Pandemic to panic stalls the world. Markets everywhere slump. Corona or not it has hit Asian corporate and State governments in India hard. The debt of world corporate is burgeoning. Note, the coronavirus has just arrived, but the rest have been building up over the years. The pandemic has only exposed these and if it continues, it can lead to a sharp down morphing into a financial crisis and may trigger a chain of defaults.
Politically it may act as a cover up for many dodgy decisions of any Donald Trump, Xi Jinping, or Emmanuel Macron. It may usher in new politics, business or trade norms and can even bring to surface many conflicts. There are apprehensions of distributional issues that might arise out of the economic fall-out of this pandemic. Possibilities and hypothesis abound.
On ground are stark realities. India’s growth forecast has again been lowered. This time it is by S&P Global ratings. It has reduced growth to 5.2 per cent on March 18 against its earlier forecast of 5.7 per cent for 2020. Earlier, Moody’s too had cut it last week.
In her first speech as International Monetary Fund Managing Director Kristalina Georgieva in October 2019 said 90 per cent of the world is likely to have slower growth in 2019, and India along with Brazil is to be worst-hit. Asia-Pacific growth is projected to halve to 3 per cent following “an enormous first-quarter shock in China, shutdown in the US and Europe and deep recession across Asia-Pacific amid virus transmission.”
Director, Biotechnology department, Dr RK Sharma of Mangalayatan University in Aligarh, Uttar Pradesh, says that it is not a new virus. In the present state, the virus forms fibroids in lungs affecting respiration and may lead to multi-organ failure in acute cases. The scare is a bit hyped up, he avers.
The big question is: Can the plunge of Sensex to a three-year low on March 19 to 28,288 almost close to 27,019 it touched on September 2, 2014 be ascribed to the virus? The Sensex increased 14 times from 1991 till 2014 and gained about 2000 points since late May 2014 polls and early September 2014. Market believes this is possibly the real level than the hyped 42,059 on January 2016.
Apparently, conditions of State government budgets support this. A newspaper study of 17 State budgets reveals a shortfall of close to Rs 3 lakh crore in the fiscal 2019-2020, with Bihar alone having a deficit of Rs 25,400 crore. Actually, the budgets are presented in a hyped manner. Actual revenue realisations i.e. total taxes collected by the Centre, a fraction of which is shared with the States, are falling due to stymied economic activity. Most States have made meager increases over toned down revised estimates.
States together reduced Rs 1.05 lakh crore expenses in their revised budgets fiscal year-end. This almost tallies with the Rs 112,660-crore difference mentioned in the Central budget 2020-21. The pattern is comparable to 2017-18 and even of the UPA regime. Karnataka Chief Minister BS Yediyurappa recently said that his State lost Rs 11,887 crore revenues from the Centre due to lower tax transfers and compensation against GST collection shortfalls.
The Central budget 2019-20 presented last July expected tax revenues of Rs 19.6 lakh crore and disinvestment receipts of Rs 1.05 lakh crore. The revised estimates in the 2020-21 Budget on February 1 put it at Rs 18.5 lakh crore, shortfall of Rs 1.1 lakh crore. Divestment gains were about Rs 40,000 crore. Total 2019-20 fiscal deficit may rise to Rs 2.24 lakh crore, Rs 24 lakh crore more than original estimates!
Indeed, revenue targets are often kept at an unrealistic high. The Centre had to take a tough measure of curtailing last quarter expenditures since December 2019. In many cases, salary payments and project allocations were delayed. A significant gain was Rs 2.01 lakh crore by the States from VAT on petro-products. The Centre gained Rs 2.14 lakh crore, as per Petroleum Planning and Analysis Cell. So, despite crude prices touching over 20-year low of $30 a barrel, the Centre announced a rise of Rs 3 per litre of fuel – about Rs 40,000 crore a year. It thus gained over Rs 2.6 lakh crore from petro-cess of Rs 10 per litre too.
The latest virus scare has put the spotlight on health. Shockingly, States spend no more than five per cent on it. While Assam, Kerala and Chhattisgarh spent more than the national average, Punjab and Haryana spent far below it. And therefore, it is no surprise that India is put at 129 of 186 countries in UNDP’s Human Development Index (HDI)!
Budgets are also guided by populism. Six States – Assam, Bihar, West Bengal, Tamil Nadu and Kerala — are scheduled to go to polls in 2020-21. Sops and freebies pep up Assam budget. So are the budgets of other States except Bihar, which is facing severe crunch. In 2018-19, Assam gave tea garden workers Rs 5,000 per head to over 7 lakh tea garden workers, an important voter segment. They would again get Rs 3,000 each in 2020-21. West Bengal has doled out, a la Delhi, free electricity, Tamil Nadu regularises unauthorised colonies and Kerala enhances pensions. All promise job increases as jobless youth form large segments in Assam (27%), Kerala (36%) and West Bengal (13% except Bihar (22%).
So much is happening beyond the virus world over. Corporate debt is surpassing the 2008 sub-prime crisis level. One set is called “zombies” i.e. companies which earn too little to be able to pay even interest payments. These are said to survive by issuing new debts. Central banks around the world are worried as cash crunch could enmesh in severe financial crisis.
The IMF says that one-tenth of the Chinese corporate debt of $20 trillion is in zombie firms. The latest Donald Trump incentives, paid sick leave and federal funds for Medicaid along with shutdown to fight the virus may lead to deep trouble. Realising this, Prime Minister Narendra Modi has announced setting up of an ‘Economic Task Force’ to formulate a revamp plan even as he announces March 22 ‘Janata Curfew’ to combat the coronavirus.
Travel bans, sporting events cancelled, mass gatherings prohibited, deserted shopping malls et al add to the slowdown. Airlines, hospitality, transport, tour operators and daily wagers are majorly hit. The world needs a way out. India is looking towards Modi for a solution. It can be achieved only through opening up social and economic activities to spur growth and not succumbing to the scare.