It goes from bad to worse. The number of those infected by Covid-19 continues to rise worldwide. With close to 3.5 million cases worldwide and over 2,30,000 deaths, things are getting a bit tough for the world economy. In India, overall numbers are rising. However, considering the nation’s population, there are relatively fewer infections and deaths. The government has extended the nationwide lockdown by another two weeks with some relaxation in areas with no new infections.
Many are pinning hopes on a quick lifting of restrictions on people movement. The news is not so good as it is from the demand standpoint. For any economic growth, there has to be a demand for goods and services. The United States, the world’s biggest consumer market, is all set to witness a slump in demand.
The reason for that is more Americans are saving money in a bank account than before. The last they saved 13 per cent or higher of the GDP was in 1981 when America witnessed runaway inflation. Over 2 trillion dollars are earning zero interest rate in the US. Americans are not spending anymore as they used to. America’s savings rate was 8-9 per cent. It has suddenly shot up. That gives an indicator of the demand slump that lies ahead for consumer goods and services.
In India, your finances are dependent on the government action going forward. India’s economy has to show positive growth. Extended lockdowns can cause significant damage to an economy that relies on high growth.
The government has limited financial firepower as it spends more money than it earns as tax revenue. The direct and indirect taxes that the government depends on for managing the budget are likely to suffer a severe setback over the next few months.
There is bad news on the tax revenue front too. The government has delayed announcing the collection of goods and services tax for April 2020. Media reports suggest a dramatic fall in revenue collection due to the lockdown.
The first quarter of the financial year is likely to witness a significant slump in the government tax revenue as the government has extended deadlines to pay taxes and file returns for small and medium enterprises. Direct taxes are also likely to see delays.
That limits the government’s ability to pay for extra expenses that it may have to incur to tide over the economic crisis created by the pandemic. The government then has to put on hold expansion plans, infrastructure spending, salaries of government employees, and many other things to save money.
If the government chooses not to cut expenditure, it would have to borrow more money from the markets. The other recommendation is to print more money. There is no way the government can go overboard with both the options. It has to strike a balance so that the finances do not go haywire and cause inflation next year.
A significant majority of experts (59 per cent) surveyed by CARE Ratings, a credit rating agency, believe India’s growth to hover around 1-3 per cent in 2020-21. The same survey findings suggest that a third of the experts think that it would take the workforce about three months to get back to normal after the lockdown goes.
Impact on your money
Your fixed deposits are unlikely to see any higher interest rate. Despite worries over the future of government finances, experts in the CARE Ratings survey predict inflation to remain in the 4-5 per cent range over next 12 months.
Industries directly affected by the pandemic — such as travel, transport, hotels, retail and entertainment — are unlikely to stage a sharp rebound. Businesses dependent on rural and urban consumers are likely to be a barometer. Many people felt that people are unlikely to stop buying consumer goods and essentials.
Hindustan Unilever, the biggest consumer company in India, announced a fall in revenue and profit growth. The company blamed it on the lockdown in March 2020. The company announced below-expectation results. The company highlighted in a presentation last week that it was difficult to predict market growth and consumer demand. That should worry stock market pundits for days ahead. We may continue to see a turbulent trend in financial markets.
(The author is editor-in-chief at www.moneyminute.in)