Reasoning the Religion

I am a born Hindu and believe in a supreme power that is beyond the comprehension of most of us common folks. As a modern urban Hindu, my religious orientations are not particularly strong. I have no problem in bowing to the supreme power though any method that various religions may offer, so long as it is out of my free will. In the past, I have closed my eyes and offered a quick prayer when I passed a temple, a church, a gurdwara or a mosque. On each occasion, I got a sense of calmness and little boost to my dwindling confidence towards the task in hand. 

Also in my life so far, no one has forced me to adopt any particular religious practice, though I have witnessed a number of them in the family. While some of these practices are logical and based on some sort of scientific reasoning, many are just followed as they have been accepted as custom. I found it easier to follow those with some sort of reasoning and followed others, if at all, out of respect towards elders who told me so. However, I have come to adopt only very few of such religious practices in my life that could satisfy my reasoning for their existence. 

This freedom of choice, to seek the supreme power through any medium or process, is highly practical and achieves the aim of boosting the confidence or comforting myself in a moment of distress. 

When looked in the context of religious polarisation in the world today, I consider myself as a liberal who respects all religions while continuing to be a proud Hindu. I am not an expert in the subject of religion, but I have been told since my childhood that all religions are nothing but different routes to reach the same supreme being. But in present times, this belief of mine get subjected to regular critical scrutiny when I hear ever increasing shrill of voices that promote own religion over others and force obedience to own religious practices & beliefs. I also notice that these voices come from all religions with no exception, and have become a major reason for social conflicts. These conflicts are gradually getting intense and are spreading through all parts of the world. The frequency and intensity of such conflicts is gradually reaching a point where almost all societies look divided with fragile peace, if any, and are ready to erupt with even a trivial trigger.

I have attempted many a times to look deeper in search for a reason as to why any religion, that is meant to show the path of salvation and peace to its followers, can become the rallying point for social conflict of such proportions as we witness today. Each time my quest takes me to confusing and diverse directions that digress me from the primary objective. I do realise that it is a highly complex socio-religious sphere with no single answer to this quest. However, when I analyse my own upbringing and the freedom that was allowed to me as a child who could reason with the religion, I do see some patterns and probable answers.

Lets start from the beginning...

First - In order to keep going in the face of adversity, humans need something to hold onto. Today this 'something' could be support of parents, a friend, a relative, a religious leader or God. In the past after the humans developed the cognitive abilities and imagination, this 'something' was provided by some gifted orators & social leaders that showed way out of misery like hunger, lack of shelter, illness or oppression by some powerful ruler. They would have also reasoned as to what led a man to such distress and how to keep out of trouble.  When the followers increased, the guidelines became some sort of set of rules to be followed to avoid troubles. At the same time, the occurrences or phenomenon that could not be explained logically, might have been attributed to a super natural force beyond the human imagination. This later got converged into religion and the societies got their first Gods. When worship and adherence to the guidelines were successful in keeping people out of troubles, Gods became successful with mass following. As religion provided that 'something' to hold onto, it survived, was carefully nurtured and evolved over centuries . However, overtime the practitioners of religion introduced many practices that were more for their own selfish benefits than the social good. When some followers would have questioned such practices, at this juncture the religion might have been given a form that was beyond questioning and human reasoning - it just needed to be followed because God said so. Scared of unfavourable consequences, many blindly followed what was told to them.

Second - As the religion had mass following with majority that did not question even the wrong practices, politicians would have found it a very promising tool to expand their political desires. So the religion came to acquire a very prominent place in any king's strategy to rule. This marriage of convenience benefitted both the sides and together it generated a power that ensured long term rule. The acceptability of King to masses must have improved when religious leaders were seen by his side. During these times, the religious practices would have got further refined and text / holy books written to record and perpetuate religion. Similarly, as most needs of the religious leaders were met by the Kings, the religious leaders focused on spirituality, a state of mind that is only possible when lower level needs of Maslow's hierarchy are met. It is very hard for a person struggling to arrange food or shelter for his family to focus on spirituality. 

Third - Subsequently, there appears to be a carefully crafted scheme to grow the number of followers, to keep them from questioning the religious practices and to uphold supremacy of the imaginary force called God. This led to introduction of religious text in the education system through stories to shape the thinking since early childhood. Many schools (madrasas / gurukuls / missionary schools etc) taught religion to produce future religious leaders to perpetuate the religion and its practices. Children only learnt what was shown / taught to them and there appears to be a systematic suppression of human logic, a critical element that differentiates homo sapiens from animals. As human logic was suppressed, the pass outs from these schools, were more like human machines or half animals that followed religion without any application of human reasoning.

Four -  With the birth of new religions in the societies when old religion came to have too many wrong practices and as people travelled from one part of the world to the other and found locals following different religious practices and different Gods, religious competition began. This competition, sometimes, was fierce and violent. Canvassing own religion and conversion from other faiths to own, become the contentious issue. While some countries welcomed new religions from overseas, others protected local religion at great costs.

Five - However, as world became interconnected, the religions were no longer restricted to the place of their origin and gained followers in different countries. However, they remained dominant in the place of their origin, leading to emergence of centers of their prominence with majority followers. With societies divided in majority and minorities on the basis of religion, the intergroup competition started by religion, took the shape of a game for dominance where one group attempting to outplay the other. This game has been played for decades now and has become so deep rooted that a person gets easily identified with his religion than any other characteristic. 

Six - Once societies got divided along religious lines, it was a recipe ready to be further exploited for political objectives. This is what happened thereafter. Like politics, religion also became a profession that was mostly aimed at own growth and prosperity. With religion becoming the subject of heated debates and conflicts, even otherwise rational individuals took extreme positions in matters related to the religion and started dividing the world between us and them. The religion has become sort of identity today and we have lost our originality of being humans. If we look deeply, it may be a sort of virus that that have corrupted the cognitive sphere of most of us today to such an extent that it looks improbable to repair it any time soon.

In today's world order where most religions exist almost everywhere, freedom to follow what one feels right for himself / herself without being questioned or looked down upon, is the only mantra for co-existence. However, with the extent of cognitive corruption that we carry today, it may not be a reality in our lifetime. 

Taxation Matters : Clubbing of Income

I have come across various cases where a taxpayer starts reflecting the receipt of rent of his house property in the name of his wife while the ownership of the house continues to be in the name of the taxpayer. Similarly, in some cases, the dividend and sale proceeds of shares owned by a taxpayer were transferred to the bank account of a spouse. In both the above cases, the taxpayer did not include the income (rent/dividend/capital gain) while calculating his tax liabilities. This type of transaction diverts the income to someone else to save on taxes. The Income Tax Law provides for the clubbing of income of such transactions in the hands of the taxpayer. 

Therefore, it is important for any taxpayer to understand the provisions relating to the clubbing of income to avoid incorrect computation of his / her tax liabilities. The clubbing provisions are covered under Sec 60 to 64 of the Income Tax Act and contain provisions under the following categories:-

1. Transfer of Income without transfer of the asset (Sec 60).  The income will be clubbed in the hands of the transferor who transfers the income.

2. Revocable Transfer of Asset (Sec 61), where a transfer can be revoked / asset transferred back subsequently.    The income will the clubbed in the hands of the transferor who transfers the income.

3. Salary / Fee / Remuneration paid to spouse from a concern where the individual has 'substantial interest' {Sec 64 (1) (ii)}. The income will be clubbed in the hands of the spouse whose total income is higher. The substantial interest here means more than 20% voting power or share of profit.

4. Transfer of assets to the spouse (directly or indirectly) without adequate consideration {Sec 64 (1) (iv)}. The income will be clubbed in the hands of the transferor who transfers the asset. In connection with this provision, if the taxpayer gifts cash to the spouse who in turn invests it in an asset, the income arising out of such asset will also be taxed in the hands of the taxpayer who gifted cash. However, if the transfer of the asset to the spouse is under an arrangement to live apart, it will not attract clubbing provisions.

5. Transfer of Assets to Son's Wife without adequate consideration {Sec 64 (1) (vi)}. The income will be clubbed in the hands of the transferor who transfers the asset.

6. Transfer of asset to a Person / Association of Persons for Immediate or Deferred Benefit to Spouse / Son's Wife {Sec 64 (1) (vii) & (viii)}. The income will be clubbed in the hands of the transferor who transfers the asset.

7. Income earned by a minor child, including stepchild {Sec 64 (1A)}. The income will be clubbed in the hands of the parent who has the higher income. However, income earned by the child on account of manual work or any activity involving the application of his / her skills/knowledge/talent/experience will not be so clubbed. 

The above provisions clearly indicate the conditions under which the income of another person/spouse/son's wife/child will be included in the income of the taxpayer. Non-compliance could attract additional tax, interest and penal consequences. 

Taxation of Gifts in India

Many times I have come across questions relating to the taxation of gifts in India. People often present various scenarios of property (movable or otherwise) passing from one individual to the other and seek clarifications if such transactions attract any tax liability - both on acquisition and disposal of such property. To understand the provisions relating to gifting in India, let's cover its background and the current provisions.

A gift is something given away willingly to someone without any payment or consideration in exchange. So if something of value is given away without any payment or something in return, out of the free will of the doner, it is termed as a gift. Gifts have a very special place in Indian society where valuables are gifted as a matter of accepted customs. In addition, valuables also get passed on from one person to the other as part of an inheritance or Will upon the death of the owner. While the exchange of gifts between related individuals is part of our customs, the exchange of gifts between individuals not related to each other may be a potential source of corruption. Accordingly, the law treats both these transactions in different ways. 

Gifts were subject to tax under the Gifts Act 1958 (GTA) which was later repealed in 1998. Hence gifts of all types remained exempt from tax for the next six years till 2004 when the Income Tax 1961 was amended to bring gifts of certain types within the ambit of taxation. A new provision under Section 56 (2) was introduced in the Income Tax Act 1961 to tax gifts in the hands of its recipients as "Income from Other Sources". This provision has since been amended a few times with the last amendment in 2017 [Sec 56 (2) (x) of the Income Tax Act]. 

With the amendment in 2017, all categories of taxpayers (not only individuals or HUFs) are liable to taxation on the value of money or properties received without any consideration (or inadequate consideration) as "Income from Other Sources", if the value of the benefit exceeds Rs. 50,000/-. It implies that gifts of value up to Rs. 50,000/- (aggregate value in Previous Year) are not taxable.  

A. Money as Gift.    In the case of money, if the total value of such gifts received in the previous year exceeds Rs. 50,000/-, the whole of money received in the previous year, shall be liable for taxation. 

B. Immovable Property as Gift.    In case the immovable property is received without any payment and the stamp duty value exceeds Rs. 50,000/-, the whole of stamp duty value shall be taxable. However, if the payment is made for such immovable property and it falls short of the stamp duty value (inadequate consideration) by more than Rs. 50,000/-, the difference between the stamp duty value and the payment already made, shall be taxable. 

C. Other Moveable Properties.    In case of any property, other than the immovable property, is received without any payment and 'fair market value' of such property exceeds Rs. 50,000/-, the total value of such property(ies) received during the previous year shall be taxable. However, if the payment is made for such immovable property and it falls short of the fair market value (inadequate consideration) by more than Rs. 50,000/-, the difference between the fair market value and the payment already made, shall be taxable. 

The Exceptions to the Rule.    However, the above provisions do not apply in case such money or property is received under the following conditions:- 

1. From any relative (spouse, brother or sister, brother or sister of the spouse,  brother or sister of either of the parents, any lineal ascendant or descendant of individual or spouse, spouse of anyone referred so far).

2. On the occasion of the marriage of an individual.

3. Under will/inheritance / from a trust created for benefit of the individual.

4. From any local authority / charitable institutions.

5. Under the scheme of amalgamation/demerger.

The above provisions can be easily understood with the help of the following diagram.

Once the money or property received as a gift has been taxed or not taxed as per the provisions indicated above, any subsequent income generated / or gain on its disposal, will be liable for taxation as per the provisions of the Income Tax Act.

 

In case of any further queries, please feel free to email them to me.

Prashant Gupta

Last Updated on 28 Dec 2020 (2000h)

Good and Bad Debt

1. In initial lessons of corporate finance, debt is considered to carry the lesser cost of capital than equity and hence becomes an interesting leverage aspect of designing the capital structure. The calculations demonstrate a gradual increase in the value of a firm when debt is added as part of the capital as against equity. This notion, as a concept in finance, helps corporates to reduce the overall cost of capital to maximize its value by creating an optimum mix of equity and debt. In public finance, on the other hand, debt is a means of financing the deficit to bridge the shortfall of income to incur the required public expenditure. Most governments resort to deficit financing as a fiscal tool to further the growth prospects of the economy. Economists have theorized that enhancing public expenditure, even if it is non-productive, is positive for the economy due to its multiplier effect and support to the demand curve of the economic equilibrium. The debt, therefore, is an inseparable part of the finance and is an important factor that circulates the money and helps to expand the size of the economic cycle with each rotation. 

2. Due to this reason, central banks across the world tend to take an accommodative stance to facilitate easier credit creation by bringing down interest rates and infusion of liquidity. This infusion becomes more prominent during a crisis like COVID-19, as everyone runs to keep firms/businesses viable and employment at acceptable levels. In normal times, however, central banks keep balancing between liquidity and inflation, keeping both within reasonable limits. 

3. The cost of debt, though less than the equity, is an unavoidable liability for the borrower, which compounds and rises exponentially, in case not paid on the due date(s). The borrowers that do not generate enough returns to service their debts, face prospects of losing management control or, at worst, liquidation. Public debt, however, has a different character due to sovereign backing, a guarantee that can not fail (except foreign debts). For a government, that runs short of revenues, debt can be repaid with additional debt (about 70% of sovereign borrowings refinance maturing loans. Source: Reuters), which amounts to shifting liabilities of the present to future generations, an otherwise unsustainable cycle, moving purely on the sovereign backing. In case markets are not adequately deep to facilitate borrowing, governments may resort to even printing of fiat currency (it has its own implications for the economy).

4. In our attempts to relentlessly push the economic cycle towards higher growth, the debt levels around the world have been rising sharply. As per the World Bank, the world's total debt (public and private) stood at USD 188 trillion, 227% of the world's collective economic output in 2018. It has grown from 114.6% of GDP in 1970 to its present levels (Figure 1). As per an estimate by the International Institute of Finance, this burden would have surpassed USD 255 trillion in 2019, nearly three times of world GDP and amounts to USD 32,500 debt (INR 24.37 Lakh) for each human on this planet. This sharp rise in the debt levels is due to public borrowings, mainly by the USA, Japan and China that constitute about 68% of world public borrowings. Source: Reuters).

Figure 1: World Debt as % of GDP (Source: World Bank)

5. The share of both public and private debt has increased constantly as indicated in Figure 2. However, the public debt has witnessed a sharper increase since the 1970s as compared to private debt. In the last 48 years,  while the private debt has increased its share 1.89 times (from 76.6% to 144.8%), the share of public debt has more than doubled (2.15 times, from 38.1% to 82.2%) during the same period. 

Figure 2: Share of Public and Prive Debt (Data Source: World Bank)

6. With this size of the debt, the liability of debt servicing becomes extremely critical. Though the long term interest rates have declined over the past two decades (Figure 3), they constitute a substantial part of the expenditure. If the world weighted average interest rates are taken at 4%, the annual debt servicing liability comes to around USD 10.2 Trillion, with emerging and low-income economies bearing the substantial part of this liability due to higher interest rates. 

Figure 3: Long Term Interest Rates (Source: World Bank)

7. Due to this massive increase in debt and debt serving burden, many private entities become unviable and face eventual closure/bankruptcy. The non-performing debts (Non-Performing Assets or NPA for the lenders)) have become a major problem across the world and threaten the stability of the financial system itself. This led to the introduction of debt reforms including debt restructuring and bankruptcy codes in most economies. The banks, the primary credit creators for an economy, face an existential threat due to mounting NPAs, many having succumbed and failed. When the lender or the borrower involved were systemically significant, the government had to even bail them out at the expense of taxpayers. This led central banks to prescribe NPA provisioning, capital adequacy and lending norms for banks. The result is that banks and borrowers, both are fearful and do not want to engage, leading to a decline in credit growth in most economies of the world. In India, the bank credit growth has declined to a five-decade low to 6.14% in FY 19-20 (Source: Business Standard). With the disruption of business cycles due to COVID-19, the situation is likely to further worsen despite RBI taking exceptional measures to ease the liquidity. 

8. The situation of public debt is no better, but for the sovereign backing, it carries. The public borrowing of some of the governments, as a % of GDP, has crossed their GDP with Japan at the top of list with 236%, followed by Greece at second spot with 182%, Singapore at 13th place with 110%, Bhutan at 17th place with 103%. Some others are inching closer to this mark with UK at 29th place with 87%, USA at 34th position with 83%, Sri Lanka at 36th place with 75%, India at 50th place with 70% and Pakistan at 55th place with 67%. (Source: CIA World Fact Book). With the COVID-19 outbreak, the governments across the world are taking steps to stimulate their economies and have announced packages up to 20% of their GDPs (total commitment of about USD 9 Trillion, Source: IMF), which will eventually push the public debt envelop and fiscal deficits further.

9. Over the last century or so, the world has clearly overindulged in debt and has enjoyed easy availability of money for both public and private borrowers. Higher and faster economic growth being the sole objective, the interest rates have been driven down with easy access to money. Credit creation targets have eroded the process of due diligence leading to a substantial increase in default risk. The problem has gradually reached a tipping point beyond which the fine balance between credit creation, business risk and economic growth, shall reverse its benefits threatening the very functioning to the financial system leading to yet another financial crisis. 

10. Indications, accelerated by COVID-19 pandemic, are already appearing including the slowing down of economies, rising unemployment levels, declining business sentiments and risk aversion,  rising bond yields, rising market capitalization without strong fundamentals (rising PE levels) and above all, debts reaching unsustainable levels. Are we heading for challenging times in the short to medium term? 

COVID-19 Panic and Fear - A Data Point

With compulsory confinement inside our homes and continuous beaming of updates on Corona statistics on TV channels, one may turn in to a pessimist about the future prospects of our 'normal' lives. To add to this pessimism, there are some experts who predict a sensational number of people getting infected-with and dying due to the pandemic in the near future. So, it is not uncommon for many of us to panic and fear for an uncertain future.

As the cost of any death is too huge to bear and all efforts MUST be made to contain the pandemic that has the potential of causing widespread deaths, the response of most countries of the world to COVID-19 has been on expected lines - saving lives while they can be. This unprecedented consensus in dealing with the pandemic is at a huge economic cost, that world has consciously accepted.

While the steps taken so far are in the right direction, and this piece does not undermine their necessity and importance in any way, it attempts to relate the COVID-19 deaths with that of the world births and deaths data to assess the severity of the present situation.

We live in a planet inhabited by about 7.7 billion humans apart from so many other species that significantly outnumber us. In 1950, the world population was close to 2.5 billion that has prospered and added 5.2 billion (~ 200% of 1950 number) to reach 7.7 billion in 2020. This translates into an average of 75 million additions per year to this planet in the last 70 years.

The rate of births has witnessed a consistent rise over these years as indicated by the chart shown here (Our World in Data). The births have risen from 97.40 million per year in the 1950s to 140.66 million per year in 2020, a rise of more than 44% over these years. As per the projections, the birth rate of ~140 million per year (3,85,000 per day) is likely to remain more or less constant in the coming decades.

Similarly, the number of deaths has also risen from 51.27 million in the 1950s to 56.66 million per year in 2015 and 60.20 million per year (1,65,000 per day)  in 2020, recording an increase of 17.41% over these years. What we need to note here that this death rate is inclusive of all the reasons that may cause it. Hence this death rate includes the past history of pandemics and other diseases that continue to haunt mankind. 

As per an estimate made by the World Health Organisation, the top 10 causes of death in the world are shown in the chart below. It is also estimated that about 54% of deaths worldwide (~ 90,000 per day) are caused by these top 10 reasons. What is interesting to note is that these deaths, caused by well-known reasons, though continue to haunt mankind, have gradually been accepted as 'normal' over the years. We, despite our scientific advancements, are yet to find any permanent cure for them. Besides these health conditions, about 1.35 million people die in road accidents alone every year (3,700 per day) in the world. 

Now let us examine the data related to Coronavirus available up to 13 Apr 2020. The data of 85 days, captured since 22 Jan 2020, indicates the total number of people infected to be 1925 thousand with 120 thousand deaths worldwide (Source: Worldometer). This translates into a ~ 22,600 inflections per day and ~ 1,411 deaths per day and accounts for 0.856% of  1,65, 000 deaths per day. A much higher percentage of 2.12% of the daily deaths are caused by road accidents alone. 

We also need to remember that the present rate of deaths due to coronavirus is under a condition when we do not have any vaccination or known treatment still. Though the development of any vaccine takes many years, given the urgency of the current pandemic, it is estimated that a vaccine for COVID-19 will be available in the next 18 months. In the meanwhile, most of the countries around the world have taken tough measures, even at disproportionately higher economic costs, to contain the spread of the virus. These steps appear to have had some positive effect to flatten the curve indicating a reduction in the number of deaths per day.

So, if the above is true, why is COVID-19 causing so much panic around the world? 

Given the data point, it does not seem to be the number of deaths per day that can justify the panic. However, given its rate of spread and the restrictions that have been imposed to contain it, we are sensing some fundamental changes in our 'normal' lives after the present phase of the pandemic is over. Individuals and businesses alike do fear the new 'normal' and the changes that we shall have to make to our well settled routine to mitigate higher health risks. And probably, this fear of unprecedented changes in our lifestyles and routines, is more responsible for our panic than the deaths caused by the virus.

Lastly, we live in a world of electronic and social media, whose reach is spreading exponentially with each passing day. Unlike the previous pandemics, some of which had even a higher mortality rate, the news of coronavirus is being consumed at unprecedented rates, getting the highest priority in headlines where nothing else appears to be as important. This certainly adds to the panic and fear amongst the locked folks.

Therefore, while the world finds its vaccine in the next few months and COVID-19 settles down in the list of pandemics that the world faced and conquered, we need to step back a little and take a pragmatic approach towards the current situation and avoid panic and fear.

- Prashant

COVID-19 AND ITS IMPACT ON INDIAN ECONOMY

COVID-19 AND ITS IMPACT ON INDIAN ECONOMY

Introduction

1.       Towards the end of 2019, the news of a novel coronavirus started emerging from Wuhan in China. While the spread was rapid and effect on those infected horrifying, the scale of devastation that it has come to acquire, was rarely imaged. Even the experts and agencies like WHO also did not consider it very serious in the initial stages. It is only when the virus spread out to other countries and a number of casualties started rapidly rising, that world took cognizance and national level efforts started to contain the spread.

2.       The threat was larger than World Wars in its spread and engulfed almost the entire world, forcing nations to take unprecedented steps of widespread lockdown bringing the economies to a screeching halt. With complete energy diverted towards Corona battle, everything else became secondary in priority. In the second-most populous country in the world, India also announced 21 days lockdown to prevent the country from an imminent disaster. While efforts at war footing have been launched, it is premature and uncertain to assume that the impact of the virus has been contained. There are suggestions of the virus coming back even to those regions that were considered to have successfully contained it and were proceeding to open up the restrictions.

3.       Under these evolving conditions, it is difficult to say with certainty as to what will be the long-term impact of Coronavirus on the world in general and on India in particular. But this paper attempts to assess the short- and medium-term impact of this virus on the Indian economy.

The Pandemic

4.       Before Corona pandemic, there were similar occasions that led to mass infection and deaths. The flu pandemic of 1889, that started from Russia, spread to a large part of the world within a short time and claimed close to one million lives. Similarly, Spanish flu of 1918, the deadliest of the pandemics so far, infected close to 500 million people and claimed about 100 million lives. Likewise, the Asian flu, SARS, Ebola, and AIDS have claimed millions of lives in the past. However, the mortality rate of Coronavirus is much higher as per current statistics.

5.       Since Nov 2019, the COVID-19 has spread across the world and has exponentially infected close to a million people and has claimed about 50,000 lives. The sharp and rapid rise in the number of cases has made even the most powerful nations look helpless and meek. China, however, appears to have flattened the curve to contain the pace of spread after enforcing some of the very stringent measures. The spread, after being relatively flat in the initial stage, took a steep upwards turn in March and indicates almost vertical climb of the curve (Figure 1).

Figure 1: Exponential Rise of Corona Cases in the World[1]

6.       In India alone, there are about 2000 positive cases with 58 deaths reported up to 01 Apr 20. The cumulative and daily number of cases is indicated in Figure 2.

Figure 2: Daily Cases in India

7.       India’s response to contain the virus has been much better than expected and includes bold measures like 21 days lockdown, a period when this piece is being written. As the day-wise figures indicate, the social distancing measures put into place seem to have an effect. Various models have been put out on the likely impact of these measures on the spread of the virus. Based on a study conducted by Rajesh Singh and R Adhikari titled ‘Age Structured impact of social distancing on the COVID-19 epidemic in India’ only two scenarios are likely to bring the spread under control in India. The first is three sets of lockdowns of 21 days, 28 days and 18 days with a gap of 5 days between each period bringing the spread under control by 10 Jun 2020 and thee second is a single lockdown of 49 days, bringing the spread under control by 13 May 2020. It can this be assumed that normalcy would return earliest by Mid May 2020 and latest by end Jun 2020 if the measures are effective.

8.       There are a large number of experts who have also given their advice on the spread and ways to contain the spread. This article intends to update readers on the possible economic impact that this pandemic is likely to have based on an informed assessment of the situation and various reports published.

The Economic Impact

9.       In recent past before the outbreak of Coronavirus, India had witnessed economic slowdown for a variety of reasons. The quarterly growth had been declining successively for six quarters up to Q2 FY20 and started to show signs of some recovery in the Q3 FY20 when the quarterly growth of 4.7% was registered. With many structural reforms and measures to boost the growth, it was expected that growth may pick up in following few quarters.

Figure 3: Quarterly GDP of India

10.     However, due to unprecedented measures that had to be taken to contain the spread of the virus, the economy with various constituent sectors staring at medium to long term shocks.

11.     As economic engine is more like a sluggish giant that takes time to respond to measures, the lockdown shock is like application of emergency breaks that stops the movement rather quickly, but takes much longer to accelerate post the halt. The situation is likely to accentuated by widespread migration of labours and their subsequent slow return back to their workplaces post return of normalcy. Hence, even in the best-case scenario of infection containment at the end of lockdown in mid-April 2020, the economic recovery is likely to take much longer time.

12.     As the negative impact of the pandemic commenced in Feb / March 2020 when most of the current fiscal year was over, the current fiscal is not likely to manifest much of the negative impact. However, as the lockdown will continue in next fiscal FY 20-21, the first and second quarters are likely to be worst affected, particularly the first quarter. As indicated above, there may be two broad scenarios for India. One 21 days lockdown and second 49 days lockdown. In both the scenario, the economic impact is likely to significantly different.

13.     The estimates of the likely economic impact has been made on the basis of following presumptions: -  

(a)           The estimates have factored in the following sectors of economy: -

(i)       Agriculture, Forestry & Fishing.

(ii)      Mining & Quarrying.

(iii)      Manufacturing.

(iv)     Electricity, Gas, Water Supply & Other Utilities.

(v)      Construction.

(vi)     Trade, Hotels, Transport, Communication & Services related to Broadcasting.

(vii)     Finance, Real Estate & Prof Services.

(viii)    Public Administration, Defence & Other Services.

(b)     These are the same sectors that are indicated in the calculations of GVA & GDP for the economy in the data published by Ministry of Statistics and Programme Implementation (MoSPI). Out of the above, the impact has been assessed as follows: -

Sector / Item	Share of GDP	Likely Impact
(i)       Agriculture, Forestry & Fishing	17.60%	Least
(ii)      Mining & Quarrying.	2.12%	Moderate
(iii)      Manufacturing	15.13%	Severe
(iv)     Electricity, Gas, Water Supply & Other Utilities	2.57%	Least
(v)      Construction	7.61%	Severe
(vi)     Trade, Hotels, Transport, Communication & Services related to Broadcasting	18.29%	Severe
(vii)     Finance, Real Estate & Prof Services	21.25%	Moderate
(viii)    Public Administration, Defence & Other Services	15.44%	Least

(c)      The impact has also been graded with Q4 FY 19-20 least affected and Q1 FY20-21 most severely affected. Things will gradually return to normal in subsequent quarters.

(d)     As the decline is sharp, the recovery is also likely to be sharp as economy will start functioning again after the lockdown. However, due to a number of factors, it will take longer to attain pre-Feb 20 growth rates. Out of the total impact, 70% has been assumed to occur during Q1 FY 20-21, 20% in Q2 and 10% in Q3.

(f)       On sectors like construction and manufacturing, the recovery will be even longer due to large scale migration of labour. Migration of labours will also have some impact on agriculture sector as well.

(g)      The estimated quarterly GDP, in these two scenarios of lockdown, is indicated in Figure 4 below.

Figure 4: Estimated Quarterly GDP Growth / Contraction Post Lockdown

14.     With these quarterly numbers rolling out, the estimated GDP growth for FY 19-20 is estimated to be around 3.3% (against 5% earlier) and that of FY 20-21 to be 2.8.% (against 5.9% earlier) in case of 21 days lockdown and (-) 2.8% if the lockdown is extended to 49 days period.

15.     In case of first scenario of 21 days of lockdown, in FY 20-21 the economy is likely to suffer loss of GDP to the tune of ₹ 9.66 Lakh Cr (4.6% of GDP). However, in case of second scenario of 49 days lockdown rolling out, the loss is estimated to be ₹ 20.96 Lakh Cr (9.48% of GDP).

16.     While the overall economic impact has been estimated here, there are sectors like tourism, aviation, railways, road transport, construction, manufacturing amongst others that will suffer more than the others.

Economic Stimulus

17.     With the economy facing grave risk, the government has come out with stimulus to minimise the likely loss to the economic activities and more importantly, to support the people at the bottom of the income pyramid who are likely to suffer the most.

18.     The package has been a graded response that has attempted to address one issue at a time. It started with relaxing some compliance requirements, followed by a package for the weaker section of populace and measure to increase liquidity with maintain financial stability.

19.     The package for the vulnerable sections of the society is estimated to cost ₹ 1.7 lakh Cr wherein the measures include providing food grains at highly subsidised rates, cash transfers, free cooking gas cylinders for three months, insurance for frontline health workers amongst others. This cost of this package may be partly borne by some PSUs, but a major portion will add to the fiscal burden of the central government. In addition to the package announced by the central government, almost all states have come out with some relief plan for the vulnerable strata of the society like providing daily meals and shelter to the needy.

21.     However, considering the impact on the economy that may vary from about 4.6% to 9.5% of the GDP, the package of ₹ 1.7 Lakh Cr (0.8% of GDP) appears highly inadequate. In case we consider the scale of packages that have been announced by other countries (close to 10% of their GDP), the package appears even more insignificant.

22.     Apart from this, the cost of free medical treatment and quarantine of the suspected cases, where most of the government machinery including armed forces are involved, will also be significant.

23.      To ease the pressure on liquidity and to maintain the stability of the financial system of the country, RBI also took some significant steps. Considering that the COVID-19 impact is more predictable in the long run, than in the short run, the impact is time inverted.

24.     The RBI thus would have to support businesses as well as to take measures to inspire business confidence and the measures taken seem to point in the right direction. This includes the following: -

(a)     Safeguarding liquidity conditions in the banking system through repo and CRR cuts. The CRR cut of 1% alone (4% to 3%) is expected to infuse 1.37 lakh crores liquidity into the banking system. Additionally, the increase in Marginal Standing Facility limit to 3% from 2% will also provide additional liquidity of a similar amount.

(b)     The repo rate has been cut by 75 basis points to 4.4% with reverse repo being cut by 90 basis points to 4%.

(c)      The RBI has put in measures to protect continued flow of credit to the real economy through fundamental recalibration of the targeted longer-term refinancing operations and a universal forbearance program for stressed sectors to long term bank credit flow.

(c)      To give relief for borrowers, the RBI has allowed a three-month moratorium on all term loans. This would provide stability and ease the stress on individuals and organisations.

23.     While these measures have provided much needed immediate relief to the business community, there were demands from the sectors like tourism and aviation, that are suffering the most during the lockdown period.

Fiscal Deficit

24.     With the economic activity suffering, it is bound to have a negative impact on the fiscal health of the central as well as state governments. While it will take some time to compile the combined fiscal deficit post-Corona pandemic, the impact on fiscal deficit may not be very significant as the major cash outflows will occur in next fiscal FY 20-21.

25.     If we consider the economic package of ₹ 1.7 Lakh Cr announced on 27 Mar 20 alone, the effective fiscal deficit, after taking into account the extra-budgetary sources as well, is estimated to touch 7.3% for FY 20-21, as against the budgeted target of 3.5%. This may increase even further, if additional stimulus is provided, which at this stage appears inescapable. The condition is likely to get more aggravated with declining tax collections.

Figure 5: Estimated Fiscal Deficit Post Corona Lockdown (1.7 Lakh Cr Package)

26.     However, under the present exceptional circumstances, sticking to FRBM targets and containing the Government expenditure may not be very desirable as the primary aim is to minimise the losses to the economy. With Indian economy having the potential to attain 12% nominal GDP (8% real) in normal conditions and given the present rate of growth of public debt of ~ 8%, the debt to GDP ratio of the Central Govt. can be raised by 2 to 4%[2]. This would provide extra headroom to the Government to provide much-needed stimulus to the economy.

Impact on Stock Markets

27.     The severity of the impact of COVID-19 can also be assessed with the help of the sharp corrections that have taken place in stock markets around the world.  Similarly, the NSE Nifty in India crashed from a high of 12246 in Feb to a low of 7610 in March 2020, a decline of about 39%. Though the stock market has witnessed heavier crashes in the past, the rate of decline in March 2020 was the most severe.

Figure 6: NSE Nifty 50 Index

Post Corona World

28.     Having seen the impact of COVID-19 on Indian economy, let's look at post-Corona World. After the world recovers from this pandemic, the world is not likely to be same again. There will be systemic readjustments amongst various nations as well as in the individual lives of humans. Some points are highlighted here: -

(a)     World Supply Chains will gradually readjust to reduce their risk of over-dependence on China. This may result in world realigning towards countries like India that can offer alternatives to China in cheap and young labour.

         

          (b)     Nations will practice more protectionism and less of globalisation.

(c)      Countries will focus more of medical research in general including viruses.

(d)     Countries will take up creation of medical infrastructure as a priority area. Most companies / countries engaged in manufacture / supply of medical equipment are likely to benefit.

(e)      WHO is likely to witness some changes in its leadership and re-write is SOP on response to situations like Corona in future.

(f)       In finance risk, hedging will gain more importance. The insurance sector is likely to benefit in general.

(g)      Countries may witness reduction in high levels of polarisation in political and social classes.

(h)      Digital transactions will get a boost.

(j)       Personal finance will also, witness a structural change where more focus will shift to the creation of risk pool or emergency pool of money.

(k)      Work from home will become more acceptable across sectors. Working from home brings down establishment costs and technology can ensure a minimum level of output.

         

          (l)       Post lockdown, the birth rate may see a spike similar to the baby-boom post-world war.

(n)      Visits to theatres, tourist places may see a temporary decline for some time.

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[1] https://www.worldometers.info/coronavirus/

[2] Hindu Business line, 29 Jan 20