India’s fiscal response will be very calibrated compared with global peers: Barclays Bank

What is your own assessment of the conversations you have been having with your clients? What is the kind of data your research team has been sharing with you? How badly hit is it and now that we have gradually opened up, what challenges lie ahead?
This is an unusual crisis and it has been severe. It has been completely a new territory for many of us. We do not know how the pandemic will evolve and how it will end. We have very less view on how people will respond and what policy responses are likely to happen in order to reconstruct our lives. So to your question about what we have been hearing from our clients and customers; I think the impact has been severe not in small measure because the lockdown in India has been equally severe compared to some of the advanced economies. And it is always the case that a crisis exacerbates over known vulnerability.

I think one of the things I must point out is that even before we entered the pandemic situation, our economy was weakening. The financial system also was trying to find its feet. So several countries have had their own responses. I think for India, it has become particularly idiosyncratic because the hardships are higher and the health capacity is weaker. Our own ability to enforce restrictions is circumspect. So this is on top of people’s mind that the crisis has been weakening their growth profile much more than anticipated.

There have been concerns in the last couple of days which have gripped the market and a bit of it is reflected in today’s price action as well with the way Bank Nifty is leading the decline in the market right now due to fears of fresh NPA creation. What are your thoughts in this direction and what are some of your own observations after talking to some of your clients?
First of all, the impact is multi-sectoral. As you point out, there are some sectors for which it will be a multi-year recovery path if at all and for some, hopefully as we get into Q2 of this year, we could see them come to their original growth trajectory. If you look at power generation, despite the onset of summer, it has taken a hit. If you look at railway freight, that has come down. If you look at fuel consumption, that is badly hit. If you look at it and you talk about industrial trade, much of where the economy is Maharashtra, Delhi, Tamil Nadu, Punjab, I think they have seen major economic losses.

Even if you look at states like Kerala, Karnataka, Haryana where they have seen a faster recovery cycle, my sense is that while there the pace of recovery could be contingent on some pent up demand, our own sense is that there will be precautionary increase in savings, reduction in discretionary consumption and specifically on sectors that you mentioned like travel, recreational services and aviation industry. So I think the viewpoint that this is a difficult road of recovery, there are surely signs of that.

Talking of recovery the economists are engaging in discussions on what would be the nature of the recovery? Share with us some of the intelligence or inputs you may be gathering from your colleagues overseas on how corporates and policymakers are assessing things on how things could be three to four quarters far out?
We should put the response in a broad bucket. First and foremost, there is a health and safety response that the government and both public and private sector companies will be engaged in. Then there is the response in terms of social insurance. Several markets have talked about something in terms of a payout not necessarily income dependent and we could talk about a few markets where we have seen this happen. And the third bucket is in terms of stimulus. So the health response, the social insurance response and then the stimulus are three things.

If you look at Asia Pacific, if I could use that as a context in terms of how the other markets are responding to it, I think there are both monetary as well as fiscal responses. I think none of the central banks in the region have been sitting idle. In India, there have been rate cuts across the board, in Australia and New Zealand it is possibly the case that they have reached the lower bound as the rates are already low; so their response has been largely in terms of the fiscal. And on the fiscal side, the governments have also been scaling up. So if you look at Australia, they have announced something to the tune of 11% of their GDP, New Zealand around 4-5%, Korea stimulus is similar to ours thus far, which is about 1-1.5%.

But the key learning or observation is that countries which have got low reliance on foreign inflows, where there is high foreign reserves and low inflation, can think of the template that the large economies used for the great financial crisis of 2008 in terms of QE. But markets like ours where that is not necessarily established, I think our response will therefore be very calibrated. That is what we have been observing.