Coronavirus pandemic: Fiscal and monetary boosters required to support reeling economy

Mumbai: Both fiscal as well as monetary boosters are needed to help the economy from the twin troubles of output gaps and price spikes due to the coronavirus pandemic which is yet to make a solid medical impact on the country, say economists at SBI Research.

The report also call upon the Reserve Bank to consider a degree of prudential forbearance in the most affected sector of hotel, aviation, transport, metal, auto components and textiles to help them tide over the crisis.

As of today, three people have lost their lives in the country while over 125 are infected. But the increasing lockdowns across the nation have already left the travel, tourism and hotels industry in the limbo which can only aggravate as more cities join the lockdowns and social distancing measures come into force.

On the demand side, an inoperability analysis of transport, tourism and hotels show significant impact on demand and hence output.

"On an aggregate basis, we estimate that the impact of a 5 per cent inoperability shock could be 90 bps on GDP from these three segments along with storage and communication segment, and the same can spread over FY20 and FY21, with a larger impact in FY21," SBI Research said in a report on Tuesday.

In 2018, the country received 10.6 million foreign tourists, up 5.2 per cent over 2107 and netted USD 28.6 billion in foreign exchange earnings from tourism which was up 4.7 percent in dollar terms.

The proposed one-month travel ban will have severe impact on foreign tourist and earnings.

"Based on above numbers, we can estimate that the country will lose around 2-3 million tourists in 2020 that will lead to loss of USD 5-7 billion foreign exchange earnings. We also believe that domestic train and air traffic will also get hit from this."

On an average 25 million persons uses airplanes and 300 million uses trains monthly for travelling. A 10 per cent reduction will lead to loss of revenue of Rs 3,500 crore on a monthly basis.

Since China is the source of critical inputs for many sectors, supply shocks are akin to higher price of inputs which in turn affects price of all commodities up the supply-chain.

"The impact of supply disruptions in terms of cost-price increase in output due to increase in prices of value-added inputs or assumed price escalation of 5 per cent is maximum for chemicals, electrical and non-electrical goods, metals, textiles and transport equipment which may see up to 7-8 per cent spike in prices," says the report.

The report warns that simultaneous demand and supply shocks will also have serious implications for the banking sector and just demand side shock is expected to lead to an output loss of 1.2 per cent in banking and insurance combined.

Therefore, "we believe a combination of monetary and fiscal policies could be the best option," says the report as it believes that "there is no standard theory on how to tackle a pandemic".

Policy prescriptions will depend on the possible impact across the sectors due to inoperability in sectors impacted by the pandemic and therefore sector specific responses, notably the strategic sectors along the domestic global supply chain appears more cost effective.

On the monetary side, the report explains that the first best option is maintaining a proactive liquidity regime and ensuring stability in financial markets. The RBI could also go in for a rate cut to accommodate the possible surge in liquidity demand and shock-related price increases.

However, a rate cut will have more to do with coordinated policy actions by the central banks, it says and warns that "deposit rate cuts (and hence lending rate) beyond a point is counterproductive and actually creates perverse flows into liability products that are offering higher interest rates. This could always be a recipe for future problems, if assets and liabilities are not properly matched, as the experience of Yes Bank shows".

Also, the pandemic shock has an embedded adverse supply shock angle as China is the supplier of many critical inputs. Hence only a rate cut in current situation with no fiscal measures will lead to asset bubble and possibly no correction in demand, the report warns further and underlines the need for reviving consumer demand for any of the measures to have any tangible impact on

the ground.