Economic cost of 21-day lockdown is Rs 7.2 lakh crore

“From 12 midnight tonight, the entire country will go under a complete lockdown,” Prime Minister Narendra Modi said on Tuesday. “To save India and every Indian, there will be a total ban on venturing out of your homes. Every state, every Union Territory, every district, every village and every locality is being put under a lockdown.” Though this sudden announcement of lockdown sounds just like the Demonetisation announcement, this time, it is to fight a far more dangerous threat of a virus infection than an economic malady like black money.

For the Indian economy, already reeling under a stagflation and high unemployment, the lockdown will add supply-side stress, accelerating the slowdown further and jeopardising the incomes of millions of people, particularly those in the informal sector. This in turn would depress the demand-side further. The magnitude of the impact of a complete nationwide social and economic shutdown for three weeks is likely to be far more severe than either the 2016 demonetisation or the 2017 GST rollout.

Former Chief Statistician of India Pronab Sen said, "At the moment, it is a supply-side problem. Both production and distribution of non-essentials have come to a halt. This affects at least 55% of the economy for three weeks or about Rs 2 lakh crore. It may even be larger due to previous partial lockdowns by various state governments."

"Now, after the lockdown is lifted, there will quite possibly be an increase in sales which will be met through existing inventories. This does not, however, add to the GDP (as these goods and services had already been produced and accounted for). It may take a few more months for the final production and sales to resume." "In the interim, between now and full production resuming, a large number of people would have been unemployed and not earned any income. As a result, in the second round, demand-side will become a serious constraint," Sen said.

Former Chairman of the Prime Minister's Economic Advisory Council C Rangarajan said, "The impact of lockdown will be felt through several channels, weakening of domestic demand, disruption in supply chain and disruption in financial market. All of this would result in declining production and retrenchment of employees."

Sen said, "In FY20, we would be lucky if the growth rate is 3.5% (full fiscal). It would be a very different scenario for FY21. In the first half, we would be lucky if the growth rate is zero. In the second half, the growth could revive by as much as 7%, taking the average growth for the year to 3.5%."

A 21-day nationwide lockdown may cost a Rs 7.2 lakh crore impact on the economy, predicts Care Ratings. "Assuming 80 per cent production is lost, and 20 per cent of the economy (that constitutes the essential services and farming) still functions, Rs 35,000 -40,000 crore of GDP will be lost every day. Of the 21 days lockout, 14 days spill over to FY21, therefore potential total loss will be in the region of Rs 6.3-7.2 lakh crore assuming 18 working days will be split across the two years," says a report by CARE Ratings.

Multinational investment bank Barclays said the cumulative shutdown cost will be around $120 billion, or 4 per cent of GDP. Of this $120 billion, the new 21-day shutdown accounts for roughly $90 billion of impact, the balance $30 billion impact being on account of earlier shutdowns declared by state governments and the global supply chain disruptions and travel restrictions caused by Coronavirus. “This would roughly translate to around 2 percentage points of a loss in output, and as a result, we are shaving down our CY2020 GDP forecast from 4.5 per cent to 2.5 per cent and FY20-21 forecast to 3.5 per cent from 5.2 per cent earlier,” Barclays said.

"Given the 21-day lockdown in India, India's GDP growth is expected to moderate further from our earlier estimate of 5 per cent for FY20. And growth for FY21 remained highly uncertain" said Arun Singh, Chief Economist, Dun & Bradstreet India. According to Dun & Bradstreet's latest Economy Forecast, the probability of countries entering into recession and companies going bankrupt has increased and India is not likely to "remain decoupled" from the global meltdown.

The nationwide lockdown will disproportionately hurt the informal sector. “The kind of devastation that is going to be faced by the bottom 50 percent of the workers in the informal sector is unimaginable,” said Jayati Ghosh, Professor of economics at the Jawaharlal Nehru University.

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, according to Kunal Kundu, India economist at Societe Generale. “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 said that the informal workers 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.

The lockdown has triggered a mass exodus of informal sector workers and daily wagers from major cities and industrial hubs to their native villages. Reverse migration of all those who left their jobs due to the shutdown would take time which could be at least a month, impeding a faster resumption of production activity post the lockdown period.

With the nationwide 21-day curfew abruptly declared, India’s supply chains have suffered severe disruptions, amid widespread confusion about which essential businesses are permitted to operate during the lockdown. Overzealous and ill-informed police are stopping even the goods trucks carrying essential supplies like food, grocery, vegetables, fruits, medicines, fuel etc. Police are also reportedly harassing couriers of ecommerce companies delivering online orders to urban middle class homes.

The blow of the lockdown to people and businesses could have been considerably softened, had it been done with proper planning and strategies.

(V Venkateswara Rao is a retired corporate professional and a freelance writer)