Covid-19 Pandemic’s Lasting Cost On Indian Economy Smaller Than Expected: Neelkanth Mishra

“Disastrous” in terms of inequality but best possible outcome for the economy: Neelkanth Mishra’s views on the pandemic’s impact. 

Customers shop during the festival of Dhanteras at night in Atta Market in Noida, Uttar Pradesh. (Photographer: Prashanth Vishwanthan/Bloomberg)
Customers shop during the festival of Dhanteras at night in Atta Market in Noida, Uttar Pradesh. (Photographer: Prashanth Vishwanthan/Bloomberg)

The Covid-19 pandemic’s lasting impact on the Indian economy has turned out to be far lower than earlier expected as corporate India managed to shed costs and improve their balance sheets, according to Neelkanth Mishra.

An income analysis by Credit Suisse done earlier in the year showed an estimated Rs 20 trillion loss to the Indian economy. However, 75% of this was a loss which didn’t have a lasting impact. “We call it ‘water under the bridge’. What people didn't earn, they didn’t consume,” the India strategist at the financial services and research company told BloombergQuint’s Ira Dugal in an interview. “So the lasting implications were very low.”

Since then, the estimated loss has reduced to Rs 15 trillion, making the lasting impact even lower. Of the Rs 15 trillion, about Rs 8 trillion was borne by the government in terms of increased indebtedness. About Rs 4.5 trillion was a loss in personal income or wages but it is the poor who are left with a worse balancesheet. The remaining Rs 2 trillion or so is the loss of retained earnings and capital for companies, he said.

The drastic cost-cutting measures adopted by the large Indian firms pushed the pain of the lockdown to the bottom 30-40% of the enterprises and individuals, he said.

From an inequality perspective that’s a disastrous outcome but from an economic momentum perspective that’s actually the best possible outcome.
Neelkanth Mishra, India Equity Strategist, Credit Suisse

The top 10-20% of India’s companies, households and individuals, which spend the most, came out of the lockdown with a better balance sheet because their consumption was severely impacted while their income was secure. On the other hand, the bottom 50% saw a deteriorated balance sheet because their income was impacted while they still had to maintain their basic consumption, Mishra explained.

The incremental savings of the top 10-20% are likely to drive investment, consumption and hence growth in the coming months, according to him. “That is the economic stimulus that has come through and therefore the lasting damage to the economy is much lower.”

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What Stage Is The Economy At?

After nearly a 24% contraction in the first quarter of financial year 2020-21, India’s economy contracted 7.5% in the second quarter. According to a report by Credit Suisse, the consensus forecasts of GDP growth for FY22 over FY20 stopped falling after October 2020 (currently at -1%). Its analysts expect these estimates to be revised upwards.

The recovery from the pandemic is mostly done, said Mishra, adding that there are several elements which could continue to add to momentum.

First, the restocking process will continue for a bit longer after a period of destocking which was underway even before the Covid crisis hit. In addition financial conditions remain easy and a rebound in government’s tax revenues will likely add to spending.

India’s fiscal policy, by accident, has been quite pro-cyclical....part of this was because tax collections were weak and part of it was because there were a lot of government functions you couldn’t do from home. As both have started to normalise, in the second half of the fiscal year, numbers are going to improve.
Neelkanth Mishra, India Equity Strategist, Credit Suisse

A normalisation of exports by early 2021 will also help stretch the near-term momentum for longer than what markets have currently anchored, Mishra said.

Upgrades To Medium Term Outlook

Contrary to a growing belief that the scars of the pandemic will bring down India’s medium term growth momentum, Mishra believes that there could be upside to medium-term growth.

The recently announced production-linked incentive scheme for 10 sectors will add significantly to this growth, said Mishra. The market strategist expects the scheme to add 1.7% to India’s GDP by FY27 and the momentum will start coming in by FY22 itself, he said. This could mean a 0.3-0.5% addition to annual growth.

It signals a turn in India’s industrial policy which I have not seen ever. The government is paying companies to grow. If you cross a certain growth threshold, I will pay you. Second is the government is choosing champions...And more importantly if there are 20 companies that apply, I will pick the ten biggest...The excitement I see in the industry is transformative.
Neelkanth Mishra, India Equity Strategist, Credit Suisse

While the upside to some sectors like telecom hardware remains uncertain, others such as automobiles, textiles, food processing, mobile and medical equipment are already seeing a clear momentum, according to Mishra.

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