India lockdown to disproportionately hurt informal sector

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A man wearing a facemask, amid concerns over the spread of the COVID-19 novel coronavirus, pays for groceries in a local market in New Delhi on March 14, 2020.

Jewel Samad | AFP | Getty Images

India’s move to put its 1.3 billion people in a 21-day lockdown to contain the coronavirus outbreak will disproportionately hurt the informal sector, experts told CNBC. 

Prime Minister Narendra Modi in a televised address Tuesday said people would not be allowed to leave their homes for three weeks after the order went into effect hours later at midnight. He also announced that $2 billion would be provided to strengthen India’s medical infrastructure and treat patients infected by the virus. 

The impact of the lockdown on India’s informal sector, which includes many street vendors as well as taxi and auto drivers, will be huge, Kunal Kundu, India economist at Societe Generale, told CNBC. 

“When we talk of aggregate demand, what is important to realize is that 65% to 70% of India’s economy is unorganized,” he said. “Those are the people who would definitely be more affected, (and) even the small-and-medium enterprises.” 

Kundu explained they would undergo three continuous weeks with zero cash flow as their customers stay indoors; that duration may be longer if the lockdown is extended after 21 days. Many of them would lose their wages during the lockdown and some are likely to face unemployment. He added that the federal government needs to move fast and introduce some fiscal measures that can assure money will still flow into the bank accounts of those affected individuals and small businesses. 

“Because their survival depends on daily cash flows,” he said. 

While most commercial and private establishments would be closed, India said that essential services such as grocery stores, banks and ATMs, gas stations, and delivery of goods purchased online would still be allowed. The finance ministry eased several rules in light of the outbreak that includes extending the date for filing taxes, local media reported. 

India currently has 512 active cases of COVID-19, the respiratory illness caused by the coronavirus that was first detected in China and has since infected more than 375,400 globally and killed over 16,300, according to data from the World Health Organization. 

Urgent fiscal response

The nature of the health crisis and its economic fallout makes it necessary for an urgent fiscal response, especially one that targets severely affected sectors and low-income families, Radhika Rao, an economist at Singapore’s DBS Group, told CNBC. 

“The government has assured of a wider stimulus package, which along with higher disbursements towards healthcare could comprise of direct income support for informal sector workers,” Rao said, adding that sectors such as travel, tourism, and airlines could see short-term rescue packages. 

“States have already upped the ante by providing cash handouts and ensuring necessity/food supplies, which might be funded through higher borrowings,” she said.

Kundu added that New Delhi could look to adopt a temporary universal basic income scheme to support those who’d be most affected by the lockdown so that they would have some form of cash flow in order to survive. On top of that, he said, the coronavirus epidemic is a medical emergency and some people will, inevitably, fall sick with COVID-19.

“In India, out of pocket expenses for people are really very high,” Kundu said, adding that India risked losing generations if people fell into situations where they had no income during the lockdown but needed to get medical treatment. 

While emergency fiscal measures would likely widen India’s fiscal deficit, which typically hinders investor confidence, the timely decline in oil prices could provide a windfall for the central government, according to Rao. She explained that every 2 rupees per liter increase in excise duty on oil would result in additional revenues worth 0.1% to 0.15% of GDP.

“Markets are unlikely to be critical of fiscal support at this instance given the extraordinary turn in global conditions,” she said. 

Growth set to slow further

India had been systematically locking down in recent weeks. Non-resident visitors, including those of Indian origin, have been temporarily banned from entering, international and domestic flights have been cancelled and passenger service on the country’s extensive rail system is suspended till the end of the month, the Associated Press reported. Schools, shopping malls, cinemas, and other places of public gathering have also been closed. 

“This is an extension of existing state orders – 30 states and union territories had already announced lockdowns in 548 districts, whilst only 6 states and union territories were not completely locked down,” Akhil Bery, South Asia analyst at political risk consultancy Eurasia Group, told CNBC.

“While it is certainly quick to go from a Janata curfew, to locking 78 districts, to 548, to nationwide, the government recognizes that speed is of the essence here,” he added, referring to the voluntary curfew that was observed Sunday. 

The coronavirus outbreak comes at a time when India is already struggling to return to higher growth levels. Economists are predicting a further slowdown in GDP.

Indias Prime Minister Narendra Modi is displayed on screens in an electronics store during his address to the nation in New Delhi, India, on Thursday, March 19, 2020.

T. Narayan | Bloomberg | Getty Images

Priyanka Kishore, head of India and South East Asia economics at Oxford Economics, told CNBC she predicted full-year growth for the calendar year 2020 to be closer to 3% but that prediction may change depending on how long the lockdown will last. 

Kundu said Societe Generale’s growth prediction for fiscal 2021, which runs from April 1, 2020, to March 31, 2021, was about 5.1% before Modi’s Tuesday announcement. He added that there is a possibility of revising down the number and that the economic pain would linger until about September. 

India needs to tackle the current situation with a combination of fiscal and monetary policies and particularly ensure the informal sector is looked after, Kundu said.

On an individual level, workers in that sector may not mean much for the economy but on an aggregate level, they have a huge impact, he added. “When you’re talking about aggregate demand, if these people do not see the cash flow happening, the aggregate demand of the economy will collapse. That’s my worry.” 

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