Clichéd arguments of there being no free lunches are a fact in the present context. (Illustration by C R Sasikumar)

Today, it is hard for one to say whether it is more challenging to opt for “unlocking” the economy as compared to “locking” the country. In a way, the former option looks more difficult because when the country opted for the lockdown, there seemed to be little choice. It was based on the assumption that lives were more important than livelihoods. But as the decision sank in, and its impact played out, it was realised that the lockdown led to the impoverishment of enterprise and that the epidemic was spreading. The decision to unlock the economy in phases poses a major conundrum for the government. Unlocking also means getting back to a state of normalcy at some time, which will be problematic.

First, the steps involved in unlocking the economy. Opening up of non-essential production has been allowed, though it’s fraught with ambivalence at the state level. But, this will be ironed out in the typical “jugaad” manner over time. But what about services? This is probably the most crucial element of unlocking the economy at a time when the number of infected has crossed 25,000 a day and is moving north. How does the government agree to allow public transport to function? And when will the railways and airlines’ operations be restored to normalcy? The truncated services have complex “standard operating procedures”, which deter travel. But once opened up, the SOPs will lead to chaos as there would be millions of people on the move every day. Therefore, the door has to remain closed for a longer period.

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Second, after three months of the first economic package that offered free foodgrains to the poor elapsed, the Prime Minister announced its extension for another three months, which would cost the exchequer Rs 90,000 crore. But what happens after three months? Can one really withdraw the scheme, given that most sectors in the economy would, at best, be getting back on their feet rather than walking? Withdrawing any scheme for the poor is tough, though retaining the same will add another Rs 90,000 crore or 0.45 per cent of GDP every three months, adding pressure on the fiscal deficit.

Third is the moratorium provided by the RBI to borrowers for six months beginning in March. The lingering question is: What happens after the six-month period ends? The first-quarter corporate results are abysmal, with negative growth in sales and a sharp drop in profits. This will get reflected in their ability to service their debt commitments. The Purchasing Managers Index for June also indicates that activity is sluggish and it looks unlikely that there will be a turnaround in July. With output growth being stifled in this period, it is improbable that those who took the moratorium can actually start servicing their debt. Additionally, the retail portfolio is filled with mortgages of borrowers with “no jobs or lesser salary” (NJLS). These individuals have been affected for at least a year. The question is: How long will one extend this facility and, more importantly, what happens when it ends?

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Fourth, the RBI has tweaked the NPA classification norms in conjunction with the moratorium, which is logical. But, at some time, money has to be repaid to the banks, and if not, the loans have to be classified as NPAs. There is already talk of restructuring loans but which part of the asset portfolio would qualify for the same? Should it be only the SMEs, which are on the radar all the time, and also sectors that have been deeply impacted, especially in the services sector such as tourism, hospitality, airlines, and entertainment? While restructuring is a short-term measure, banks will be keen on knowing how the RBI will be looking at these assets because when forbearance becomes a bad word there can be a ballooning of NPAs. This is problematic for the system and the government because it would mean the provision of more capital to support public sector banks.

Fifth, and related to the previous point, is the outcome of lending based on guarantees given by the government for SMEs and NBFCs. This was a useful step announced by the Finance Minister — in line with what several governments in the West have announced to support their economies. While it would be too pessimistic to say that a large part of the debt could go bad, defaults in the region of 10-20 per cent cannot be ruled out. Hence, an SME package of Rs 3 lakh crore of guarantees may have to be forgiven (waived off) and paid through the budget.

Sixth, the curse on all central banks this year has been the provision of liquidity to the system. Central banks in the West have opted for quantitative easing in different forms while the RBI has used long-term repo operations and measures like facilities for NABARD, SIDBI, targeted long-term repo operations and open market operations to ensure that there is a lot of money in the system. But with subdued production (supply) even in 2021-22, the generation of excess demand across the world leading to higher inflation cannot be ruled out. The puzzle is what will happen to the loans that have been taken today at a variable rate, which will become more expensive in future. This can affect the economic viability of units in the second round.

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Clichéd arguments of there being no free lunches are a fact in the present context. Someone has to pay for this package and while the government will find itself fiscally strained, it could collect revenue through more taxes — the dividend distribution tax, surcharges on higher incomes or a COVID cess — but this will be intrusive. The RBI will have to move away from the accommodative stance and rein in inflation.

The scenario painted here is not without a sense of déjà vu as the post-Lehman drama played out, which though was of a smaller scale than the current pandemic, was not without repercussions. We need to be ready with answers now.

This article first appeared in the print edition on July 15, 2020 under the title ‘Some unlockdown questions’.The writer is chief economist, CARE Ratings. Views are personal

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