Covid-19 will devastate the economy. Fasten your seatbelt, writes Praveen Chakravarty – analysis
Immediately after Finance Minister (FM) Nirmala Sitharaman presented the Union Budget on February 1, I wrote an article in this newspaper comparing India’s economic crisis with what was, then, just the problem of China’s coronavirus, highlighting the denial of their respective crises by both governments
A lot has changed since then. Coronavirus is no longer just a Chinese problem, but a global one. India’s crisis is no longer just economic, but also a health crisis. China has moved from denial to action and is now apparently returning to normal. India has just started efforts to combat the epidemic. Will the virus affect 1% or 10% or 30% of the population of India? It is an issue that health experts are dying on. In any case, it is clear that 100% of the Indians will be the most affected by the Covid-19 economic shock.
Every major country has closed its borders. Every major city, town, or province has imposed a blockade. Billions of people are under house arrest, or will be soon. Public places are being closed and meetings are being canceled. Perhaps the world has not experienced such a disruption in lives and societies in such a synchronized manner since World War II. People in quarantine cause an inevitable slowdown in economic activity. A massive global economic shock cannot be avoided. So being quarantined, one could escape the coronavirus, but cannot escape the economic impact of the virus. The question is not how serious the impending economic crisis will be, which will surely be deep and acute, but how long the economic pain will last and what can be an effective antidote.
China, the epicenter of this health crisis, is supposedly recovering much faster from this contagion than the rest of the world, and could soon reopen its factories and operate at full capacity. But with a virtual global shutdown, it will take much longer to recover the global economy. The world’s largest economies, such as the United States and Europe, are expected to contract and shrink in the short term. Recovery from such an extreme economic shock will be slow and late.
Unlike the 2008 global financial crisis, developed countries no longer have the margin to print money or lower interest rates to stimulate their economy to a full recovery. Your available economic recovery tools are robust and compliant. Fortunately, India still has some powerful tools in its economic recovery toolbox that can help us get us out of this looming economic slump. The governor of the Reserve Bank of India (RBI) earlier this week first admitted that the economic impact of the coronavirus can be severe, and assured companies of the RBI’s readiness and readiness to act. This was a step in the right direction.
First, the Government of India needs to launch a large stimulus package, targeting consumers and not producers. Money in the hands of people in times of crisis acts as a buffer for the economy as a whole. Then India still has the monetary leeway to cut interest rates, as alluded to by RBI Governor Shaktikanta Das, who can incentivize both the demand and supply sides of the economy. Third, we just need to duck down and fix the financial system by proactively merging risky financial institutions with bigger, safer institutions. There is no time left to wait for these unstable institutions to reach the brink of collapse, threatening the entire financial system as we are witnessing it, and then running around to rescue them casually. These are the immediate steps that can be effective to mitigate the disastrous impact on the economy and help restore normalcy. Sure, there will be a fiscal impact of all these measures, but now is not the time for fiscal conservatism.
Supply-side reforms, infrastructure investments, and the like that economists are calling for will take time to come and may therefore be the next phase of the revival package. While the Indian Economic Recovery Toolbox is not empty, sadly the owners of this Toolbox don’t seem to know how to use these tools.
I have no doubt that the FM is very hard-working and sincere in its attempt. But there seems to be a big gap between your intention and action. His most recent handling of the twin collapse of world oil prices and YES Bank was inexplicable. Gasoline and diesel prices could have been drastically reduced, thus immediately putting ~ 4,000 in the hands of half of all Indian families, according to my calculations. Instead, he chose to raise tariffs and accumulate all the savings from falling world oil prices. YES Bank should have merged with the State Bank of India, and the opportunity used to initiate actions in all other risk institutions. Instead, the banking industry was forced to maintain YES Bank as an independent entity and, therefore, limit the options for acting in other fragile banks and institutions. Also, instead of cutting GST rates to boost consumption, the GST council earlier this week raised tax rates on mobile phones, which is now a staple for most Indians. If the government’s justification for the tax increase was that it will stimulate domestic mobile phone manufacturing in the long term, then I can only remind the finance minister of Keynes’ quote: “In the long run, we are all dead.”
At a time when the global economy is spinning, the government’s economic policy-making skills do not inspire confidence. In the coming months, the virus will infect many more Indians. And it will pass. But the economic wounds will last longer. When economic activity collapses as suddenly and abruptly as it will due to the coronavirus, this leads to a liquidity crisis. Companies lose revenue due to falling demand, and then cannot meet their payment obligations to sellers and banks, leading to a chain reaction. A liquidity crisis, when not acting quickly, leads to a solvency crisis, forcing the closure of these businesses. A solvency crisis can become a full-blown economic crisis.
It does not need to develop this way. The economy can be padded with cushions and recover. In order to do that, we need an FM that has the capacity to manage a $ 3 trillion economy.
Praveen Chakravarty is a political economist and a senior member of Congress.
The opinions expressed are personal.