One contagion is enough for India

India has chosen an odd combination of strategies in its fight against the coronavirus: a harsh lockdown on economic activity and a meager fiscal response to the loss of jobs and incomes.
What’s making this more painful is a denial of the role of finance in both containing the fallout of the outbreak and in supporting the recovery later.
Allowing a credit contagion to take hold is a serious error, especially as India’s under-capitalised lenders were swamped by corporate defaults even before Covid-19 struck. As both retail and institutional loans go sour at a rapid pace, the financial sector will amplify the
shock of virus-related shutdowns and hobble the return to anything resembling normalcy.
Prime Minister Narendra Modi has extended an expiring 21-day national shutdown to May 3, promising to relax some curbs in areas that aren’t likely to become disease hotspots.
Leave aside the problem of determining safe zones when the government isn’t testing enough for infections, which have crossed the 10,000 mark. Beyond a token $22.6 billion plan announced on March 26, the Modi administration has shied from concrete steps to help the working class survive their loss of livelihood. The lapse is made worse by a monetary authority seemingly oblivious to the crumbling of a shadow-banking industry that’s been struggling with high funding costs for nearly two years now. Lowering the benchmark interest rate or boosting liquidity by $50 billion is of little use when those who need the money are simply not getting it.
This approach needs to change. Let Team Modi figure out a fiscal strategy, and then let the Reserve Bank of India step in to support it. This will mean copying the US playbook, where programs like Paycheck Protection, targeted at small firms and their employees, and Main Street Lending, aimed at bigger firms, are government backed with the Fed providing funding to banks making the loans.
The template will need to be tweaked to fit the Indian economy’s highly informal setup, marked by a near-complete absence of social safety nets — barring a rural job guarantee that pays less than the minimum wage in agriculture. A quarter of the workforce consists of migrants who go back and forth between urban centers and their village homes. They suddenly have no work and no money to buy food or pay rent. Even with the government’s promise of distributing free food, the 500 rupees ($6.5) a month it has started crediting into no-frills bank accounts held by women is paltry.
—Bloomberg

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News