If the pandemic lasts more than a month or two, a full-blown recession cannot be ruled out even in India.
The sharp drop in the stock markets, the prospect of a prolonged lockdown to prevent the spread of the Covid-19 virus among global populations, the massive job losses everywhere, and the collapse of demand for all products barring everyday staples and necessities should force us to think the unthinkable: that India could be on the brink of its first real, full-blown recession.
We have talked loosely about “recession” off and on, but India has never had a drop in real output for a long, long time; we have had growth recessions, where growth rates fall, but overall gross domestic output (GDP) has rarely fallen in absolute terms.
Our last true recession was in 1979. The four recession (or negative growth) years since Independence happened once in the late 1950s, once in 1965 (-2.6 per cent), once more seven years later in 1972 (-0.5 per cent) and finally in 1979 (a massive -5.23 per cent).
Since then we have had growth recessions and low growth years, but almost never negative growth, except in the order quarter or two.
Those days are upon us. It is obviously too early to forecast growth given the kind of uncertainties facing us on Covid-19 and how long its negative effects will devastate the health of the economy, but one cannot rule out a recession for at least a quarter or two in fiscal 2020-21.
The government will surely start spending counter-cyclically in the coming weeks, which will revive growth for a while. But given the weak state of banks, the deteriorating state of the fisc, the still over-leveraged corporate sector and the shaky cash flows of most micro, small and medium enterprises (MSMEs), any concessions on the monetary or fiscal side cannot continue endlessly.
The Covid-19 scare is going to change the Indian economy in fundamental ways that we did not envisage earlier.
First, the Covid-19 scare will hasten India’s shift towards a digital future, where most growth will be led by technology and services and not manufacturing or agriculture.
Second, the job market is going to polarise even further, with huge demand for high-skill jobs, declining demand for middle-skill jobs, and high growth in part-time and gig jobs. The era of full-time, good quality jobs is coming to an end. When jobs move to the home, companies will cut wages and outsource more, creating gigs rather than full time employment.
Covid-19 will accelerate this trend as most jobs are already being done out of home. This trend is irreversible even after Covid-19 is behind us.
Third, growth in general will slow down as India’s total fertility rate falls below replacement levels, the world deglobalises, and debt-fuelled growth tapers down even after the immediate pandemic fears abate.
In key ways the world is now as, or more deeply in debt, than it was when the last big crisis hit. But the most risky pools of debt have shifted – from households and banks in the United States, which were restrained by regulators after the crisis, to corporations all over the world. As businesses deal with the prospect of a sudden stop in their cash flows, the most exposed are a relatively new generation of companies that already struggle to pay their loans. This class includes the “zombies” – companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.
India has its share of zombie companies, and no amount of fiscal pump priming will make them pay their way. This means another banking crisis looms.
Fourth, the sharp drop in the stock markets – which may have further to fall – will have a strong impact on investor psychology. The negative “wealth effect” will reduce the propensity to spend.
Less than 5 per cent of Indians invest in stocks or mutual funds, but the numbers are growing. Over the last four years (including April 2019-February 2020), in mutual fund systematic investment plans (SIPs), and these investments would surely have taken a knock in the recent market crash. So the wealth effect will not spare a large number of middle and upper middle class Indians.
If the pandemic lasts more than a month or two, the bottom will fall out of Indian consumer confidence, which will anyway return to old levels only after a long lag.
The upshot: a full-blown recession cannot be ruled out even in India.
The Narendra Modi government and the central bank should pull out all the stops to ease fiscal and monetary policies. Currently, they are frozen like deer caught in the headlights. Time to get a move on.