Covid-19: What India needs right now is a programme to help the destitute

The current Covid epidemic has been compared with the great plague of the 14th century that led to revolutionary changes in polity, economy and society in Europe. There are some who argue that the Covid epidemic will have a similar impact globally. This is an overstatement as the world is much better prepared in terms of health care, medical research and other resources to cope with this crisis. Yet some long-term impact, perhaps not revolutionary, will be felt in all countries.

The long-term consequence of the epidemic will depend on the impact of the short-term measures taken to manage the crisis. In India, we have chosen to go for a strong lockdown to slow the pace of spread of the virus. This only buys time for preparing health care systems for coping with a virus that is not going to disappear till a vaccine is available in quantities that can immunise the majority of the population or till the majority of the population has contracted the disease and developed an immunity to it, a process which  may take many months perhaps even a couple of years. But if this buying of time goes on for too long and leads to an economic impact that makes medium- and long-term measures more difficult, then it becomes self-defeating. Hence, we need a balanced approach that uses a lockdown carefully to slow the spread and at the same time starts relaxing the constraints on economic activity.

Take India, for instance. It appears that India’s gross domestic product (GDP) will dip by as much as 20 per cent in the first quarter of FY21, and the pace of recovery will depend on how long the lockdown continues and on whether there is a surge in cases later in the year after the lifting of the lockdown. For the year as a whole, the GDP at the end of FY21 would be 1.5-2 per cent higher if the lockdown ends soon; but would be lower in absolute terms if the lockdown is extended or if there is a resurgence of the disease later in the year when the lockdown is lifted.

Who will bear the burden of the falling GDP? Judging by the impact of the lockdown, a large part of the burden will fall on wage earners, particularly daily wagers and migrant labourers. The income of small business enterprises, company profits and tax revenues will also suffer. Right now, this is being managed politically by creating an air of panic and ensuring that the lockdown restrictions prevent any mass dissent from being expressed in meetings or marches or demonstrations. 

Illustration: Ajay Mohanty

A different consequence is the potential impact on Centre-state relations. The Covid epidemic has demonstrated that India cannot be run on a sharply centralised basis, and active and constructive cooperation between the Centre and the states is an absolute necessity. The Centre has called the shots on policy pronouncements and setting the norms for red, orange and green zones with little flexibility left for state governments to adjust lockdown conditions and reopening of economic activities. This has been modified in the recent package and the state borrowing limits have also been increased. Hopefully, this more accommodative stance will continue.

The impact on the economy will depend on how the different elements in the relaxation of the lockdown are phased in and whether priority is given to restoring employment or avoiding fiscal overspend. On May 12, the prime minister announced a stimulus package of Rs 20 trillion. Judging by the details released, about 40 per cent of the announced stimulus package is really not additional spending but measures already announced including the liquidity measures announced by the Reserve Bank of India since February. The announcements by the finance minister show that much of the rest is not really a direct fiscal stimulus but credit measures, long-term development programmes and, somewhat oddly, relaxations in foreign direct investment norms in defence production and private participation in the space programme.  What this relaxation has to do with the immediate challenges posed by the epidemic and the long lockdown is open to question.

The real fiscal stimulus in the form of additional income or cash in the hands of households is about 1 per cent of GDP, according to a calculation made by State Bank of India’s economics department.  This includes some expenditures already included in the February Budget. Separately, on May 9, the government announced an increase in market borrowings from Rs 7.8 trillion to Rs 12 trillion, or about 2 per cent of GDP. The difference may be the borrowings required to make up for the expected revenue shortfall. There are some calculations of revenue shortfall which suggest that the bulk of the increased borrowing is to make up for this shortfall. Clearly, the government wants to avoid the charge of fiscal profligacy and is not taking on board suggestions from many economists that they should be aiming at a fiscal stimulus of 3-5 per cent of GDP.  The government has said that its package is to empower people. But at this point what we need is a rehabilitation package for migrant labourers, the millions thrown into unemployment and small enterprises beaten down by the lockdown. 

A more speculative question is the potential impact of the epidemic on the global economy. There are openly stated goals in India of attracting industries that wish to leave China. This expectation must be seen in the light of the possibility that we will see a significant reduction in the importance of global value chains as companies hit by the disruption of input flows decide to pull back to greater domestic dependence, a trend favoured by the technological developments that are reducing the comparative advantage of low cost labour. However, the prime minister’s March 12 speech seems to have focused more on self-reliance and self-sufficiency as the driving goal of policy.

At this point, the focus of policy must be to correct the serious adverse impact of the lockdown on wage earners and micro enterprises, direct public resources to building up the health care system to cope with the medium-term challenge of the virus and restore services for other diseases like TB, which also require urgent attention, find a way of running the education system for a couple of years with social distancing. This will require effective action at the state level, which the Centre must facilitate by allowing local flexibility and shifting fiscal resources to the states with minimal strings attached. Look after those who produce what we call the GDP, and the economy will recover as both supply and demand builds up.

1. Getting ahead of coronavirus: Saving lives and livelihoods in India, McKinsey & Co, April 2020

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