Lockdown 3.0: What next for the Indian economy and the stock markets?

Major industrial hubs like Delhi, Mumbai, Ahmedabad, Pune remain in the red zone, and hence, the relaxations given in lockdown extension may not make any material impact on the slowing economic growth

With the continuing increase in the number of confirmed cases in India, albeit at a slower exponential pace, it was expected that the lockdown that was ending on May 03 was likely to be extended. The earning population, however, was looking forward to such relaxations that they would be able to work/earn and that their employers/suppliers would face much lesser difficulties in soon clawing back to the pre-lockdown capacities.

The bifurcation of the country into three zones with different levels of restrictions applicable to these categories has had mixed reactions. People in the green zone are happy with most relaxations, except on transport, although they are unsure about their scale of operations returning to normal levels given that their counterparts in orange and red zone may still be under more restrictions. 

Major industrial hubs like Delhi, Mumbai, Ahmedabad, Pune remain in the red zone, and hence, will face higher restrictions. This may result in much slower resumption in output, especially because of inter-linkages between units in red zone and other zones. Hence, at a larger degree, the relaxations given in lockdown extension may not make any material impact on the slowing economic growth. Gross domestic product (GDP) growth forecasts made by local and international agencies of 0.2% (for calendar 2020) or 1.2-1.8% (for FY21) may have to undergo further cut. The more we extend the lockdown, the more we lose in terms of output and wellbeing, which may be difficult to recoup.

One is unsure as to how a partial lifting of lockout will help the strained debt servicing ability of corporate and micro, small and medium enterprises (MSMEs), how will labour shortages across key industries be resolved (especially given the fact that the migrants are now being ferried to their natives), whether the Reserve Bank of India (RBI) will extend the moratorium period beyond May 31 and by how much. What will happen to industries facing existential crisis like tourism, hospitality, aviation, entertainment and whether fragilities in the financial system will further undermine sentiments and domestic spending etc.

The extension of lockdown will further strain the fiscal situation. Immediately on announcement of the extension, an industry association has suggested instituting a Government spending package equivalent to 3 per cent of GDP, which would add Rs 6 trillion to the available firepower. India does not have fiscal buffers to go for large stimulus as expected by the business community. If reports are to be believed, the Indian government is likely to cap its overall spending on coronavirus-related relief at around Rs 4.5 trillion rupees ($60 billion), due to concerns that excess spending could trigger a sovereign rating downgrade. The next package should be focused on sectors that are getting decimated and which have great multipler linkages.

A section of the population felt that total lifting of curbs across the country is a risk worth taking and the Government needs to lift the lockdown entirely now as a piecemeal approach may not work because of interlinkages. Some others feel India could see more deaths due to hunger than from the pandemic if it continues to remain in lockdown to halt the spread of Covid-19.

The country must accept the coronavirus as the new normal, and facilitate the return-to-work of able-bodied while protecting the most vulnerable. The country should get ready for a new normal for a few quarters where everyone will want to save more and more and discretionary spend could get postponed. Buying behavior will change materially for some time.

The equity markets have risen and retraced 50 per cent of the earlier fall, even as the macro situation continues to remain grim. There is hope that the easy money policy followed by central bankers will keep bringing liquidity into the system and Indian economy will bounce back quite fast.

Whether the realisation of the ground realities will sink in after a complete lockdown lift will be interesting to watch. At the micro level, some companies that were anyways shaken by the multiple disruptions over the last three - four years will face a grave danger about survival given the pandemic’s impact on topline and working capital rollover. Sector rotation could happen with cash in sectors coming back in favour and leveraged or capital intensive sectors going out of favour.

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Deepak Jasani is the head of research at HDFC Securities. Views are his own.