Covid-19 impact progressing from supply shock to demand shock: BofA Securities

The economic impact of Covid 19 outbreak is progressing from a supply shock, to a demand shock as incomes and jobs shrink according to a survey by BofA Securities and it expects demand boosting measures from the government.

A survey of over 1000 persons by BofA Securities shows that COVID- 19 outbreak is fast progressing from a supply shock, to prevent spread, to a demand shock, on falling incomes and job losses. Only 16% reported that they saw no change in income and employment since lockdown. While 19% have lost their jobs.

This, in turn, is leading to postponement of discretionary consumption demand: jewelary by 53.5%, FMCGs by 47%, two wheelers by 40%, cars by 37.6% and painting homes by 30%. 33.7% respondents are also delaying house purchases.

A survey by paisabazar.com showed that in terms of Impact on Income – Over 86% of the Self-Employed and business segment reported a loss in income. More than a fourth said their income has come to nil. 56% of salary earners said their salary has been impacted due to the pandemic and the resultant restrictions, while 12% said they have lost their job.

“Our proprietary survey on the economy supports our call of demand-side measures by the government” said Indranil Sengupta, chief India economist at BofA Securities in a report.

Demand-side measures should include lending rate cuts, tax subsidies for SMEs and real estate; oil tax cuts, waiver of interest on interest during the bank loan moratorium, lower income tax cuts offset by a COVID 19 cess on higher income. Other steps could be re-capitalizing PSBs through non-fiscal levers like additional recapitalisation bonds , or, RBI revaluation reserves; and issuing PSU bonds to fund infrastructure, the report said.

Although the worst may be over, the BofA India Activity Indicator also points to further GDP contraction. The firm expects 7.5% GDP contraction in FY21 assuming that the current restrictions are removed by November with the re-start taking till mid-January. “In response, we continue to expect the RBI to contain yields through open market operations (OMO), along with banks’ held to maturity (HTM) limit hike, to pull down lending rates 20bps by March( one basis point is 0.01 %). The newly formed RBI MPC will likely cut rates by 75bps by March.

Courtesy: Economic Times