Far reaching impact: Global industry set for a prolonged slump

Other central banks have acted as well, in provisioning of liquidity and reducing policy rates.

There are emerging signs of government fiscal responses picking up, over and above the first reactions via emergency packages. The US seems to be taking the lead with the administration in talks for a substantial $850 bn stimulus package with the intent to deliver this quickly. President Trump has indicated there may be bipartisan support for such a measure. Other geographies including Europe may also step up to the plate in the days to come.

As the virus reach expands

The intensification of growth supportive measures comes as the coronavirus has spread rapidly in major parts of the world, with the relative intensity now seemingly shifting from China to other geographies.

The earlier narrative largely tracking growth post-infection in China as well as Chinese growth linkages to the rest of the world has now been upended, with prospects of a shutdown in large swathes of global economic activity upon us. This comes when the global business cycle was at a mature stage with US and China already expected to slow even without the coronavirus shock.

In the new developing scenario post the outbreak, many forecasters are beginning to factor in a 50% shave off the global GDP growth in 2020. The sequence of the virus’ spread, and the consequent implementation of lockdown measures, will dictate the timing of the economic impact on various geographies. While China may have seen the worst in Q1, for a large part of the developed world, this may happen over Q2.

Don’t blame the central banks

Massive monetary easing and a financial system awash with liquidity could be reminiscent of the scenario post the Global Financial Crisis (GFC). However, it can be argued that intervention through an easing of monetary policy could possibly be more inefficient than usual. The world is experiencing a significant economic shock. And in reaction to this and related uncertainties, financial conditions (defined here as a composite of liquidity, movement of currency, credit spreads and equity prices) are rapidly tightening.

The Indian scenario

India has had a challenging growth environment last year. Apart from the global industrial slowdown that impacted us, there have been two persistent internal drags on our growth: stagnant income growth and continuous impairment of lender balance sheets. On the back of a lacklustre FY20, it is now exceedingly likely that FY21 growth will also take a big hit owing to the coronavirus pandemic. A continued depressed growth environment will further stress the weaker aspects of India’s macroeconomic framework.

The government will likely face fiscal stress in the year ahead on account of the revenue side, even without undertaking significant new expenditures. The bulk of reforms must come via monetary and macro-prudential policies. The principle is similar to that described before with respect to global central banks. And while policy rates have yet not been cut in any emergency move, the market is largely assured that the cuts are coming sooner than later.