Coronavirus hurting growthApprox Read Time: 5 minutes
Coronavirus hurting growth:
- It is clear now that the economy is going into a prolonged downswing, and chances of a 5% growth in FY21 are slim.
- Unless the government steps in with some stimulus, even a 4.6-4.7% GDP growth looks like a tall task.
- While there is a demand for a rate cut, that could prove less useful at this point because corporate credit risk is set to deteriorate sharply, and banks should be very cautious.
Fiscal stimulus needed:
- A fiscal stimulus of at least Rs 1-1.5 lakh crore is needed even if tax collections come in well below targets (collections could fall short by 30-35%).
- We need to keep the economy going, and this isn’t the time to worry about high fiscal deficits.
- The Rs 45,000 crore that the government is expected to earn from the higher levies on auto fuels will come in handy.
Boost small businesses:
- The funds should be channeled into smaller businesses, which could be given a line of credit and allowed a moratorium for tax payments, maybe even loan re-payments.
Govt spend on infra projects:
- The government should spend on projects—construction of infrastructure, roads—to ensure daily wage earners are able to make a living, and small farmers, too, could be helped.
- Those most vulnerable to losing their incomes are workers in the informal or unorganized economy—waiters, truck and taxi drivers, salespersons, shop assistants, etc.
- This is a good time to roll out labour reforms.
- By protecting labour, the government has only frightened the corporate sector from hiring; easier hire-and-fire rules would encourage them to take on more people.
Rate cut not enough to boost growth:
- Meanwhile, RBI could consider some forbearance on asset classification for MSMEs.
- A 50 basis point rate cut by RBI, even if it happens, can at best, spur lending at the margin.
- This is because lenders are already cautious, and borrowers are also not highly interested.
- The collapse in demand—for goods and services—exacerbated by the epidemic, will see production being scaled down.
- Given the uncertainty surrounding businesses, jobs, incomes, and even wealth, few individuals would want to leverage themselves at this point.
- From a lender’s point of view, however, it is critical to use capital carefully.
Capitalization of banks needed for capital growth:
- Even before talking of growth capital, it looks like banks are going to need a lot more capital for provisions.
- There is likely to be a sharp increase in defaults, and NPAs are now certain to rise for a host of sectors like construction, real estate, telecom, tourism, transport, and hundreds of companies are likely to be downgraded.