Coronavirus pandemic may adversely affect output and prices: SBI Ecowrap

The nearly 30 per cent fall in global crude oil prices can lower petrol prices by Rs 12 per litre and diesel prices by Rs 10 per litre in India from their present prices, said State Bank of India (SBI) research team's publication Ecowrap published on Tuesday.

However, if both the Centre and states are not willing to cut fuel prices, they must not -- under any circumstances -- raise excise duty.

"Rather the additional revenue accruing to the Centre can be spent on providing relief to people at the lower strata who will lose income because of shutdown of commercial activity in states as novel coronavirus (COVID-19) spreads," said Ecowrap.

At the same time, there is a need to revive consumer demand. "This may be done through an employment-generating package targeting the efforts to contain the spread of virus," said the report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI.

As the number of cases of COVID-19 in India rise, the economic impact is expected to accrue from supply chain risk which may link up with exports as in pharmaceutical sectors.

On the direct exports side, a set of commodities may see some disruption where China is an important export destination, said Ghosh. On the demand side, adverse demand shock is expected to hit sector like air transport, tourism and hotels, which in turn will affect other sectors.

Thus depending upon the degree of forward and backward linkage of a sector (domestic and global) the impact of the COVID-19 will vary across sectors.

Ghosh said the arguments of Reserve Bank of India (RBI) cutting rates has more to do with coordinated policy actions by the central banks.

However, if RBI does cut, and that too by a large amount, then the current favourable interest rate differential can turn adverse and result in capital outflows.

"Coordinated monetary policy actions are good but exits are always not coordinated, and thus causes significant market disruptions. Deposit rate cuts beyond a point is counterproductive and actually creates perverse flows into liability products that are offering higher interest rates," said Ghosh.

This can always be a recipe for future problems if assets and liabilities are not properly matched, as the experience of Yes Bank shows.

Besides, the pandemic shock is not comparable to other types of crisis as India has an embedded adverse supply shock angle with China as the supplier of many critical inputs.

"Hence only a rate cut in the current situation will only lead to an asset bubble and possibly no correction in demand. We thus believe that in the current COVID-19 outbreak, a combination of monetary and fiscal policy will be the best option," said Ghosh.

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