Sustaining Lockdown 3.0

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Surviving the economic emergency

IN what could be termed as “once in a century” systemic shock, the second wave of Covid19 in the Indian sub-continent is again unleashing devastation both on the health as well as on the economic front. With mutated behaviour, the rapid rise in deadly infections is ravaging livelihoods, shrinking incomes, disrupting supply chains, impacting labor supply and severely damaging the consumer and investment sentiment. Unlike other Indian states which are going through a second Covid19 lockdown, J&K is witnessing an unaffordable third consecutive lockdown since 2019. As a result the intensity of economic strangulation experienced by households, individuals and businesses  in this region is far worse than what is being felt in mainland India.

Life vs Livelihood

There has been divided opinions in the region when it comes to the decision of imposing stringent lock-downs for containing the spread of Covid19. Those in favor say that its the only way to save lives and avoid overwhelming the UT’s modest healthcare system. Those against it argue that devastating livelihoods will have more socioeconomic repercussions compared to consciously planned partial or smart lock-downs. This is not for the first time since last year that this dichotomous debate has taken place. Govt.’s around the world have been struggling to trade off between closing the economy and containing the spread of virus. However, a recent research by OECD (Organization for Economic Co-operation and Development) on data from 45 countries suggests that the choice is not binary at all. In-fact data supports that rapidly containing the pandemic sooner may well lessen the economic impact drastically. In the short run (may be a quarter or less) the economy might suffer but the longer time frame of around 12 months show that economies which prioritized containment of virus were better placed in terms of recovery, creating livelihood and economic opportunities for its people. However, the rider to it is that the lockdown for the sake of it without amping up the vaccination program and boosting the healthcare systems is a costly mistake. Lockdown is an opportunity that needs to be leveraged to make sure the spread of infection gets halted, and in case it reoccurs people should be well prepared to handle it through vaccination. That seems to be the only available option to save lives and livelihoods both.

Before embarking on the economic fallout of this third consecutive lockdown on the regional economy and the possible approach that can help in mitigating the economic pain, it is essential to briefly highlight some sanguine characteristics of the current situation. Firstly, unlike last year when there was no breathing gap between the unprecedented August 2019 lockdown and the 2020 pandemic lockdown, J&K this time is entering the lockdown after a much needed 8-9 months of working season. Although these past few months in terms of economic activity have been far below the normal capacity, however, the depleted household savings and business risk appetite got a much needed replenishment. This paltry yet timely replenishment is expected to prove handy in surviving the unfolding tide. Secondly, unlike last year when a complete halt in the intrastate and interstate movement of goods created supply side bottlenecks, this time around the Govt. has been extremely cautious in keeping the macro flow of goods least disturbed.  Thirdly, while the virus was totally novel and there was no available remedy to fight it out last year, this time there is plenty of hindsight experience and importantly a range of effective vaccines available in the markets. However, despite these hopeful characteristics, the expected economic fallout on account of the unfolding lockdown is going to test the very limits of Kashmir’s widely debated resilience this time.

Economic Impact

Among four main engines of economic output i.e. Personal Consumption, Business Investment, Govt. Spending and Net exports, J&K’s economy is primarily driven by consumption and Govt. Spending with a mild support from investment and exports. These two components create a major portion of our economic output, household incomes and employment. Being a consumption driven economy, J&K, besides consuming domestic production, also imports goods worth Rs. 60,000 crore (approx) annually. Consumption supports trading sector which is the largest employment provider in J&K’s economy after agriculture. It provides livelihood to over 10 lakh people which is almost a quarter of J&K’s total workforce. The impact of lockdown is going to hit trading activities very negatively resulting in immediate downsizing of the workforce. This will eventually lead to job and income losses instantly.

Agriculture sector which generates most of its income through export of cash rich produce like Apples, walnuts, saffron etc too shall be feeling the pain of market slowdown in mainland India. This demand slump is expected to reduce the anticipated cash inflows in this essential conduit of the regional economy. Being the main tributary of the rural revenue, the stunted agrarian income will have immediate repercussion on the retail segment of regional urban centers. Another sector which is closely linked to trading is the transport sector. From passenger vehicle operators to logistical entities facilitating movement of goods in the economy, this sector supports over 3 Lakh people in J&K. The ongoing imposition of the lockdown is going to throw some serious challenges at the livelihood of these people. Another 3 lakh people associated with handicrafts might have to witness tied up capital in unsold inventories on account of global slowdown and demand shock in mainland India. Since these artisans produce mostly luxury items like shawls, carpets, walnut wood and paper machie items, these items are the first ones to get out of the consumers shopping basket during times of slowdown.

Manufacturing sector which creates employment for over 1.5 lakh people in the region is suffering from a more toxic ailment besides demand shock. The nature of last years financial package which surrounded primarily around bank credit & moratorium has bloated their balance-sheets with huge amounts of debt. This is resulting in a very excruciating fixed monthly obligation of debt servicing and loan repayments. The shock on their cash inflows  on account of the lockdown is going to throw all their cost equations out of the window. This might result in widespread layoffs, bank defaults and even foreclosures.

The negative sentiment surrounding the pandemic has also halted most of the business investment decisions. Instead of business expansion in terms of machines, brick & mortar establishments and workforce, people tend to retrace in all aspects of spending. Take for example the labour and material intensive construction sector of J&K which supports Lakhs of people in the economy. The nature of lock-downs is such that it sets in a very negative sentiment and as a result all the construction projects in pipeline take a back seat. This leads to further contraction in economic output, job creation and overall demand in the economy.

Crisis of any sort do not impact businesses only. Importantly it diminishes the spending sentiment of even those which have stable salaries. People tend to postpone their buying decisions which ends up spiraling down the demand even further. This demand shock sends tremors to all layers of the economy ranging from big purchases like cars, houses and tractors to non-durable sales like apparel, consumer goods and even services like healthcare, personal care and entertainment etc.

As per the last CMIE (Centre for monitoring Indian Economy) survey J&K’s unemployment rate was 11.4% for the month of April 2021. With lockdown rolling out in the month of May 2021, this number is going to go deep south for sure. Job losses result in income loss which in turn slumps the demand in the economy further. A very lethal recipe.

Sustaining the shock

The magnitude of the ongoing crisis is something which is global and happens once in a century. As such the ability to survive such a colossal shock is beyond individuals capacity. This is where the Govt., both at the UT as well as the central level, needs to step up and rescue the people from this health and economic emergency. Since the other three engines of economy i.e. consumption, investments and net exports are down and out, its the moral and constitutional duty of the Govt. to amplify its spending program and lubricate the economy till the time other constituents come out of bad weather.  Govt alone has the capacity as well as reach to afford this scale of expenditure. Yes, Govt. revenue is shrinking but saving the present by borrowing from the markets and spreading the repayment in a staggered manner in coming years is the most viable option right now. Govt. is the custodian of all our collective assets. These assets are worthy enough to create income in coming times which can sustain such expenditures. Individuals or small social organizations cant.

There is a need for a smart lockdown rather than a complete lockdown after the infections are plateaued. Importantly, the administration has to come up with an exhaustive vaccination program on a war footing. That alone will make this lockdown worth bearing. Last one year has plenty of lessons which has taught us that lockdown alone can be counterproductive. Besides vaccination, it is essential that Interstate and Intra-UT supply chains are allowed to operate without much disruption.

Financial support:

Almost 2.5 lakh households in J&K fall below poverty line. Last few years of constant lockdown might have pushed even more people into abject poverty. Had it not been for the numerous social organizations which are doing a commendable job in supporting the needy, the condition of the people at the bottom of the economic ladder would have been quite grim. The first and immediate response from the Govt. should therefore be to announce a three months sustenance allowance for these vulnerable sections of society. Even Rs. 6000 per household for three months will incur a paltry cost of only Rs. 150 crore to the state exchequer. That’s not even 0.14% of the states expenditure size. This expenditure will not only provide a safety net for the destitute but will also create instant demand in the economy due to their high marginal propensity to consume.

The Govt. needs to announce an immediate business support package. Businesses in J&K can no longer be rescued with meager support like credit facilities, interest remissions and moratoriums. That phase is long gone. Its not a liquidity issue any longer. They are facing insolvency now. The inflexible debt contracts with banks on the other hand is a total mismatch with the volatile income shocks. Govt will have to come up with a major major business revival response. The scale of expenditure might demand Govt approaching the union Govt for funds as well as issuing long term bonds in the markets. Taxes which the Govt. survives on will only come if businesses survive, people find employment and economy survives the shock of the century. Therefore rescuing businesses is a win win situation for both the Govt as well as the people.

Another effective route of pushing low cost liquidity in the system to spur demand will be to pay three months salaries & pensions of the Govt. Employees in advance. Monthly salary outlay towards Govt. Employees working for the GoJK is around Rs. 3200 to 3300 crore. Paying three months in advance will infuse a liquidity of around Rs. 10,000 crore in the system instantly. The only cost that the Govt. will have to bear will be nominal interest amount charged on arranging the funds in advance from short term market borrowings. But the amount of demand that it will create in the other layers of the economy will soften the pain of demand shock substantially.

For rest of the world the health and economic emergency witnessed is something which occurs once in a century. For J&K, the added prequel of August 2019 made the twin pandemic lock downs even more excruciating and absolutely unaffordable. Sustaining this shock without a magnanimous Govt. support is therefore beyond imagination. The Govt, both UT as well as the Union, therefore needs to come up with an immediate economic response which caters to the economically vulnerable sections, impoverished households and dying businesses of Jammu and Kashmir.

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Ejaz Ayoub

Ejaz Ayoub has been working in the BFSI industry in the field of Financial Risk Management, Strategy and Foreign Exchange. He can be reached at:[email protected]

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