We could see a situation where there is no demand but prices go up, owing to the inability of firms to cut cost on essentials or other commodities due to shrunken volumes

Donald Trump continues to be as dismissive of the economic impact of the coronavirus as he was from the start and sanguine about the future, but the cold fact is, news coming out of the superpower is less than encouraging even if one is an optimist. Contrary to predictions of a sharp economic bounce by the White House, the three big lenders, JP Morgan, Citi and Wells Fargo, together set aside $28 billion this quarter for potential bad loans, a figure last seen during the 2008 financial crisis.

In most countries, including India, the belief is that the extent of crisis is still not showing up owing to the massive stimulus that governments across the globe have unveiled in the form of deferments, direct assistance and unemployment aid. Morgan CEO Jamie Dimon was quoted as having said: “This is not a normal recession. We have only staved it off for now by way of stimulus but we are surely going to see the effects down the road.” If the old saying that the world catches a cold when the US sneezes holds good, where India is headed is unclear irrespective of pundits’ prophecies on television screens.

That our economy will contract during 2020-21 is a given, and forecasts by economists, research and rating agencies range from minus 5% to as high as minus 15%. Our GDP hit the nadir during April and May and any recovery from thereon will only be a plus is also understood, but have businesses pressed the last button in terms of operational measures needed to survive? The answer, going by what we have been witnessing since Unlock 1 from June 1, is NO.

Since April, we have seen companies essentially laying off employees and slashing salaries to bridge the gap between revenue and expenditure. It was their first step. Will that be enough or are further measures required as we get realistic about the state of the economy? Let us look at simple examples. Of the dozens of beauty salons in Hyderabad, two belonging to a leading chain were shut down a few days ago. They were located on a prime commercial road. In terms of revenue, they clocked zero during lockdown but stayed afloat.

The decision to close them was taken in the first week of July as the opening up of cities a month earlier has not seen patrons coming back. Hopes dashed, they folded up and sacked their beauticians, who were paid reduced salaries during lockdown. These are the first signs of hitting the bottom in terms of business operations. Over the next few months, the number of showrooms/outlets in varied sectors—automobile, apparel, restaurants or footwear—is expected to reduce by 25 to 30%, due to subdued demand.

In other words, if 10 automobile showrooms in a city were selling 100 cars per month, the reduced demand of say, 60 or 70 cars, would be met by six or seven dealers as the weaker ones will yield space. What does that mean? Jobs lost, commercial space vacated, reduction in power consumption and elimination of a range of ancillary needs. That the overall demand has gone down is coming out through anecdotal evidence as also from the trade figures put out by the government recently. Those in power may have chosen to tout it as an achievement, but the trade surplus (difference between imports and exports), seen for the first time in 18 years, essentially means falling demand, be it gold, fuel or machinery.

Is this the first sign of stagflation—increasing inflation coupled with high unemployment and stagnant demand? Remember the non-stop rise in fuel prices and its possible cascading effect. We may, therefore, see a situation where there is no demand but prices go up, owing to the inability of firms to cut cost on essentials or other commodities because of shrunken volumes. It’s similar to perhaps what we are seeing in the airline sector. The per sector fare, say between Chennai and Mumbai, has gone up despite the occupancy level hovering around 50-60%. As and when the weaker ones in the sector opt out, businesses would get consolidated among the few that are able to sustain.

The next cycle could be when normalcy is restored in terms of economic activity but demand remains suppressed owing to behavioural change, loss or reduced income and uncertainty about the future, prompting people to keep as much cash balance as they could. That is when prices drop until consumers once again see value in investment at lower levels and begin investing, apart from returning to luxury spend, be it foreign travel or branded apparel. That could set off the last leg of recovery where rise in demand leads to enhanced business activity resulting in more showrooms, more flights in the skies, hotels getting back to pre-COVID occupancy levels, etc.

The problem is all this is a long shot. The middle class, which at best has the resilience to last two/three months without a job or reduced salary, is already feeling stressed. Migrants, who were desperate to go home at the height of the pandemic, are trickling back to cities in the absence of gainful employment in their home towns and villages. But if demand does not pick up, whether all of them get their work back is the million-dollar question.

A reverse migration then looks plausible given that the farm sector is the only one expected to do well. None of the above scenarios may occur if the global or Indian economy sees a V-shaped recovery. There were such hopes, raised by experts, in the first months of the pandemic. However, the near consensus now appears to be in favour of a U-shaped recovery, which means the pain has to be borne before we witness the bounce. And no one seems to have a clue about the depths to which we could sink before we begin the arduous climb up.