Govt should implement an intelligent lock-down exit strategy, says SBI report

The Government should implement an intelligent lock-down exit strategy, as an elongated lockdown will only prolong irreversible growth collapse, cautioned State Bank of India’s economic research report “Ecowrap”.

When it comes to the time taken by the countries to reach the pre-Covid growth levels, the report opined that the country-wise past recession experience suggests that the recovery in economic activity and the capital formation tends to be slow and it typically takes roughly 5 to 10 years (lost decade) for real economic activity to reach its former peak level.

“We now believe that we should implement an intelligent lock-down exit strategy as the discussion has moved from debate between lives and livelihood to also between lives and lives as an elongated lockdown will only prolong irreversible growth collapse,”said Soumya Kanti Ghosh, Chief Economic Adviser, SBI.

The report assessed that since Covid related lockdown began only in the end of FY20, the decline (in Q4:January-March FY20 GDP growth to a 40-quarter low of 3.1 per cent) suggests full year trend which will become more pronounced in Q1 (April-June) FY21.

In fact, SBI’s research shows that health, safety and quality assurance will significantly determine consumption into the future. Another major change which is being observed is the increased preference for local brands and cutting back discretionary consumption.

“All these will have material impact on consumption in FY21. The picture that emerges is that, the policy action cannot be assumed to have reached some finality.

“So far the Government consumption has been restrained in ‘Atmanirbhar Package’ and it is more about supporting businesses through liquidity,”as per the report. It added that the picture that emerges is that the policy action cannot be assumed to have reached some finality.

Entrenched private final consumption

According to the report, the decline in private final consumption expenditure (PFCE) in the FY20 was clearly visible in both current and constant prices.

“For FY20 as a whole the PFCE dropped by 300 basis points (bps) in the current prices. In the quarterly movements the PFCE registered a drop in Q4 in terms of share in GDP, indicating that truncated lockdown in Q4 had an impact on consumption,” SBI said. One basis points is equal to one-hundredth of a percentage point.

The report emphasised that the investment demand as captured in the gross fixed capital formation (GFCF) has contracted sharply in real terms, dropping by whopping 12.6 per cent which does not augur well for the revival in growth in the near term.

SBI assessed that the only entry that has shown positive growth is the valuables, which have grown in double digits reversing its contraction the previous year. Steep rise in gold prices have fueled investment demand for gold leading to rise in valuables in Q4 (January-March 2020) on quarter-on-quarter basis.

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