Who lends money to the government in India

India under the sign of the corona crisis

The country has been under lockdown since the end of March. The drastic measures to combat Covid-19 will be a test for the 1.3 billion Indians. Prime Minister Narendra Modi wants to use the crisis to position his country as an alternative to China as a manufacturing location.

The hostel "Horn Ok Please" ("HOP") is located in a narrow side street in the west Indian metropolis of Mumbai. Unlike most of the over a thousand hotels in the city of 20 million people, it has not yet closed its doors and is still open to the few stranded guests in the suburb of Banda. But the business is currently not lucrative: The few guests bring too little money for Smith Jain and his business partners for the income to cover the costs. Nevertheless, one thing is clear to Jain: he won't put anyone on the street.

India has been under a nationwide lockdown since March 25th. Since March 22nd there has been no more regular international air traffic, three days later the government in Delhi declared a curfew throughout the country. Because there is hardly any improvement in sight at the moment, the restrictions have been relaxed somewhat, but have already been extended three times, the last time until May 31. The corona virus has a firm grip on India.

The industry is practically at a standstill

As everywhere in the world, the drastic measures are hitting the economy with full force. Industry is practically at a standstill, investments are being postponed, and consumption has collapsed. The analysts from Capital Economics expect negative growth of 4% - for the first time since 1979 the economy is shrinking. Unemployment soared to 24% in May, before the outbreak of the Corona crisis it was 8.7%.

The tourism sector is currently suffering particularly. “We need some relief when it comes to rents,” demands the young entrepreneur Jain. Because in the Indian cities of Mumbai and Delhi, rents are stiflingly high, especially in the hospitality and hotel industries. Salary cuts are currently taking effect across all sectors for employees who can keep their jobs. Not with “HOP”, however: the hotel continues to pay salaries normally despite the crisis. However, like many entrepreneurs, Jain has an ongoing loan. He now fears that he will soon no longer be able to meet the demands. By then, at the latest, he would also have to lay off staff.

The livelihood of the migrant workers is breaking away

The economic consequences of the restrictions affect all levels of society. Those who earn their living in the informal sector are particularly vulnerable. Such employment relationships are not regulated at all or only poorly, and there is no social safety net. You can stand on the street overnight. According to estimates by the World Bank, almost 40 million Indian migrant workers have lost their livelihood in the past few weeks. These workers, often from rural areas, currently see no reason to stay longer in the cities or near industrial centers, at least as long as there is no prospect of work. You want to go home.

But at first the authorities didn't want to let her go. Then at the end of April the government gave in and asked the member states to organize the transport of the workers. Now special buses and trains are rolling. The problem: There are far too few tickets. Some workers are already setting out on foot, and displeasure is growing among them.

The way the authorities deal with the workers could prove to be a boomerang, warns Mohit Bhasin, advisor at KPMG at the interface between government and private sector. Because if the economy should get going again soon, the workers would be needed in the cities. But dealing with them is likely to leave its mark. It is questionable whether they will come back immediately without major concessions. “There is a possibility that some of them will prolong their home stay. Then we will certainly have a shortage of labor, »says Bhasin.

The measures to combat the Corona crisis have different effects from region to region. Bhasin, who is analyzing the developments, says that it mainly affects the states with high population densities and a strong industrial base. This also includes the Mumbai metropolitan area. Many shops had to close. The state of Maharashtra, in which Mumbai is located, lost CHF 5.14 billion in tax revenues in March and April alone. In order to be able to continue paying the salaries of the officials, the city government had to borrow money from Delhi. But it is still a bit early for reliable forecasts, says Bhasin. "We don't yet know the full extent of the problem." Indeed, the number of Sars-CoV-2 infections in India is currently increasing.

It doesn't hit everyone equally hard

It also doesn't hit all industries equally hard. It doesn't look too bad for the food industry, for example. Production is running and supply chains that have been interrupted at times have been revitalized. In the country's small mom and pop shops, for example, the local biscuits that are so popular in India have long been part of the range again. For many Indians, enjoying lunch tea without it is unthinkable. Parle-G from Mumbai is one of the largest producers of this Indian counterpart to “petit-beurre”.

The production lines for the biscuits advertised as “freshly baked” run at three quarters of the capacity. The manufacturers are likely to survive the pandemic largely without damage. However, special rules currently apply to food and fast-moving consumer goods (FMCG), such as food, personal care products and cleaning agents. Despite the lockdown, they can continue to be produced, even with reduced staff. At the same time, the industry is benefiting from the fact that the government is cautiously trying to get the economy going again.

Clearly noticeable easing can initially be expected for essential goods such as food and services, says KPMG expert Bhasin. Other branches of the economy, such as the textile sector, are facing difficult times. With almost 45 million employees, no other sector employs so many Indians. Agile companies have recognized this and converted their production lines to protective clothing, N-95 masks and gloves. So also Raymond, one of the largest Indian and at the same time global textile manufacturers. But apart from the production of such textiles, the production halls are largely idle.

Business is good at recycling companies

The Shakti Plastic Industries was promptly requested to resume operations. Waste production has declined in the past few weeks, but has never come to a complete standstill. The recycling company's machines rattle again. “Other recycling companies don't work because they don't have enough staff. We have our in-house workforce, ”says Rahul Podaar. The workers live on the factory premises, 100 kilometers from Mumbai. Shakti is now working again at 40% of normal capacity. "We can't make up for our loss, but we expect good growth in the second half of the year," says the boss.

The pharmaceutical industry can also hope for a quick recovery. India benefits from the fact that, as the so-called pharmacy of the world, the country has become irreplaceable for many active ingredients and is at the forefront of global pharmaceutical production. The world's largest manufacturer of the drug hydroxychloroquine (HCQ), for example, is based in India. The highly controversial drug is said to help against Covid-19. There is no evidence of this yet. But manufacturers of soaps and disinfectants are also seeing increasing demand, which will not collapse anytime soon. The companies benefit from the fact that Indian consumers are increasingly relying on cheaper domestic products than expensive foreign products.

First trust has to be rebuilt

In their attempts to secure jobs and keep the economic damage as small as possible, governments and central banks around the world are currently putting together rescue packages. India's government under Prime Minister Narendra Modi also announced a first aid package worth CHF 22 billion at the end of March, which is intended to support 800 million people over the next three months with rice, grain and direct payments.

But with a volume of only 0.8% of economic output, that was no more than a drop in the bucket. In addition, it is mainly Indians who already have access to social benefits and farmers who benefit from this. This causes criticism from some. "I did not expect that the government would take next to no action to remedy the situation to a certain extent," says Jayati Ghosh of Jawaharlal Nehru University in Delhi. Immediate measures are now needed, such as an employment guarantee, to prop up the economic colossus of India, says Ghosh. Trust must first be rebuilt; the millions of people who had been forced to give up their jobs needed a new perspective. Modi had even publicly called for no one to be laid off and rent deferrals to be granted. But that only postpones the problems.

To get the economy going again, the central bank eased monetary policy. Last week, Prime Minister Modi announced the long-awaited $ 266 billion rescue package. With this, the government wants to give smaller companies and workers a helping hand. The package corresponds to 10% of the country's annual economic output. But after Finance Minister Nirmala Sitharaman revealed the details, disappointment spread. Much of the program is about medium to long-term structural reforms. The part of the aid package to combat the immediate consequences of the corona crisis only accounts for between 1.5 and 2% of gross domestic product.

The package is unlikely to slow down the plunge in the Indian economy. Ghosh sees it that way too. The Indian economy has been down for a long time, she says, and now, to a certain extent, the flow has stalled.

Does India benefit from China's bad image?

There are experts who believe that the crisis will also open up new opportunities for India. For example, the hard-hit country could benefit from China's increasingly negative image and bring parts of the value chain into the country. KPMG advisor Bhasin is assuming a twofold change. On the one hand, more and more countries want to secure vital productions in their own country. In addition, some were considering leaving China as a production location, says Bhasin. Countries like Japan and South Korea have already started to incentivize their companies to diversify away from China. That would also be conceivable for India.

A program announced in April by the Modi government to lure foreign manufacturers of electronic devices to India on lucrative terms is heading in this direction. The American smartphone manufacturer Apple is in talks with the Indian government about relocating up to a fifth of its production capacity from China to India.

The Corona crisis painfully shows Modi that the manufacturing industry is the linchpin for sustainable modernization of the country. The manufacturing industry contributes just 15% to economic output. In an international comparison, India ranks very far below.

In his address last week, the head of government emphasized that the rescue package would make an important contribution to the country's economic independence. Modi wants India to become more independent from foreign countries. In response to current events, the government now wants to expand the production of medical products. According to the government's will, India will later become an important location for the production of high-quality goods in the electronics, pharmaceutical, chemical and medical industries.

Modi has promised a lot in the past

But that could take a while. In India, which is plagued by corruption, a largely still ailing infrastructure and a rampant bureaucracy, better framework conditions are needed for foreign companies to invest. In addition, similar plans have been announced repeatedly in the past. It stayed that way.

It has almost been forgotten that Modi took office as Prime Minister in 2014 with the promise to boost industry, modernize the financial system and fight corruption. With his “Made in India” economic program, he wanted the economy to grow from a volume of 2 trillion at the time. $ 5 trillion by 2025 Increase $, turn India into a manufacturing Mecca and create 100 million new jobs. But many economic reforms, such as a relaxation of rigid labor laws, petered out. Firms with a workforce of 2o0 and more still need government permission to lay off workers. Instead of starting at such points, Modi relied on an identity-based nationalism and protectionism.

Structural reforms would be important here, because with 80 to 90% of the working population in informal activities - according to relevant estimates - the government must fear that 400 million people will slide even deeper into poverty as a result of the current crisis. Industrial jobs would help here - in case of doubt, also the employees of the Horn Ok Please hotel in Mumbai.