Almost 80 per cent of India's Rs 204 lakh crore economy has ground to a halt since the 21-day national lockdown began on March 25. At an average of Rs 55,890 crore per day, India's gross domestic product (GDP) will suffer a setback of at least Rs 9.4 lakh crore. Hence, in FY2021, the Indian economy will in all likelihood shrink rather than grow.

The lockdown, though necessary to break the chain of transmission of coronavirus, will leave destruction across industries such as travel and tourism, aviation, hotels and restaurants, malls, multiplexes, automobiles, among others. And, to a lesser degree, impact sectors such as consumer durables, fuel, electricity and petrochemicals.

But, that is provided the lockdown lasts just the 21 days announced so far. Experience of coronavirus containment in South Korea and Japan suggests it may need up to 60 days to break the cycle of transmission. If so, India may have to brace up for not just one burst of 21-day lockdown but two, possibly three - with or without breaks. If the lockdown extends as far as June, as per some predictions, the economic misery will multiply manifold.

What's making it worse is that India was already in a deep slowdown and economic contraction. It could possibly be a recessionary trend, says CMIE. India Inc. is in a deep contraction, the biggest contraction in real value added in over 20 years, according to CMIE. "The contraction in 2019/20 is 12.9 per cent. This is worse than the six per cent contraction during 2008/09 following the global liquidity crisis. All other contractions in the past 20 years for which data is available have been much milder than these," says Mahesh Vyas, Managing Director & CEO, CMIE, in a note.

With Finance Minister Nirmala Sitharaman announcing what may be the first instalment of the much awaited economic package - Rs 1.7 lakh crore food and direct cash transfer measures targeted at poor and underprivileged - the government may finally be getting its act together. The Reserve Bank of India's (RBI's) rapid fire announcements the next day will complement the Centre's moves in providing relief to individuals and businesses through three-month EMI moratorium, reduced interest rates and pumping in an unprecedented Rs 3.74 lakh crore additional liquidity to businesses to hit the ground running when the lockdown is lifted.

Rs 10-Lakh Crore Hole

Most offices and establishments are closed or operating at minimal capacity with staff working from home. Travel, tourism and hospitality sectors were the first to bear the brunt of coronavirus' global spread with the Centre restricting travel of foreign citizens first and then cancelling domestic flights as well. Metro rail services and around 12,000 passenger train services have also been cancelled till April 14.

As the virus spread in China, it forced a lockdown and closure of ports, which disrupted supply chains for many Indian businesses. Now, as economic activity begins to pick up in China, the lockdown in India and other countries is disrupting supply chains across the globe as the coronavirus outbreak is spread across 199 countries and territories.

While the lockdown started only in the last week of 2019/20, the fourth quarter of FY2020 has seen large disruption. But the real impact in loss of GDP will be felt in the first quarter of FY2021, when a major part of the lockdown will be in place, even if we do not factor in an extension of the lockdown.

How much of a hit will the Indian economy take? It is estimated to vary from 1-4 per cent of the FY2021 GDP, which is estimated to be Rs 224 lakh crore. Former RBI governor Bimal Jalan says GDP could get impacted by 1-2 per cent. Lekha Chakraborty, Senior Economist at the National Institute of Public Finance and Policy (NIPFP), says it's too early to put a number as things are changing exponentially. She believes one can safely say 1 per cent of GDP would get wiped off.

A 1-2 per cent hit on GDP means business activities worth Rs 2-4 lakh crore could be shaved off due to the outbreak. But these are very conservative estimates. Some analysts and economists are predicting doom and gloom for India and the global economy.

A report by Soumya Kanti Ghosh, Group Economic Advisor, State Bank of India (SBI), says the total cost of the lockdown is at least Rs 8.03 lakh crore in nominal terms or output loss of at least 4 per cent. The report further estimates a 1.7 per cent impact on real GDP because the 21-day lockdown will result in at least 70 per cent of the economy grinding to a halt. SBI pegs the 2020/21 real GDP growth at 2.6 per cent with a clear downward bias and first quarter GDP numbers witnessing a contraction. For 2019/20, it has revised GDP growth rate from 5 per cent to 4.5 per cent with fourth quarter growth at 2.5 per cent.

Ratings agency CARE estimates the dent to be in the region of Rs 6-7 lakh crore. It explains: "Real GDP in 2019/20 is around Rs 140-150 lakh crore. Assuming 300 working days, we can be looking at Rs 45,000-50,000 crore of daily output which can potentially be lost due to shutdowns. Assuming 80 per cent is lost while 20 per cent still functions, there could be something like Rs 35,000-40,000 crore of GDP lost every day. Hence, the total loss can potentially be in the region of Rs 6.3-7.2 lakh crore assuming 18 working days."

It further says that as the 21-day lockout spills over to 2020/21 with 14 days going into the next year, the loss in 2020/21 can be in the region of Rs 4.2- 4.8 lakh crore. Other collateral damages of the lockdown are loss of income and consumption.

Sachchidananda Shukla, Chief Economist, Mahindra Group, says their analysis of consumer wallets shows the coronavirus outbreak could impact $470 billion (Rs 35 lakh crore) worth of items, which is equivalent to 30 per cent of India's consumption.

Economic Package: Damage Control

Mahindra's Shukla argues that though the lockdown could cost 4 per cent of GDP, activity could rebound later and eventual FY2021 GDP growth could be in the range of 2.5-3 per cent depending on how soon we reach normalisation and the way governmental measures be it monetary, fiscal and administrative - are executed.

By government measures, Shukla means an economic revival package. Can the government make good of this loss by pumping in money, reviving demand and the economy? The bigger question is if it can afford an economic package what will be fiscal consequences in future?

Given that the estimated loss of GDP due to the outbreak could be in the range of Rs 2-7 lakh crore, the economic package should be, at least, in the range of Rs 3-5 lakh crore, experts say. Former finance minister P. Chidambaram has asked for a Rs 5 lakh crore stimulus. He says with the Centre estimated to spend Rs 30 lakh crore in 2020/21 and states likely to spend Rs 40-45 lakh crore, it is possible to find Rs 5 lakh crore over the next six months to mitigate the impact of coronavirus on the economy.

Former RBI Governor Bimal Jalan says the government should be willing to increase the fiscal deficit by 1.5-2 percentage points. "The government has to pump money into the system. Demand is not very high, (and therefore) to create demand, government has to transfer some money (into the hands of people). These are measures to ensure that even if growth declines, the economy does not go into recession."

The government has projected GDP at Rs 224 lakh crore, and fiscal deficit at 3.5 per cent of GDP, in 2020/21. With a 2 percentage point increase in fiscal deficit, we are looking at a stimulus package of up to Rs 4.5 lakh crore, and fiscal deficit of 5.5 per cent in 2020/21.

Can the government afford such fiscal profligacy? And, should it? The economic package comprises 5 kg of cereals per person and 1 kg of pulses per household free for the next three months; hike in daily wages under MGNREGA from Rs 182 to Rs 202; Rs 1,000 in two instalments over next three months to widows, senior citizens and specially-abled persons, three LPG cylinders for free under the Ujjwala Scheme.

What Next

Is this a comprehensive plan? Will this add greater burden on the exchequer? No, feel experts as the package in current form requires a fresh expenditure of Rs 70,000 to Rs 1 lakh crore.

NIPFP's Lekha Chakraborty says if you look at the demand for grants of 2020/21, you would notice these announcements are marginal. In MGNREGA, the 2020/21 budget estimate is Rs 9,500 crore less than revised estimates of 2019/20. A Rs 20 increase in daily wage will not make much of a difference to either the beneficiary or government budget. The SBI report puts fresh expenditure by the government for the package at Rs 73,000 crore, which means Rs 1 lakh crore is already budgeted by the government.

The RBI has announced a massive Rs 3.74 lakh crore liquidity boost through various measures, including a 75 basis point cut in the repo rate. This will bring down the cost of funds for businesses and provide consumer loans at lower rates. It has also allowed banks to offer a three- month moratorium, which means any default during the three months won't make the loan account an NPA. The government has promised that if situation does not improve by April, it will suspend the Insolvency and Bankruptcy Code (IBC) by six months.

However, if the spread of the virus does not slow down by April, the government might go for another period of lockdown. Then, these measures will not be enough, and the Centre and state governments between them can pump in additional support worth 1.5 per cent of GDP, feel economists. An economist from a large business conglomerate says each day the government delays a stimulus for businesses, industry loses Rs 1,500 crore.

The government might still need to pump in another Rs 3-4 lakh crore to compensate for loss of revenue due to sharp decline in business activities, GST compensation for states and even waiving of interest and penalty of telecom companies' AGR dues.

How can such a large package be funded? This will have to be via deficit financing. The government has two options: First, borrow directly from the market as it does every year or ask the RBI to subscribe to its paper, which then means monetising the deficit. Or, simply, RBI prints more currency. That option would be more costly for the economy. So, how will it be done? The current gross borrowings of government of India for FY2021 at Rs 7.8 lakh crore have resulted in a fiscal deficit of 3.5 per cent. Any additional borrowings would push it up by 1-1.5 per cent depending on the size of the stimulus.

However, in Option 1, lower interest rates prevailing in the market provide an opportunity to raise resources at a low rate from the market. But it will have a crowding out impact as lesser funds would be available for the private sector. This implies that in the event of a large requirement, the Centre may have to opt for a mix of the two options. If it goes for the RBI option, it will amount to monetisation of debt or printing of more money to finance the deficit. This will have negative implications like higher inflation and depreciation in the value of the currency.

Forex and Gold Reserves

Can India use its forex and gold reserves? It is highly unlikely as foreign exchange reserves are still inadequate. The Bimal Jalan Committee, which decided the issue of RBI's surplus capital, has actually made a case for increasing the size of the foreign exchange reserves from the present level. The current reserves can cover only 11 months of imports. Second, the $491 billion forex reserves are lower than the country's total external debt of $558 billion. Much of the external debt is short term, due in next one year.

Forex reserves provide a buffer against any external risk to the country. India's external position is vulnerable because of persistent current account deficit and dependence on hot inflows into the stock market. The country needs stable flows like FDI.

The Consequences

The government has so far been reluctant to announce a big stimulus package despite many countries doing so.

The global coronavirus war chest has already crossed the $12 trillion mark. The US government recently announced a $2 trillion stimulus package, which is 10 per cent of its GDP, while France announced a $380 billion package. Spain has in mid-March announced a stimulus package worth $220 billion, which is almost 20 per cent of its GDP.

Why is India, then, still shying away from a comprehensive economic package? The fiscal cost of an economic package could be very high. The Narendra Modi government has always maintained that the extravagant stimulus during the UPA government was one of the reasons for the economy getting into a mess.

There are long-term fiscal challenges of a badly thought-out or too generous stimulus package. "We should avoid the temptation of splurging money. First, it may not be as sound it is in the United States or elsewhere. Also, its very difficult to slow down those programmes once the crisis is over," says S.C. Garg, the former economic affairs secretary.

An economic stimulus means the central government borrowing more to fund such a scheme. With 3.5 per cent estimated fiscal deficit for 2020/21, the Central government's borrowings are pegged at Rs 7.96 lakh crore, and an interest cost of Rs 7 lakh crore, which accounts for almost a quarter of its Rs 30 lakh crore estimated spending. A Rs 4.5-5 lakh crore package means additional borrowing, higher interest outgo in future, leaving little scope for spending on asset creation.

This may further affect the country's sovereign rating and result in higher cost of borrowings for the government and companies overseas. An extravagant economic package can also lead to unsustainable inflation. However, Jalan says rating agencies will understand India's compulsion as the corona outbreak is affecting other countries too, and may be more lenient with ratings.

An economist from a large business house says repercussions of recession and joblessness will be much severe than a 100 basis points rise in interest rates. While the government's first instalment of the economic package targeted the poor and vulnerable, several industries, including auto, aviation, tourism and hospitality, are still awaiting a package.

The demand is for a sharp cut in the borrowing rate, reduction in income tax and GST rates, relaxation in NPA norms and interest rate subvention for the impacted sectors. The government has already deferred income tax return filing date from March 31 to June 30, extension for filing GST 3B returns for smaller companies for March, April and May to June 2020. It has increased the threshold for triggering insolvency proceedings against a company from (default of) Rs1 lakh to Rs 1 crore.

While these are important steps in making life easier for businesses, vastly impacted sectors haven't lost hope yet of comprehensive sectoral packages. That remains to be seen. After all, the Modi government's stated policy on sector-specific economic relief is a strict-NO!

(With inputs from Joe C Mathew)

@Dipak_Journo