Dissecting the COVID crisis

Abstract

Subramanian and Felman (2019) had come out with a policy piece discussing what has been ailing the Indian economy in recent years. Their focus was on the slowdown since 2018. In this paper, the ex-CEA had argued that India suffered from four balance sheet crisis that started with the twin crisis on bank and infrastructure firms balance sheets, which later percolated to the balance sheets of NBFCs and real estate sector. The authors in this policy piece had feared that a temporary exuberance in the economy could put the policymakers back into a state of paralysis, as had happened time and again. The first of the twin balance sheet crisis had been so quickly forgotten once the economy picked up around 2014 on the back of unsustainable credit growth by NBFCs to the real estate sector. The same mistake had repeated itself since no effective regulation had resulted from a similar story of banks and infrastructure sectors. Little did these authors know that the derailment of any regulatory step would instead be caused by an unthinkable risk that was about to hit the world from its epicenter in Wuhan. The COVID crisis has given an already battered Indian corporate sector a debilitating blow. Given that it is an ongoing crisis and the firms’ financial results have only started trickling in, it is too early to comment about the magnitude of damage it could have had. The only high-frequency data point that could be an (imperfect) indicator of relative positions of the industry is the stock market return i.e. if you are a strong believer in the rationality of Indian capital markets. Figure 1 shows the relative performance of the various industry portfolios formed on 1st March and held until the end of June. The top and bottom 6 industries have been shown, and they are the usual suspects of this crisis. The worst-hit industries include automobile, hotel and restaurant, real estate, wholesale and retail, consumer-durables and, of course, airlines. The list should worry us even more because most of these listed industries were already doing poorly before the crisis and are also the major employers.