Both liquidity measures and market interventions to rein in foreign exchange volatility need to be used prudently, without exhausting all the ammunition at one go
The coronavirus contagion may well inflict an economic shock as deep as the global financial crisis of 2008-09. Economic activity has come to a standstill across a range of trades, services and industries, putting the livelihoods of millions in jeopardy. At the same time, the erosion of wealth amidst the unprecedented global market meltdown could lead to a decline in consumption and investment. This tailspin needs to be arrested fast, through individual and cooperative efforts by governments. For this, the sheer spread of the disease will have to be contained, so that consumer confidence returns and producers can return to work. But the irony here is that steps taken to contain the spread of the disease, such as placing restrictions on the movement and congregation of people (in other words, ‘social distancing’) can drive the economy further down – even as there can be no denying the effectiveness of such steps. As the UNCTAD’s assessment observes: “Many countries around the world are fearful that measures put in place to contain Covid-19 could affect the supply of parts from Chinese producers, therefore affecting their own output.” Hence, a public health initiative across the world will, in fact, have to be viewed as a key economic stimulus. The UNCTAD estimates a reduction in global growth to 1.6 per cent in 2020, against the OECD’s estimates of 2.4 per cent. In the case of India, growth could come down to 5 per cent or less, even as the disruption in China arguably opens up export opportunities.
The Centre’s moves on the economic front leave much to be desired. In order to arrest the impending loss of livelihoods and closure of businesses, it should implement its cash transfer programmes with a sense of urgency. However, its decision on Friday, to appropriate gains to consumers from the recent oil price fall with hikes in excise duties on fuel, only to fritter away some of these gains on higher Dearness Allowance payouts to its own staff, seems inexplicable. It neither shores up the fiscal deficit nor provides a broad-based economic stimulus. A relaxation in GST rates could have helped.
The RBI must ensure that the taps of emergency credit and liquidity remain open for businesses, particularly MSMEs, whose payment and working capital cycles are badly hit. This may need unconventional measures, going beyond lending ultra-cheap funds to the liquidity-surplus banking system through repos, variable rate repos and long-term repo operations. With banks’ credit growth at just 6 per cent year-on-year and investments in G-Secs growing at nearly 11 per cent, there’s little evidence that bankers are using the liquidity available to them to step up credit flow. It would also be pragmatic to consider forbearance on risk-weighting of bank loans and NPA recognition as temporary measures to help MSMEs. Both liquidity measures and market interventions to rein in foreign exchange volatility need to be used prudently, without exhausting all the ammunition at one go.