India may run into additional risk of balance-sheet damage in second half of 2021: Jahangir Aziz

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By Tamanna Inamdar:

The gap between Brazil and India was almost entirely explained by the fact that despite fiscal being a much greater problem in Brazil, they opted for a significant amount of fiscal support through income support but not through spending in infrastructure, says Head of Emerging Market Economics,
JP Morgan.

We know about the minus 24% GDP contraction for India in quarter one. We know about the projections ranging from 9% to 14% for the year. In hindsight, was there any other way we were going to go with the kind of lockdown we had?
I found your question ironical as it is a public health crisis, it was a public health failure and you are asking economists what was the solution to fighting the virus. I find it is akin to asking a bunch of public health officials how to solve the subprime problem in 2008. I have no idea whether that was the right way we are going about it or if there was any alternative. It has to be something that you have to address public health officials and you have to address the ministry of health in the Government of India.

All we can see is that every other country had some form of a partial lockdown. Whether that lockdown was necessary or was the right way of doing things, whether there were some alternative ways is not something that I as an economist, I have any clue of.

My question to you is and I am not asking whether the lockdown was correct or not, as it is not in your expert domain. But considering the severity of the lockdown, was this economic fallout unavoidable?
If you are going to lock down 75% of the economy, that is going to have a massive impact on the economy and that’s where the impact should have been — minus 24% or minus 25%. The manner in which the lockdown had an impact. If you look at countries with similar kinds of infection rates per million, one country that comes to mind is Brazil which had probably a higher rate of infection and Brazil had huge difficulty in trying to put together a programme by which they could separate mobility from infection rate and there the impact on the economy was of half that of India. On a quarter on quarter basis, India declined by 67%, the second largest in the world after Peru. Brazil on the other hand, fell by about 35%.

If you look at the policy options, the gap between Brazil and India was almost entirely explained by the fact that despite fiscal being a much greater problem in Brazil, they opted for a significant amount of fiscal support through income support but not through spending in infrastructure, not doing things which you really cannot do in a lockdown. By just providing income support particularly to what in Brazil is called the familiar families which would be equivalent to the BPL families in India and that amount of income support has allowed Brazil with a higher infection rate to be able to limit the decline to about half of India.

The market analysts have continued to upgrade Brazil’s growth though Brazil will still have a negative growth rate. They have continued to upgrade Brazil’s growth while they have continued to downgrade India’s growth and it is almost entirely due to the fact due to that one policy decision that the fiscal support has been in the form of income support and not in the form of infrastructure and other spending.

In June, most of the indicators showed a fairly sharp bounce-back and that was perhaps expected as the economy was opened gradually. Is the recovery sustainable because it seems to have been a little shaky in August and September?
If you look at mobility indicators, for the last six weeks, the Apple mobility indicators have surprised us on the upside both in the case of Brazil as well as India. The Apple Mobility Indicator did jump in the initial months just after the lockdown was removed and then it sort of stabilised but in the last I would say six weeks, things have actually started to pick up but at the same time one has to recognise that globally and not just in India and also in the case of China that almost all of the recovery has been happening in the manufacturing sector.

The services sector did pick up very smartly in the first few months of opening up the economy and then it has stabilised in almost all places or has been moving up very slowly. To a large extent, that reflects our inability to be able to delink mobility with infection rate. Every time we have increased mobility, the infection rates have gone up and with the infection rate going up we have had partial to semi-partial lockdowns taking place or restrictions on activity. That has been one of the reasons why services recovery both in terms of growth as well as labour has not been as much as in the manufacturing sector.

We are likely to go through this till we get a vaccine. Probably it will happen in 2021 and for that to happen, we are probably going to see this dual case of recovery where manufacturing recovers, services do not recover as strongly in most countries barring China. China perhaps is the only country that in the end of 2021 will not have an incomplete recovery.

In the case of India, given the policy choices that the government has made. we are looking at a additional risk that in the second half of 2021, when the economy actually starts recovering because of the vaccine etc, we might run into a problem where our houses and SMEs have completely damaged balance sheets because of the massive income shocks that they have seen in 2021 and 2020 and the lack of government support or income support.

RBI can extend forbearance as much as they want to but in reality those damages to the balance sheet will be there and the damaged balance sheets is one thing that emerging market countries do not want to have because it takes a very long time for EMs to recover from damaged balance sheets. We can recover from damaged growth and damaged demand quite quickly, but balance sheets damage takes a very long time to recover from.



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