May 8, 2021
The lockdown has reinforced the already demand constrained economy. Straight away two issues have cropped up. One that people in lockdown cannot go for work and hence cannot expect wages. Still there are many establishment which even though have shut down their business but can not afford to lose the workers when lockdown is lifted. Therefore these workers are likely to paid by their owners or employers. But India has still untied workers who get wages only when they go for work. Generally when the economy was already slumping i.e growth was collapsing the untied workers were not paid enough or they could not be picked up. But now when the compulsory lockdown is made effective what these workers would do is the larger question. Their loss in income can hardly be compensated but the government has come up with some economic package whereby it would like to transfer some limited amount in their accounts and committed to provide free ration for three month. It is expected that lockdown shall continue for a month of so. Coming back to supply side. Lockdown has resulted in shutdown of nonessential business which means neither the supply is in demand nor production is to continue. But the companies cannot be guaranteed of their profit income as there is no way to do that. What companies are being given is that moratorium of three months in the repayment of loan. Obviously these are those firms which have taken loan and by chance who take loan maintain regular payroll i.e these are the registered firms. They are expected to pay the wages to their workers even in lock down. The RBI has clearly made out that loss in demand would be much higher in the loss of supply the inflation is going to fall from the previous value and hence arbitrarily cut the repo rate by 75 bps so that the burden of repayment could slightly be reduced in difficult times. It is indirect way of creating some space for payment of wages. RBI has reduced the CRR by 100 bps to create liquidity. RBI as dollars were going back to safe haven has already open the swap line that there will be no scarcity of dollars in the market. There is one more help from the RBI is that off shore some derivatives are traded where by interest rate is paid on dollars being traded or currency futures are traded but these are not delivered called non deliverable futures. Means there is one more source of getting some dollars. Since there is lockdown now the focus is shifted to saving the lives of people. Many corporates and associations are coming forward to lend financial help to the affected. As the lockdown would be lifted how fast the economy gets back to normal and how the workers would start getting the work are the things to be watched in the future. Meanwhile GDP is likely to fall considerably.