Economic Consequence Of Covid-19
Source: The Indian Express
Syllabus: GS 3- Issues related to Indian Economy
Context: The Covid crisis has remained serious for the health situation as well as the economy. Almost all the countries are living under the lockdown. The next important step will be of exit plans from lockdown in which the task of reviving economy will be of paramount importance.
Problems in the Indian economy before CoVID-19:
- From 2014, the banking sector and infrastructure firms are under financial stress defined in terms of Twin Balance Sheet (TBS) challenge.
- By 2019, it raised the number of stressed balance sheets to four including NBFC and real estate sectors.
Effects of Covid Lockdown on economy:
- Unsold Goods: The goods of firms of all sizes and sectors remained unsold.
- No earning: As many families remains unemployed as firms are closed.
- Low Recovery of Loans: The Financial institutions are unable to collect their loans.
- Reduction in tax revenues: The government tax revenue has reduced as most sectors remains closed.
As per Reports, around 1/3rd of industrial and service firms have applied for moratoria on their bank loans and if only a quarter of these deferred loans eventually go bad, then the non-performing assets (NPAs) would increase by Rs 5 lakh crore.
Difference in government situation in Global Financial Crisis of 2008-09 and economic crisis due to Corona:
- Global Financial Crisis of 2008-09: The government had a relatively strong balance sheet: Deficits and the consolidated debt-GDP ratio were low. So, the government could recapitalize the PSU banks because of such fiscal space.
- Corona crisis: The Central and state government deficits and debts will increase dramatically as revenues will be reduced and expenditures will increase. As a result, the government will put higher taxes and more arrears on the corporate and household sectors.
How to minimize losses for sectors during Corona crisis?
- From perspective of Firms:
- Preventing them from bankruptcies: The government might need to create a guarantee fund to support lending to help firms.
- To resolve defaults: Quick resolution of default by firms is important as stressed firm condition will worsen over time. They have poor cash flows and can’t take loans from banks. So, they don’t have enough money to fund their operations and with time the firms’ market value deteriorates.
- From perspective of Banks:
- Recovery rate: It is the degree to which the banks can recover on NPA loans and the only way to maximize the recovery rate is to sort out the bad loans speedily.
- Urgent Actions: As no sector is in a strong position to rescue the banks, the costs cannot be spread, they must be reduced and any delays in handling NPAs will erode the value of assets.
A new decisive and quick approach is needed for immediate addressing of problems created by the crisis.