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India’s lockdown: Bold decision given potential healthcare risks, but economic costs uncertain
* Bold decision, unlike many Western powers: In the backdrop of weak healthcare infrastructure, high population density and low education levels, all eyes were on how India would handle the Covid-19 pandemic. By and large, the Indian govt has acted earlier than other govts (with respect to stage of case count of the disease) in terms of travel restrictions and lockdowns. At a time when many Western govts have been dilly dallying on a full lockdown (weighing the trade-off between healthcare benefits and economic costs of such lockdowns), the Indian govt’s stance is clear and unambiguous - better prevent a blow-up of the disease than risk overwhelming the weak healthcare infra in the country. The preparatory phase of a Sunday lockdown, and various state govts extending restrictions have given decent prep time for the population. This increases the likelihood of the effectiveness the 21-day lockdown starting 25th March 12AM - a long enough period from the point of view of the spread of the virus. From a market perspective - we thus believe that the actual spread of the disease in India will become less relevant going forward (unless the numbers really blow up significantly, say beyond 50-60k), with the focus now shifting to the extent of disruption caused by the 21-day lockdown.
* Nothing much to cushion the economic impact: Unlike other countries, the Indian govt has so far been largely silent on the economic impact from the lockdown, leave alone any measures to cushion the hit. Clearly, for the first time in living memory, many industries/SMEs will be running on zero revenues for close to a month. Even the ‘opening up’ after the lockdown is likely to be measured (lest a ‘second wave’ hits back). This means that there will be a permanent impact of this 21-day shutdown even into the longer-term numbers (that of funding the fixed costs when revenues are nil). Daily wage earners in cities could be badly hit (they cannot think of going back to their home towns either - with all public transport grounded). The share of unorganized sector is high, and this segment was still emerging from the back-to-back shocks of demonetization and GST. The shutdown could push them to the brink. Some state govts have offered free food supplies and cash transfers - but there is no nationwide effort announced...yet. It is possible that the disease containment is the top priority currently and some economic packages could come out in the coming days. Here, the already stretched fiscal deficit situation is a constraint (we suspect the FRBM escape clause could be invoked even in FY21). We would expect measures like MSME soft loans, loan restructuring, cash transfers, etc. In addition, at the moment - given the quick decisions on shutting down public transport - it is unclear if we should be worried about the disease spreading from urban areas to the rural areas too.
* Market recovery depends on disease peak in the West: For sure, many Indian stocks
have fallen to attractive levels (our recent note). However, we retain the view that the global
capital market sentiment would hinge on sustained drop in new daily case counts in the
US and Europe.
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