Too much should not be read into the precise extent of the fall in quarterly GDP. If in two of the three months, almost all activity was shut down, the fall had to be large. Covid-19 could have taken off exponentially in a country with India’s congestion, poverty and democratic freedoms. If India had followed Brazil’s strategy of doing nothing, its rate of infection would have had above one crore and deaths over two lakh by now, given that its population is 6.5 times that of Brazil. The initial lockdowns, although made porous by migrant workers’ distress, gave time for the medical infrastructure to be ramped up partly explaining why India’s cases per million and fatality ratios are comparatively low.

Moreover, the CSO has carefully qualified its own estimates in view of exceptional data problems and said they are likely to be revised. The revision could as easily be upwards as downwards. The indicators used in the estimation are predominantly from the transport and core sectors, which were severely affected. The home and Internet services to which households substituted are not well measured. The informal sector is also not measured well. It was hurt, but there was also a substitution towards local packaged food and other items.

These qualifications must be kept in mind as we analyse what the numbers tell us about designing policy. The fall in consumption at minus 26.7 per cent was less than that in manufacturing at minus 39.3 per cent, so supply bottlenecks exceeded the fall in demand — a demand stimulus would not have helped in this quarter.

Gradual uptick

The government did its bit. With a 16.4 per cent increase, government consumption rose to 33 per cent of private consumption from an 18 per cent average, since private consumption fell. But public administration, defence and other services fell 10 per cent. It is probable that the normal administrative functions were squeezed as officials concentrated on Covid-19 related work and expenditure. Gross fixed capital formation fell 47.1 per cent and construction 50.3 per cent. Public works, including road building, may have also stalled.

A gradual sequenced unlock started from June 1. After a rapid catch-up in June, there was a plateauing in July below past peaks, as Covid-19 spread to the States and they started imposing arbitrary lockdowns that restricted inter-State movement. But successes in reducing infection growth rates in Delhi and Mumbai suggests that adequate testing and micro-containment strategies can be effective even with gradual unlocking. The September Unlock guidelines explicitly say inter-State movement is not to be restricted.

That the August manufacturing PMI rose to 52 (it was 27.4 in April, peak lockdown), into the expansion zone, suggests that the hurdles facing the industry are reducing. Services were the worst affected, but there are signs of recovery. Their PMI also rose to 41.8 in August from 33.7 in June.

The 40 per cent-plus increase in consumer electronics sales in August 2020 compared to August 2019 indicates consumer credit has revived, since demand had shrunk in 2019 as credit dried up. The increase was 20 per cent in July 2020. This is not only pent-up demand. Better-off households have saved during the lockdowns and are ready to spend as shops open and they venture out. Rising gold prices and the RBI’s timely leeway in provisioning has led to a sharp rise in gold loans. Salary-backed personal loans have also risen.

Finance-led strategy

The government’s unconventional strategy to stimulate the economy through the financial sector is partly driven by the necessity of restraining the rise in fiscal deficits and market borrowing, which could raise borrowing costs for everybody. Future liabilities and rise in debt would be moderated to the extent that rescue is effective and growth recovers.

But the strategy is working in part because the financial sector was ready for it. The perception of extreme financial sector weakness is incorrect — enough reforms had been done. Net NPAs in public sector banks had fallen to low single digits, the bankruptcy process initiated had led to large recoveries, and there were improvements in governance and in regulation. The lingering source of weakness was tight liquidity and risk aversion due to past corporate failures that were themselves partly due to tight liquidity. Covid-19 has helped reverse this. The RBI has pumped in liquidity and government guarantees have overcome risk aversion, and so even the corporate bond market is reviving. Spreads for AAA-rated bonds have fallen by 200 basis points and for lower rated bonds by 100 per cent.

Fine-tuned government schemes and the revival of credit markets have enabled even the smaller NBFCs to refinance and resume lending. More than ₹1 lakh crore has been disbursed under the emergency credit line guarantee scheme, with tweaks that widen its ambit. Liquidity is seeping into the economy. Financial regulation has at last become counter-cyclical. While the rest of the world was doing quantitative easing, India’s severe credit drought led to a crash in consumer spending and GDP growth in 2019. A reversal is due.

Rise in NPAs

There is a fear that Covid-19 related borrower distress will lead to a sharp rise in NPAs. It is not inevitable, however, and even if it happens, banks are prepared for it. Equity is available in abundance and private banks have acquired fat cushions. PSBs can be refinanced, if necessary, through bonds that do not stress current fiscal deficits. Recapitalisation was delayed earlier because it was necessary to wait for the IBC to come into effect so that the money did not find its way to promoters’ pockets. Reform is now adequate to prevent that.

NPAs may not rise steeply, because although a blanket moratorium was given, only 10-60 per cent of borrowers have actually utilised it. Many borrowers have surpluses in their accounts for repayment. Loans to firms in severely affected sectors will be restructured so that collapsing firms do not create downward spirals, but this will be done only for firms viable in the long run. Reformed banks are now all making risk-based loans, which is why loans were not taking off until the government took on some of the credit risk.

Timing a demand stimulus

Apart from the unlock enabling resumption of supply chains as well as selling venues, industry needs adequate labour. Migrant labourers earn about five-eight times more in cities, which also have better medical facilities. Therefore, they are returning, especially as the kharif sowing is over, rural jobs are tapering and Covid-19 is spreading in rural areas. The CMIE unemployment measure has risen to 8.4 in August from 7.4 per cent in July. Adequate supply-side recovery makes the time ripe for a demand boost.

While the middle classes have cushions, migrant labour, the unemployed and small industries are the vulnerable groups. A temporary urban jobs programme that transfers money from a Centrally sponsored scheme directly to municipalities will help them meet necessary Covid-19 related expenditure, protect the vulnerable, as well as give a demand stimulus. Limited government finances imply only effective spending must be undertaken. About 2 per cent of GDP shared between employment programmes and public investment would add to demand and enhance supply. Government consumption alone is inadequate to revive growth since it is less than one-third of private consumption. It has to trigger the latter as well as revive investment that has fallen steeply.

The writer is Professor, IGIDR and Member, EAC-PM. Views are personal