six-day lockdown, which has accentuated this trend. Reverse migration has a lot of second-order effects—ranging from a fall in home rents to a negative impact on overall consumption. Bad days are back for malls, that had recovered up to 90% of their business but took a beating once again in April 2021. Malls being shut impacts their revenue and also impacts all kinds of other products, including the sales of high-end mobile phones, electronics (everything from TVs to laptops), clothes, etc. Most multiplexes operate inside malls. This has an impact on film. Due to the lockdown, automobile production in Maharashtra has been impacted. Most companies are operating their factories at 50-60% of the normal output.
- Deep impact: A big fallout of the pandemic was the work from home phenomenon, which is likely to continue through 2021 too. This will continue to dampen the demand for commercial real estate. People working from home results in other effects, as it impacts off-role workers who keep office facilities running. The small shops around offices selling food will see a further collapse in business. People don’t need formal clothes, shoes, and so on. If offices that are already built can’t be leased out, there is no point in building new ones either. That impacts the construction industry, which is a huge job creator.
- So will bigger homes be needed? The total home loans outstanding with banks grew by ?1.02 trillion between April 2020 to February 2021. This was 39.5% lower than the growth between April 2019 to February 2020. The steep fall tells that just because people have a need for a bigger home, they won't buy one.
- So the overall slowdown in the construction of real estate will lead to further reverse migration.
- Help at hand: In 2020-21, people moving back to the villages were helped by the increased work provided under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The government spent Rs. 1.12 trillion towards the scheme in 2020-21. The allocation in 2021-22 stands at a much lower Rs. 73,000 crores. So the government needs to increase allocation to this scheme.
- Banking: Loan defaults will likely shoot up now, and this comes when banks are yet to get around to declaring their non-performing assets or bad loans from the first round of Covid-19. A Supreme Court stay had stopped banks from declaring bad loans which hadn’t been classified as bad loans as of 31 August 2020. In 2021, the SC vacated the stay. Ratings agency ICRA estimates that banks have accumulated bad loans worth Rs. 1.3 trillion between September and December 2020, which isn’t reflected in the overall bad loans number yet. The overall bad loans of banks had peaked at Rs. 10.36 trillion as of March 2018. As of December 2020, they stood at Rs. 7.57 trillion. Total bad loans may be at Rs. 8.87 trillion. Chances are that the bad loan quantum might cross Rs. 10 trillion a few months down the line.
- Small firms hit hard: When the first wave of Covid-19 hit, the profit margin of many companies was expected to crash, and it did. But operating profits went up by 186.73% between July-September 2020. This wasn't dut to an increase in the total income of these firms, which actually fell by 7.07%. What the companies managed to do well was cut their expenditure by 13.72% after July. And how? Expenses were cut by renegotiating contracts with suppliers and contractors. The increase in employee expenses was also minimal. While this benefitted the larger companies, it created grave problems for the smaller ones. Big fish may do the same in 2021 also. Many smaller businesses are already having trouble finding workers, thanks to the reverse migration. Many small businessmen have exhausted their savings and capital in dealing with the lockdown of last year and have no more capacity to borrow. Overall bank lending to micro and small businesses has actually remained flat for nearly 5 years. It has grown by just Rs. 1,010 crore, or 0.27%, to a little under Rs. 3.77 trillion during this period.
- Inflation worries: Inflation is back, and the wholesale price index (WPI) inflation stood at 7.39% in March 2021—the highest in 101 months. Some of this is likely to feed into retail inflation. Also, if supply chains break down once again as Corona spreads, retail inflation will shoot up further.
- Tax collections: The tax collections of the government will take a beating. This means that the RBI will try and maintain lower interest rates in order to help the government borrow more. With high inflation and low interest rates, savers are likely to be hurt as they had been in 2020-21.
- Summary: India’s economic growth for 2021-22 is likely to end up being in the high single digit at least, thanks to the base effect of the economy contracting in 2020-21. With the government now ready to buy vaccines from foreign manufacturers and those above the age of 18 being allowed to take a vaccine, more people are likely to get vaccinated in the months to come. This will help build up immunity against the pandemic in the months to come. And the best news? Monsoon in 2021 is expected to be normal.
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