India is reopening, but apart from tipplers who were a little too thrilled about buying their first liquor in 43 days, a partial end to the world's harshest coronavirus lockdown is failing to bring cheer. Anxiety still clouds the outlook amid a lack of meaningful fiscal help for workers and companies.
Starting Monday, Prime Minister Narendra Modi's government relaxed restrictions on the production, sale and transport of goods in districts identified as green and orange. However, virus hot spots designated as red zones remain under strict curbs on any activity deemed non-essential. Since 53% of economic output comes from these densely packed clusters, is it reasonable to declare India as half open? Even that may be an exaggeration.
The metropolises — Mumbai, Delhi, Kolkata, Hyderabad, Pune, Bengaluru and Ahmedabad — are all classified as red. Intercity movement of people remains suspended with no flights or regular train services. Not being able to access demand in large consumption centres will further constrain production even in places where factories can restart. With migrant workers from rural areas scrambling to get home, the supply chain in a mess, and working capital scarce, even a labour-surplus economy like India's will struggle to fill pent-up demand.
India has identified an area twice the size of Luxembourg to host factories leaving China, Bloomberg News reported Monday. Getting ready to take advantage of shifting global supply chains in the post-coronavirus world makes sense as a strategy, but it won't see the country through its more immediate challenge.
Nobody can predict if even the modest normalization of the economy will last. With nearly 43,000 Covid-19 cases and the number doubling every 12 days, the country is still struggling to flatten the curve — even with the lockdown. If loosening leads to new infections in green zones, they could slip into orange. Community outbreaks can quickly turn orange districts into red. That uncertainty itself is enough to keep production down.
Manufacturing is already in dire straits. The plunge in April in the purchasing managers' index to 27.4 came the same day as the tentative resumption of activity. Even that record-low figure probably sugar-coats the actual situation. As Capital Economics says, the index was lifted by suppliers taking longer to deliver, usually seen as an indication of capacity shortages and excess demand. Last month it was most likely because of supply disruptions.
Automakers couldn't sell a single car in April. Construction remains at a standstill. In Mumbai, India's most expensive property market, the government's tax take from stamp duties on documents was less than $600 for the entire month — all from lease agreements. Not a single change in ownership was registered. The financial sector, which was facing a crisis of confidence even before the coronavirus, is imploding. Even if the partial reopening doesn't overwhelm India's limited healthcare capacity, it won't prevent the economy from spiralling out of control.
Then what will? India's $2.7 trillion economy has so far had to satisfy itself with a token $22.6 billion stimulus package when it requires at least 5% of GDP — or $135 billion — in federal government support to firms and families, plus at least half as much in extra spending by state governments at the frontline of battling the pandemic. Time is running out. Any package of spending and loan guarantees the government announces will have to be tweaked and fine-tuned to actually work, but red zones can't stay frozen for even another month. The fiscal bill that the Modi government seems to be trying hard to compress by its color-coded reopening will only balloon.
Disclaimer: This article first appeared on Bloomberg and is published by special syndication arrangement.