What will hamper the growth of states’ GDP? Crisil explains

‘States which are more agriculture-led are likely to be marginally better off’

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The states which have a heavy presence of Covid-19 and at the same time have their debt levels high are Andhra Pradesh, Rajasthan and Uttar Pradesh.
Liquor is an inelastic source of revenue and would have given you revenue even during a slowdown, says chief economist D K Joshi.

Crisil shared some interesting data that in lockdown 3.0, there were eight states in which the share of the districts that could be classified in the red zone were higher than the national average. Now these eight states contribute 60% to India’s GDP. So obviously since the number of red zones are higher, the lockdown is going to be a bit longer in these states. What sort of an impact do you anticipate?
We are in the process of revising our estimates. I think what this study did was it pointed out where the problem resided and as far as the lockdowns are concerned, it is a pretty complicated phenomenon to analyse from the economy's GDP perspective. Number one, they are non-linear. If you have a lockdown for let us say two months, it is much more than two times the lockdown for a month. Similarly, even if you have parts of the lockdown being relaxed, the supply chain still remains disturbed. So the impact on the output may not be appropriately captured by the lockdown that you see by dividing the zones. Having said that, the impact on GDP is going to be quite significant. As I said, we are in the process of working out the national level GDP impact and we will be releasing it in the evening today.

Which states do you think are most vulnerable to this lockdown whose finances were anyway deteriorating and now this lockdown has just sort of exacerbated this same? Whose ratings perhaps as well could come under question.

The states which have a heavy presence of Covid-19 and at the same time have their debt levels high are Andhra Pradesh, Rajasthan and Uttar Pradesh. Some states are fiscally vulnerable but they have Covid-19 under control. From the point of view of GDP or an output overall, I think three states are very central. One is Maharashtra because the share of industry and services in this state is very high. Second is Gujarat and the third is Tamil Nadu. I think an interesting aspect of the implications of Covid across states is that agriculture is not going to be impacted to that extent as the non-agriculture is going to be. This is very different from the past recessions that we saw 50 to 60 years back where agriculture used to lead. So states which are more agriculture-led are likely to be somewhat marginally better off.

I think the other hit to state finances comes from liquor and stamp duties which would be very weak right now. Liquor is an inelastic source of revenue. It would have given you revenue even during a slowdown. So the initial containment was targeting liquor also and that had a material impact on the state's finances. At least, now I think that is getting relaxed. So it is a complicated mix of things. Some states are more vulnerable from the point of view of labour because they have more share of informal labour in the overall labour force; some are more fiscally vulnerable and some are vulnerable from the point of view of output. So it is not a uniform story across the states.

Neelkanth Mishra of Credit Suisse said that it is pretty clear now that Covid is not going away in a hurry and people probably will have to live with it and every industry and every state will have to find an optimal level of utilisation at which they can maintain safe distance as well as do the work that they have. Do you think this back and forth may take some time before we actually find out that optimum level?
Absolutely. I think the shape of reaction or the contours of reaction from different states and different entities will depend on how the virus plays out and as we know, it is not playing out in a similar manner across all states. So the containment strategy and the opening up strategy will vary from state to state and I think in states like Tamil Nadu, Maharashtra and Gujarat, getting the virus under control will be the primary objective because it is increasing at a very fast pace. For other states where things are a little bit under control, they can start opening up in a different manner. So it is going to be a completely different story that plays out across different states.

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Everybody is saying that April was a month where in the first 20 days, there was absolutely no activity and then things gradually started. Across industries, 30-50% is the sort of pre-Covid level numbers that one is getting; whether you talk about production or demand or some activity going up. Do you think getting back to full normalcy could take a lot of time?
Absolutely. I think it will take a lot of time not only from the perspective of virus control but even for people to start getting back to normal. I think there will be a lot of hesitancy to do a lot of things like going out and seeing movies or indulging in sports activity. So clearly there are some parts of the economy which will be deeply influenced by the behavior changes. I think it does not look like we will get back to normal any time soon. I mean at least right now, we are in a state where the Covid curve is yet to flatten out; so it is an uncertain zone.

I think this uncertainty between containment and opening up will continue till the time we have a vaccine, which is clearly some time away. But I think what is also being realised is that since the government does not have enough fiscal muscle to offset the impact of lockdowns, some opening up is inevitable and we might see areas like construction open up where the labour intensity is extremely high. So it will be a gradual process. I do not see 100% normalcy at least in one year’s time. I think it is clearly not visible.

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