On May 12, when Prime Minister Narendra Modi addressed the nation after 49 days of lockdown, the economy had already been estimated to have lost Rs 17.5 lakh crore or around 8% of its GDP. With over 12 crore jobs lost, limited or no physical movement, devastated supply chains and colossal demand shock, India was anticipating an equally strong fiscal response from its government. The announcement of a “Rs 20 lakh crore economic package (10% of GDP)” thrilled the headline-frenzied Indian media. However, with every tranche-wise revelation by the finance minister over the next few days, an army of devils hidden in the details was let loose.
The package has an interesting multidimensional arithmetic. In order to arrive at a politically sellable ballpark figure of Rs 20 lakh crore, it amalgamated everything but the kitchen sink. It has a carefully crafted horizontal axis loaded with already committed expenditures, accrued dues and long term reforms and a vertical axis factoring monetary policy and a huge loan component which is to be borne by the already stressed banking system. Stripped to the bone, the actual hard fiscal outlay is a dismal figure of only Rs 2 lakh crore, i.e. just 1% of the GDP.
Loss upon loss
Although the actual fiscal component of the economic package was disappointing, the Indian government did acknowledge the impact of the imposed lockdown and somewhat discharged its responsibility as a government in compensating severely impacted businesses and households.
But while the rest of India was discussing the insufficiency of the economic package against the 49 lost days of work, Kashmiri businesses and households were discussing an economic nightmare of a different scale. The newly created union territory (UT) had been locked down since August 5, 2019, for nine long months. While the rest of India complained about laces for their running shoes, Kashmiris entered this deadly race barefoot.
When India entered the COVID-19 lockdown on March 25, Jammu & Kashmir’s economy was still calculating the losses it had incurred on account of the unprecedented lockdown and communication blockade that the Indian government had imposed in the UT since August 5, 2019. According to an official report by the Kashmir Chamber of Commerce & Industry (KCCI), the Kashmir economy lost over Rs 18,000 crore in the 120 days after August 5, 2019. This, added to estimated losses of another Rs 13,200 crore during the 49 days of the COVID-19 lockdown till May 12, brought the cumulative loss to J&K’s economy to a staggering Rs 31,200 crore or around 17% of JK’s GSDP.
The repercussions have been devastating. Businesses have suffered huge income losses resulting in widespread bank defaults, rampant job cuts and foreclosures. In November 2019, the J&K State Level Bankers’ Committee, representing 41 banks operating in the region, had to approach the Reserve Bank of India for a special loan rehabilitation package and relaxation in capital provisioning for bad loans to save their balance sheets. The unemployment ratio in J&K, according to a study by the Centre for Monitoring Indian Economy (CMIE), spiked from 15% to 22% within just two months since the August 2019 political crisis. The situation since that study has worsened. The current unemployment scenario currently is much more severe.
It was against this grim backdrop that various trade bodies and representative business organisations issued repeated SOS calls for an economic bailout via print and electronic mainstream media. The latest was a meeting between the trade organisations represented by the KCCI and Union finance minister Nirmala Sitharaman in New Delhi on March 17, just one week before the nationwide lockdown was announced.
While businesses and households in mainland India are gasping for liquidity, those in J&K are staring at insolvency. Unlike in the rest of the country, the most essential loss-bearing support, that is, the owners’ business capital and average savings of households in J&K, has been depleted drastically. There has been no breathing space since August 5, 2019, to replenish the risk-appetite of the average household balance sheet.
The debt-servicing pile up
J&K has a consumption-driven economy with 23% of its 44 lakh labour force deriving its livelihood from the trading sector and another 7% from the transport sector. Due to this double whammy of nested lockdowns and triple tragedy of the communication gag, logistical restrictions and demand shock, havoc has been unleashed to both these labour-intensive sectors of J&K.
While the UT has a comparatively small manufacturing sector, it does provide employment to around 3.5% of the working population. But this sector too has faced very deep losses because of the double lockdown imposed in J&K since August 5, 2019. Handicrafts, which provides an income to more than three lakh artisans (7% of the workforce) and contributes over Rs 1,700 crore to the export economy annually, was first devastated by the sustained communication blockade and is now buried under the debris of a global recession.
Besides this, J&K receives around Rs 1,300 crore as foreign remittances from its people working outside India. That too is expected to face a serious dent in the coming months because of the global economic meltdown.
More than 10% of the labour force are government employees, which is the only sector where income is expected to remain comparatively stable. The remaining working population is mostly absorbed by the agriculture sector with dismal support from a limited private sector.
The national economic response which is largely based on debt financing is too insignificant an answer to the colossal and chronic financial problems of J&K’s businesses and households. Before the 2019 debt rehabilitation by the RBI, banks operating in J&K had already been allowed to rehabilitate loan accounts in the wake of the 2014 floods and the 2016 political unrest. The rehabilitation schemes have been largely aimed at saving the banking industry, with only temporary EMI and interest deferment benefits to the borrower. Moreover, the deferment interest costs too are compounded and loaded onto the borrower with no concessions at all.
This pile-up of debt servicing has caused an unprecedented amount of financial stress in the highly illiquid and dangerously leveraged business balance sheets in the UT. Providing more debt to an already insolvent debtor is a time-tested recipe for a debt trap and a precursor for an unaffordable debt-deflation cycle. No matter how cheap and accessible debt may be, the chronic toxic debt profile and now this colossal demand shock has dried up all credit appetite in the system.
Debt might cure illiquidity, but not insolvency. Historically, monetary solutions for fiscal problems have failed with tremendous consistency. This package will end up bloating the banking system in the region with funds, leading to an unaffordable negative impact on the financial health of businesses.
Businesses in J&K were expecting interest remissions, tax holidays and equity infusion, but all they got was an unwanted EMI deferment, extension in tax payment dates and the promise of more debt. Instead of restructuring the debt with remissions and putting money directly in the borrowers’ hands, a single paint brush was adopted by the government of India to paint everything under the COVID-19 package a single colour. With incentives and fiscal goodies starting to flow from the finance minister’s kitty for the nation’s businesses and households after 49 days of lockdown, business owners in J&K, who have been running from pillar to post for the last seven months, feel as though they are the children of a lesser god.
With no customised economic answers for the government-induced problems of the devastating seven months of lockdown preceding the COVID-19 lockown, businesses and households in J&K are hopeless, dejected and despairing.
Ejaz Ayoub works at the Jammu & Kashmir Bank in Srinagar, Kashmir.