Economy On The Ventilator

The government is faced with the twin challenges of keeping companies solvent during the lockdown and reviving consumer demand once it’s over

- Samar Srivastava & Salil Panchal

Under usual circumstances, Maruti Suzuki India’s monthly auto sales numbers released on April 1 could have been mistaken as an April Fools’ joke. Sales were down by 47 percent over a year ago. Rival Volkswagen Passenger Cars India shipped a mere 131 cars, to register a 95 percent decline. Compare this to the last broad-based downturn in sales and Maruti had recorded its worst performance of a 20 percent decline in November 2008.

The recent decline underscores how badly demand and supply across the country have been hit because of the halt in economic activity due to the spread of coronavirus. The 21-day nationwide lockdown was announced only towards the end of the month, on March 25. “This is a very fickle situation and I estimate that 55 percent of the economy has shut down,” says Pronab Sen, former chief statistician of India.

As large companies like Maruti see demand falter, their suppliers who work on lower margins and tight working capital cycles may have to declare bankruptcy. While concrete numbers are awaited, anecdotal data points to a large-scale dislocation in economic activity. Ecommerce companies are unable to ship orders across states, and consumer goods makers are struggling with shortages of packaging material and workers. It’s anybody’s guess how tepid consumer spending will be once the lockdown is lifted. Lenders fear that the large growth in retail and personal loans over the last five years is likely to result in a fresh problem of bad loans for banks and non-banking financial companies.