The rate of doubling has slowed markedly…

Doing well on the medical front…
India has thus far done an excellent job of managing the pandemic. Its curve is flatter than in any other country with 50,000 or more cases. Moreover, it has managed to stretch the number of days taken for infections to double, from 4-5 days initially, to about 10 today. (In fact, until quite recently – when a surge in migration and some loosening of the rules caused a sudden spike – the doubling rate was down to 15 days.) States like Kerala and Karnataka appear to be past the peak, and are well on the way to achieving ‘green zone’ status. Also, at ~1, the number of deaths per million is among the lowest in the world, though it is up sharply from a level of about 0.5 – thanks mainly to a belated recognition by states like West Bengal of Covid-related deaths in patients with co-morbidities. In comparison, the rate in Sweden, with its controversially-loose rules, is 263 per million, and in Belgium, 687. Last but not least, the ratio of positive tests to the total number of infections has remained largely consistent, at 4.2-4.5, even after testing was ramped up significantly. (In comparison, in the US, it jumped to 15, and Italy to 20, when testing picked up.) This is a very good sign, and implies that India is not yet at a community transmission stage.

The bad news is that India is still nowhere near the peak of its curve, which may only come around September. Its R0 ratio – the average number of people who will contract the disease from one infected person – is still in the range of 1.3, well above the 1.1 that it should be when the graph peaks. The overall trajectory still points upwards, and states such Maharashtra, Gujarat, Punjab, Tamil Nadu, Delhi and Haryana have seen a sharp rise in cases in recent days. This up-tick is likely to sustain for a while, given the recent loosening of norms around migrants.

It will be over a year before a vaccine is available…

…and managing the lives-vs-livelihoods trade-off will be difficult

…but managing the economy will be a challenge
Current estimates suggest that, from the start of the epidemic, it will take 18-24 months for a cure/vaccine to be found, approved, manufactured and distributed in adequate volumes. In the interim, the government has to manage a complex lives-versus-livelihoods trade-off that is becoming starker by the day. It is acutely aware that each additional week of lock-down costs India Rs 2 trillion of GDP, and that growth will not recover in a hurry. Under an optimistic scenario, economic activity will snap back like a rubber band as soon as the lockdown is lifted, with pent-up demand providing a lift. The lockdown itself is unlikely to be lifted in one go, but in stages, with the red zones – including important industrial states like Gujarat and Maharashtra – being aggressively ring-fenced. More likely, the growth impulse will only come after a cure/vaccine is found. Rather than V-shaped, it will be a shallow U-shaped recovery, or in the worst case, L-shaped.

The damage will come in several waves…

The damage from Covid will ripple through the economy over a prolonged spell and in a non-linear fashion. After the first-order effects – salary cuts, job losses and lost sales – will come the second-order ones: declining consumer spending on homes, cars, appliances and durables. Next, loan defaults and NPAs would surge, and exports would decline as external demand dried up.

…with the end-outcome ranging anywhere from modest growth to a deep contraction this year

Depending on what assumptions are made – the length of the lockdown, the size of the fiscal stimulus and various multiplier effects, how soon a cure is found, etc – the economic projections vary greatly. In the best case, India would grow at just under 2% in FY21 (the IMF’s current projection), suffering only limited bankruptcies and job losses. It would do, moreover, with the help of a limited (1-2% of GDP) stimulus. At the other end of the spectrum, growth would be sharply negative (as low as -5%), with millions of MSMEs failing and tens of millions of jobs lost. Under this scenario, the fiscal deficit would balloon to ~15% of GDP, the public debt-to-GDP ratio would touch 85%, NPAs would rise to 10-15% and inflation to 8-10%. The fiscal projections are based on assumptions of sharp revenue losses, combined with a big (4-5%) stimulus and a smaller GDP base. A worsening fiscal position would trigger a ratings downgrade, causing foreign investment to dry up. Corporates would find it harder to borrow abroad, and the Rupee would plunge.

The overly rosy picture that some agencies have painted…

…could produce complacency

Many dilemmas to address…
The NDA’s policy response will hinge on which of these two scenarios – or a third, in-between one – it chooses to believe. There is a danger that it could end up ‘buying’ the more positive (and probably unrealistic) growth story that the IMF, World Bank and even some private agencies are currently putting out, and which Indian industry is doing too little to dispel. Economists themselves are divided between the hawks, who think that a big splurge would trigger inflation on a massive scale and undo all of the good work of recent years; and the doves, who fear that there will be permanent structural damage to the economy, which must be avoided at any cost. Following the IMF line would breed complacency and lead to damaging policy choices. In comparison, the BJP as a political party is preparing to manage the political fallout of a worst-case scenario. In any event, there is a clear recognition that any fiscal package will necessarily involve major trade-offs.

The UPA’s response to the GFC is a cautionary tale

As India’s experience with the Global Financial Crisis (GFC) demonstrates, any stimulus package that factors in only the first-order effects will fail. Nor can India blindly copy the West, where fiscal measures are backed by a hard currency. The conventional narrative around the GFC is that the UPA ‘managed it well’. But that may not be true. India was relatively insulated from the crisis, and the fiscal stimulus (~4% of GDP for 2 years) proved to be too large. It pushed up growth for only a year but had a lingering impact on inflation (which went into the double digits) and the fiscal position. It also caused the rupee to sink from ~42/USD to ~64 levels in a short span, and ultimately, it sank the UPA at the polls. The NDA will not want to repeat this mistake.

Spending will be focused mainly on the poor…

…but the aim will be to avoid moral hazard or (unwanted) behavioural changes

The current view within the NDA is to prioritise spending on the poor, who are clearly the principal stakeholders in this crisis. At the same time, it knows that it will have to tackle issues around middle-class job losses, and those affecting the trading community. However, it will seek to avoid wasteful spending on low-multiplier items, or to do anything that creates moral hazards or a permanent shift in behaviour. For instance, ramping up the minimum guaranteed days of work under the MGNREGA may discourage migrant workers from ever returning to the cities and re-joining industry. This would create huge problems in sectors such as construction and dry up urban-to-rural remittances. On the other hand, an expanded universal healthcare programme, or a front-loading of payments under the PM-Kisan scheme, would have a large and immediate multiplier effect.

Limited sops to specific industries, but the aim will be to build self-sufficiency and make it easier to do business in India

From industry’s perspective, the government may not undertake too many sector-specific measures. However, it will look to provide non-financial support, including speeding-up the payment of any dues; improving the tendering process; and bolstering self-sufficiency, though without resorting to autarky. Several trade agreements are likely to be revisited and reforms will be put in place to attract more foreign investment. Separately, the Centre will look to support MSMEs with a credit back-stop.

Financing the deficit will be tricky…

There are also dilemmas around how to finance the stimulus package – something that the markets will be watching carefully. Broadly, however, it will have to be a judicious mix of reduced expenditure in certain areas, increased market borrowings and other revenue-boosting measures, and some amount of monetisation of the debt.

…and there are open questions around the trajectory of inflation

At this stage, it is unclear what impact the crisis will have on inflation. No one knows whether it will prove inflationary (due to supply-side disruptions) or deflationary (owing to demand contraction and falling oil prices). However, the government is closely tracking high-frequency data such as the CPI numbers and truck-freight volumes, to determine this. A clear answer would help better frame the fiscal response.

A more open, consultative approach to policymaking…

…and an aggressive push by the states to attract investment

A golden opportunity to build a New India
In many ways, Covid has opened up space for fresh thinking and a dynamic, consultative approach to policymaking. In recent weeks, the government has been brainstorming on an unprecedented scale, receiving inputs from industry associations and other stakeholders. This shift is expected to become an integral part of its culture going forward. Sensing an opportunity to attract foreign investment, state governments are also reaching out to MNCs and diplomats. They are carving out land parcels to offer to industry, and looking at ways to make it easier to do business. UP, for instance, has set up a dedicated team, and is in advanced talks with companies from Japan, South Korea and Taiwan.

The government will use up some political capital to drive reforms…

…though the states will need to do much of the heavy lifting

For its part, the NDA is prepared to expend a fair amount of political capital on reforms. At the same time, it realises that what is needed, more than big-ticket measures or ‘policy adventurism’, is to ensure a stable, consistent and predictable regime for business. The overarching goal will be to achieve a soft rather than a hard landing, and to build the growth momentum from there. Finally, with respect to land and labour reforms, much of the impetus will need to come from the provinces, because these are both state subjects. Moreover, previous attempts to push such reforms failed, because the opposition turned them into ‘hot potato’ issues – even when their own state governments were pursuing the same reforms. The key will be to keep things quiet this time around.