Assuming that the lockdown will continue till mid-May, the potential economic loss in India would vary by sector, with current-quarter output drops that are large in sectors such as aviation and lower in sectors such as IT-enabled services and pharmaceuticals.

This could put 32 million livelihoods at risk and swell NPLs by seven percentage points. The cost of stabilising and protecting households, companies, and lenders could exceed 10 lakh crore Indian rupees (exceeding $130 billion), or more than 5 per cent of GDP.

Current-quarter consumption could drop by more than 30 per cent in discretionary categories, such as clothing and furnishings, and by up to 10 per cent in areas such as food and utilities. Strained debt- service-coverage ratios would be anticipated in the travel, transport, and logistics; textiles; power; and hotel and entertainment sectors.

There could be solvency risk within the Indian financial system, as almost 25 per cent of MSME and small- and medium-size-enterprise (SME) loans could slip into default, compared with 6 per cent in the corporate sector (although the rate could be much higher in aviation, textiles, power, and construction) and 3 per cent in the retail segment (mainly in personal loans for self-employed workers and small businesses). Liquidity risk would also need urgent attention as payments begin freezing in the corporate and SME supply chains. Attention will need to be given to the liquidity needs of banks and nonbanks with stretched liquidity-coverage ratios to ensure depositor confidence.

Given the magnitude of potential unemployment, business failure, and financial-system risk, a comprehensive package of fiscal and monetary interventions may need to be planned. This might be triggered progressively as situations evolve and as actions are taken to move to the more favourable through effective public-health measures and graded lockdowns.

Apart from the relief packages announced, additional measures could be considered to the tune of 10 lakh crore Indian rupees, or more than 5 per cent of GDP in fiscal year 2021. All the estimated requirements may not necessarily be reflected in the fiscal deficit of the current year—for example, some support may be structured as contingent liabilities that only get reflected when they devolve. However, a package of this order of magnitude may be essential in supporting those dealing with the possible steep declines in aggregate demand and in protecting the financial system from the possible solvency and liquidity risks arising from stressed companies

For bankruptcy protection and liquidity support, MSMEs could receive liquidity lines from their banks, refinanced by the Reserve Bank of India and a loan program for first-time borrowers could be administered through SIDBI.

Substantial credit backstops from the government could be instituted for likely new NPLs. Timely payments to MSMEs by large companies and governments could be encouraged by promoting bill discounting on existing platforms.

Actions would need to be implemented locally, with different approaches for districts based on their characteristics (such as rural versus urban, industrial versus service oriented, strong versus weak healthcare infrastructure, and heavily infected versus not infected yet).

Resuming lockdown will mean that there would be a mass movement across the country as workers would return to their work locations. Amid this, it will be very difficult for companies to monitor workers on a daily basis to ensure that their site is virus-free.

Overall, devising a credible, systemwide, stabilisation package would benefit from being executed in a timely fashion so it can influence the pace of recovery and help avoid severe damage to livelihoods, the economy, the financial sector, and society. Many global economies are also facing these issues and having to put in place their own stabilization packages, with similar intent.

(Source: McKinsey)