Beating the pandemic of recession

The Covid-19 pandemic is growing rapidly and multiplying human misery every day. The world appears helpless in front of this unseen enemy. Lockdowns in various parts of the world in general and India in particular have created an unprecedented economic crisis. It is estimated to cause a bigger loss to the global economy than even the Great Depression 90 years ago. The output loss would also surpass that of the global financial crisis 12 years ago. At that time, the world economy had contracted by 1.7 per cent. According to the Global Financial Stability Report of the International Monetary Fund (IMF) in April, the financial system is feeling the drastic impact of the virus, and a further deepening of the crisis can create a problem for global financial stability. According to  Stanford economist Nicholas Bloom, people may end up calling this the Great Depression.

Markets, both stock and money, are touching a new low. It is an economic shock for everyone. We saw crude oil prices in the US fall to negative $35.20 per barrel on April 20. The price was nearly $60 per barrel at the start of the year. Traders are trying to avoid buying crude with nowhere to store it.

The IMF estimates that the government debt-to-GDP ratio will increase by 13 percentage points around the world. Peterson Institute also expects that Covid-19 will cause a sharper global slump than the financial crisis. The Institute expects India’s gross domestic product (GDP) growth to be minus 0.5 per cent in FY21, but it may recover in FY22. Presently, it sounds like a brave prediction.

In a three-week period, from March 16 to April 3, nearly 16 million workers have lost their jobs in the US. The unemployment rate of India has increased from 8 per cent to 23 per cent in March. The complete lockdown will lead to the collapse of production for many more months. As a result, the IMF estimates per capita income to fall in 9 out of 10 countries.

Illustration by Binay Sinha

According to the World Bank, India will grow by 1.5 per cent to 2.8 per cent in FY21, while the IMF in its World Economic Outlook, April 2020, has projected that India’s GDP growth will decline to 1.9 per cent in FY21. World output will grow by minus 3 per cent and emerging markets and developing economies by minus 1 per cent at the same time. However, two ex-chief economic advisers of India, Arvind Subramanian and Shankar Acharya have rejected these projections. They find these estimates highly inflated and far too optimistic.

Barclays has cut its growth forecast for India to zero for FY21 from its earlier projection of 2.5 per cent. The bank expects the economic loss for the country would be worth $234.4 billion or 8.1 per cent of GDP. The Confederation of Indian Industry is expecting that the GDP is likely to range between a decline of 0.9 per cent and growth of 1.5 per cent.

The moot point is that Covid-19 is disrupting the Indian economy like never before. The government of India and the Reserve Bank of India (RBI) have responded to this challenge but half-heartedly. At the fiscal end, the government had announced a stimulus package of Rs 1.7 trillion or approx. 0.8 per cent of GDP on March 26. This is woefully inadequate.

On the monetary side, the RBI has come out twice to reduce the rates and to provide liquidity in the market to boost the economy. First, it announced TLTRO of Rs 3.7 trillion, 1.8 per cent of GDP, on March 27. Second, TLTRO 2.0 for an initial amount of Rs 50,000 crore of liquidity was announced on April 17, mainly for the non-banking financial companies. This again is insufficient.

The extensive 41-day lockdown will result in an 8 per cent loss of working days. To cope with the situation, the government should seriously consider the suggestions made by three leading economists — Amartya Sen, Abhijit Banerjee and Raghuram Rajan — who have come forward and suggested measures to deal with the economic fallout.

We hope and pray that the coronavirus can be brought under control soon and people would be able to resume work but Stanford economist Edward Lazear expects normalcy to return to the economy not earlier than 18 months. One thing is clear. We cannot continue with the present lockdown indefinitely. We shall have to think of a more refined lockdown where we are able to keep the infected under isolation, quarantine those who may have come in contact with them, create containment zones for the hotspots, test on as large a scale as possible and open up the rest of the country with adequate precautions. As we have said elsewhere, the easiest thing is to use the hammer of the locksmith; we have done that. Now we need the artistry of the goldsmith. Are the governments of India and the states ready and capable of it?

The government has provided Rs 31,235 crore to more than 330 million poor till April 22. But the policy priority of the government should be to provide more financial support to the poor and the migrants in particular. They must be our first priority as they have been the worst sufferers in recent days. Their plight will go down in our history as a particularly sordid chapter of thoughtless action on the part of the government. The farmers are suffering too and have already incurred huge losses. The financial sector has been in a mess since the collapse of the IL&FS. The closing down by Franklin Templeton of six of its funds has further demonstrated the risks in the financial sector. Any loss of confidence here will have disastrous consequences for the economy. Under the circumstances, the government should neither care about the fiscal deficit targets set by the Fiscal Responsibility and Budget Management Act nor should it stop its expenditure for good ratings. Today, the country needs additional funds to look after the poor and the needy and to bring the economy back on track. The government should not hesitate to ask the RBI to monetise as large a part of the fiscal deficit as needed.

It is a time to protect people, jobs and industry. India can work to strengthen this fight against the pandemic according to the formula suggested by the World Bank, which consists of three pillars – (i) protect the poorest, (ii) support and save jobs and (iii) implement emergency health operations.

The middle class must be taken care of too. At the lower end of the spectrum, they are compelled to suffer in silence. They are suffering but are reluctant to ask for help. Data reveals that the number of job losses will rise and there will be salary cuts. The decision of the government to deny dearness allowance hike to employees will further complicate the situation. A comprehensive relief package must necessarily consist of many other parts. This will need resources, but money should not be a consideration as in war. This is a war, no less.
Sinha, a BJP member, was Minister of Finance (1990-91, 1998-2002) and Minister of External Affairs (2002-04);
Srivastava teaches finance at ITS Ghaziabad

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