Coronavirus impact: Spike in unemployment rate in March points to more pain for Indian economy

With the coronavirus outbreak severely affecting every country, its impact on an already hobbling Indian economy is set to be devastating if the latest data on unemployment rate is taken as an indicator.

The Centre for Monitoring Indian Economy (CMIE) has said that the unemployment rate shot up in March. According to Mahesh Vyas, Managing Director and CEO of CMIE, the employment rate in the economy fell to an all-time low of 38.2 percent in March 2020.

The Labour Participation Rate (LPR) in March 2019 was 42.7 percent. This is the first time the LPR has fallen below 42 percent, CMIE said.

"We had feared a fall in labour participation rate because of the national shutdown to contain the spread of coronavirus. But this fall seems to have happened even before the lockdown. Of course, it gets much worse as we move into the lockdown," Vyas wrote on Tuesday. The unemployment rate is now over 23 percent.

The findings of CMIE figures have been corroborated by economists.

CARE Chief economist Madan Sabnavis thinks that the overall economic scenario could be far worse than what is currently estimated.

"On a technical basis, we can always look at numbers and arrive at a conclusion. But these calculations may not reflect the true picture in the current scenario. Even after the lockdown, there is going to be a prolonged recovery phase for activities to turn normal. For example, migrant workers who have moved out of big cities may not return immediately. We had seen this happening during demonetisation also," Sabnavis said, adding it is difficult to set a timeframe for recovery.

On account of the lockdown, most economic activities had come to a standstill. Moneycontrol, citing the Google mobility data, recently reported that post-lockdown, India saw a 77 percent fall in public mobility to places including retail restaurants, cafes, shopping centres and movie theatres as compared to the corresponding five-week period from January 3 to February 6.

Industrial outlook grim

Surveys done by the Reserve Bank of India (RBI) have painted a grim economic outlook. RBI conducts periodical surveys to give forward guidance to various stakeholders in the economy. In the latest round of surveys conducted in March-end, the respondents said demand conditions will deteriorate for the manufacturing sector, which also translated into pessimism on the overall business situation for Q4 of FY20. Even the outlook for Q1 of FY21 also indicated negative sentiment.

This was far different from an earlier survey conducted before the lockdown, which showed a relatively optimistic picture. In the earlier survey, where 860 respondents participated, all of them expected positive sentiments on external demand and their assessment of the overall financial situation was better.

Manufacturing companies assessed some improvement in production and order books from the weak sentiments exhibited in the previous quarter; the sentiments on employment conditions became mildly optimistic. They also said pressures stemming from interest payments on borrowings and salary expenses were bound to soften.

But these views changed in the second survey.

What about customer confidence? Another survey that polled consumers yielded a similar pessimistic response from the participants. Going by this, consumer confidence in early March 2020 remained broadly close to the all-time low, which was recorded in the previous survey. Sentiments on the general economic situation, employment scenario, and household income remained pessimistic.

Falling consumer confidence is reflecting on sales figures. According to a JLL report, housing sales fell by 29 percent during January-March period across seven major cities to 27,451 units while the value of unsold inventories swelled to Rs 3.65 lakh crore as buyers postponed purchases.

Similarly, the auto sector saw a 60 percent-70 percent fall in retail sales after the coronavirus outbreak, according to the Federation of Automobile Dealership Associations (FADA).

The real impact of wage cuts and job losses won't be felt immediately on account of the temporary relief measures announced by the government and the RBI. The three-month loan moratorium or deferral of Equated Monthly Instalments (EMI) announced by RBI Governor Shaktikanta Das and the cash transfers announced under various schemes for economically weaker sections by Union Finance Minister Nirmala Sitharman will only offer temporary cushion to the economically affected, analysts said.

The government has unveiled a Rs 1.75 lakh crore welfare package for poor while the RBI announced a series of measures to ease liquidity in the system (to the tune of Rs 3.74 lakh crore).

Bank NPAs may rise

After the lockdown, the bad loan levels of banks--particularly with respect to small and medium sized enterprises — may see a spike, analysts said.

"Once the lockdown is over, what happens next is a troubling question," said Siddarth Purohit, analyst at SMC Global Securities.

Already, raters have cautioned an increase in bad loans from small companies to banks in the wake of the lockdown. On April 3, global rating agency Moody's placed private lender IndusInd Bank's domestic and foreign currency issuer ratings of Baa3/P-3 under review for downgrade.

"The review for downgrade of IndusInd's ratings reflects the downside risks to asset quality amid the deteriorating macroenvironment and financial market volatility. The bank's loan portfolio includes a relatively higher proportion of micro finance and vehicle finance loans than its peers, which are at high risk of being negatively impacted by the economic shock as customers in these segments tend to have limited buffers to withstand economic stress," the agency said.

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In another report, Kotak Institutional Equities said weak retail sentiment and tightening of credit underwriting standards will likely drive lower consumer loan disbursements.

"Delinquencies are expected to increase in these segments (apart from salaried) given the underlying consumer profile with volatile cash flows," the report said.

Bank NPAs escalated to nearly Rs 9 lakh crore from Rs 2-3 lakh crore a few years ago after the massive bank NPA lean-up process initiated by the RBI under former governor Raghuram Rajan. An already slowing economy and the impact of COVID-19 could trigger another wave of bad assets.