Fiscal, monetary steps required to support economy

Mumbai: Both fiscal as well as monetary boosters are needed to help the economy from the twin troubles of output gaps and price spikes due to the coronavirus pandemic which is yet to make a solid medical impact on the country, say economists at SBI Research.

The report also calls upon the Reserve Bank to consider a degree of prudential forbearance in the most affected sector of hotel, aviation, transport, metal, auto components and textiles to help them tide over the crisis.

As of today, three people have lost their lives in the country while over 125 are infected. But the increasing lockdowns across the nation have already left the travel, tourism and hotels industry in the limbo which can only aggravate as more cities join the lockdowns and social distancing measures come into force.

On the demand side, an inoperability analysis of transport, tourism and hotels show significant impact on demand and hence output. "On an aggregate basis, we estimate that the impact of a 5 per cent inoperability shock could be 90 bps on GDP from these three segments along with storage and communication segment, and the same can spread over FY20 and FY21, with a larger impact in FY21," SBI Research said in a report on Tuesday. In 2018, the country received 10.6 million foreign tourists, up 5.2 per cent over 2107 and netted $28.6 billion in foreign exchange earnings from tourism which was up 4.7 per cent in dollar terms. The proposed one-month travel ban will have severe impact on foreign tourist and earnings.

"Based on above numbers, we can estimate that the country will lose around 2-3 million tourists in 2020 that will lead to loss of $5-7 billion foreign exchange earnings. We also believe that domestic train and air traffic will also get hit from this." On an average 25 million persons uses airplanes and 300 million uses trains monthly for travelling. A 10 per cent reduction will lead to loss of revenue of Rs 3,500 crore on a monthly basis. Since China is the source of critical inputs for many sectors, supply shocks are akin to higher price of inputs which in turn affects price of all commodities up the supply-chain.

"The impact of supply disruptions in terms of cost-price increase in output due to increase in prices of value-added inputs or assumed price escalation of 5 per cent is maximum for chemicals, electrical and non-electrical goods, metals, textiles and transport equipment which may see up to 7-8 per cent spike in prices," says the report.

On an aggregate basis, we estimate that the impact of a 5 per cent inoperability shock could be 90 bps on GDP from these three segments along with storage and communication segment, and the same can spread over FY20 and FY21, with a larger impact in FY21

– SBI Research said