CII sees Covid-19 shrinking FY21 GDP by 0.9% in worst-case scenario

Industry body again raises calls for more fiscal stimulus through Rs 1.5 trillion fund and credit protection for MSMEs

India's gross domestic product may be in for an unprecedented contraction in FY21 as the ongoing coronavirus pandemic and the resultant lockdown continues to batter most of the domestic industry, the Confederation of Indian Industry (CII) has said.

In a report that suggests ways to pick up the pieces of India's manufacturing engine once the current crisis ends, CII on Thursday said GDP growth will remain between -0.9 per cent and 1.5 per cent in 2020-21. The numbers have been compiled by the research division of the chamber which counts more than 9100 companies in its list if members.

The CII projections cover the full range of possibilities staring India's vast industrial sector. This ranges from the optimistic scenario of industrial activity picking-up immediately and resuming to full capacity shortly afterwards, to the worst case scenario of the pandemic extending further and majorly disrupting supply chains, investment activity and ultimately consumption demand.

Given the extent of the damage to the economy from the disruption to business, the GDP growth in FY21 will likely be the lowest in many decades. The economic costs of the lockdown are rising each passing day with the impact being felt across sectors. The situation requires immediate, across the board intervention from the government,” said Chandrajit Banerjee, Director General of CII. Given the situation, government intervention becomes critical not only to sustain the economy but also to prevent any humanitarian crisis,” he added.

More funds needed

CII has also pushed for more fiscal stimulus in Thursday's report titled 'A plan for economic recovery'. It has argued that while India's level of government debt remains high, a further increase in fiscal spending may easily be undertaken given that India's debt levels are much lower than those of other major G-20 countries. According to the International Monetary Fund, India's debt to GDP ratio was 68 per cent in 2018.

Repeating it's earlier demand of faster transmission of liquidity to businesses, CII said extreme risk aversion among banks and other lenders was hindering the process despite several policy moves spearheaded by the Reserve Bank of India. Subsequently, it has stressed the need for creating a Rs 1.5 trillion fund which will subscribe to non-convertible debentures or corporate bonds rated A and above. 

"The fund can be seeded by the Government contributing a corpus of Rs 10,000-20,000 crore, with further investments from banks to the tune of Rs 70,000-80,000 crore and balance Rs 50,000-60,000 crore brought in by financial institutions such as the Life Insurance Corporation of India, Employees' Provident Fund Organisation and National Investment and Infrastructure Fund, among others," the report pointed out. CII hopes this will limit government exposure while providing adequate liquidity to industry. With overall cost of credit remaining high, the availability of long-term funds must be stepped up by strengthening institutions such as India Infrastructure Finance Company Limited and National Investment and Infrastructure Fund, the report said.

Structural changes pending

For the micro, small and medium scale businesses, CII has pushed for an ambitious credit protection scheme whereby 75-80 per cent of the loan would be guaranteed by the RBI, which would repay the money to the bank if the borrower defaulted. "Sidbi could provide the guarantee for loans to industry and trade while NABARD could provide the guarantee for loans to agro-processing sectors," it clarified.

The report has also asked the government to reduce cost of transportation and logistics through vigorous implementation of the national infrastructure plan. It has flagged the high cost of commercial power, struggling ease of doing business in many parts of the country and need for labour market reforms. "Threshold limits under labour laws such as Industrial Dispute Act, Contract Labour Act and Factories Act limit the size of enterprises and good quality employment in the country," it said.

CII has also continued to argue against India's complicated taxation structure, which includes too many tax rates - both import tariffs and GST - thereby making the system irrational and open to evasion. It has pitched a three-tier tax structure, with raw materials and intermediate goods being taxed at a lower rate than final products. In addition, the GST structure can be simplified in the form of one registration after bringing down the GST rates to at best three, including zero, it said.