Challenges that will be brought by the end of the lockdown: Business Line 6th May 2020

From ensuring health measures to providing financial support and reviving the economy, the future will throw up many roadblocks to opening up the country again

Unwinding from the nationwide shutdown would be quite challenging, and unless the pieces have been put in place, the cost of doing the same would get exacerbated. It is now recognised that at some point we will have to learn to live with the virus, and staying at home is not a solution. It appeared to be the only thing to do in March, as every country was doing it.

But now it is certain that when livelihood cannot be ensured by the state (unlike in the West, where there have been cash transfers), there is a need to open up and ensure that the rules of social distancing are adhered to. The ignition key has to be turned on soon.

Social challenges

There are several challenges that lie on the road to opening up. First, the government has just started allowing migrants to go home which will be the big challenge when the shutdown is reversed as labour is unlikely to return after going through the travails. Without labour being available, the activities of SMEs, construction, retail services, transportation etc, will be short-staffed for a long time. The fear of the virus and the rather indifferent treatment meted out to them was traumatic. Hence, working in the villages would make a lot more sense even if income is lower.

Second, the crux of going back to normalcy would be the restoration of public transport, which includes trains and buses. This is probably the biggest challenge as it is very difficult to maintain social distance, especially when it comes to local trains and metro systems, and hence getting to work would be a logistical challenge across the country. All authorities starting from the Centre (Railways) to the States and corporations, need to start working on this from now to ensure that there is a plan in place. The sanitising and security arrangements have to be in place well before these services can be resumed.

Monetary relief

Third, the Centre had allocated ₹1.7 lakh crore as relief to the needy in March for three months. Quite clearly, the government would have to renew this pledge and have at least two more such quarterly installments rolled out, or else the targeted groups will be in a position of disadvantage. It is still to be seen if the government would be coming out with any additional stimulus package which is required to support an economy which has literally crash landed.

Fourth, the banking system would be the nucleus of monetary action, as the problem loan recovery as of March 31 had been deferred by three months. This pertains to the moratorium, which has to be extended further as companies which have opted for the same and have not been in operation for at least two months (April and May), will not be able to service their debt in July. This means that the RBI will have to roll this over for another quarter.

But the conundrum for the banking system is that a moral hazard has been created, where everyone has opted for this deferral. This means that at some time, the money has to be repaid; and the absence of any growth in the economy will mean a build-up of NPAs. This is a major concern, as the likely restructuring exercises which will be invoked, will elongate the NPA road.

Corporate changes

Fifth, several businesses need to do major introspection and work on the premise that their models have to change significantly as the earlier ones will not work. Industries like aviation, hotels, entertainment, tourism, real estate, taxis etc. will have to reinvent themselves. With the pandemic to last for an undefined time and its shadow being cast over a larger canvas, these industries will never be the same as the customers keep away.

Sixth, the government would be in the act of augmenting revenue, and increasing tax rates cannot be ruled out. This will be a major blow for taxpayers who have already gone through the travails of cuts in salary or layoffs. A Covid surcharge can be combined with higher GST rates. Some States have already increased taxes on petrol and diesel which will be another concern of households.

And for sure, all these measures that have been invoked by the RBI and the government will ultimately be inflationary. Any stimulus of this magnitude will lead to demand pull inflation, which will become apparent with a lag. So, the days of low interest rates will be replaced by tighter regimes.