COVID 19 Could Adversely Affect Output And Prices: SBI Ecowrap

New Delhi: With the rapid outbreak of coronavirus (COVID 19) in India, SBI Ecowrap analysed that on the demand side, inoperability analysis for three sectors -- transport, tourism and hotels show significant impact on demand and hence output.

“On an aggregate basis, we estimate that the impact of a five per cent inoperability shock could be 90 basis point on GDP from trade, hotel and transport and transport, storage and communication segment that could be spread over FY20 and FY21, with a larger impact in FY21,” the report states.

Though India has already taken plethora of steps to prevent the spread of Coronavirus, all eyes are now on the rise in active cases in the current week and next, as global experience shows the jump in second week of active cases is around seven times compared to first week.

It said on the supply side China is an important source of critical inputs for many sectors. Supply shock is akin to higher price of inputs, which in turn affects the price of all the commodities up the supply chain. The impact of supply perturbations in the system in terms of cost-price increase in output due to increase in prices of value-added input brought about by shutdown in China or assumed price escalation of five per cent is maximum for chemical and chemical products, electrical and non-electrical goods, metals and metal products, textiles and transport equipment (7-8 per cent increase in prices).

A simultaneous demand and supply shock to the economy will also have implications for the banking sector. The demand side shock is expected to lead to an output loss of 1.2 per cent in banking and insurance combined.

“We believe that in the current COVID-19 outbreak a combination of monetary and fiscal policy could be the best option. In particular, on the monetary side, the first best option is maintaining a proactive liquidity regime and facilitating stability in financial markets through unconventional measures. The monetary stance may be eased temporarily through a rate cut by RBI to accommodate the possible surge in liquidity demand and shock-related price increases. An adequate supply of cash notes to banks needs to be ensured that can meet a sudden increase in the demand for liquidity. RBI may also need to consider a degree of prudential forbearance in specific sectors like hotel, aviation, transport, metal, auto components and textiles. Furthermore, given the risk of using currency notes in times of pandemic, incentivizing digital payments further could be an effective solution in the current circumstances,” the report analyses.

It further said a rate cut in current situation with no fiscal measures will lead to asset bubble and possibly no correction in demand. Concomitantly, there is need to revive consumer demand.