Use the Covid crisis to stimulate systemic changes: analysis
Former British Prime Minister Winston Churchill was known to say that a major crisis should not be allowed to go to waste. Coronavirus disease (Covid-19), which until last month seemed limited to China, is now on everyone’s doorstep. While many hope that countries will mimic the extensive protocols used by China and contain the virus, the coronavirus could continue as a recurring problem.
Predicting its economic impact would be insane, given that there is no parallel that such a dramatically disruptive global event has been. However, one can seek to establish some general trends. The pandemic should inform our understanding of supply chains, changes in market position, fiscal deficits, and multilateralism.
Adam Smith in the The Wealth of Nations, highlights the economic value of the division of labor. But this pandemic has shown that such a division of labor, when carried too far, has costs. China generates almost 29% of global manufacturing. For comparison, India is at 3%. Covid-19 has caused a supply shock, with inadequate production.
If there is a certain impact of this pandemic, it will be the greater diversification of supply chains. Countries will have to adapt to some form of economic restart. To take an extreme example, studies have identified that over 95% of all antibiotics sold in the United States (US) come, indirectly or directly, from China. A large part of the active ingredients for medicines made in India comes from China. This cannot be an acceptable level of dependency on a country, however well intentioned it may be. This is likely to change, not only in medicines, but in other industries as well.
Disruptions in demand and supply are opportunities for entrepreneurship. Previous situations of collapse of supply and demand, such as war or the Great Depression, have been followed by substantial increases in accumulated demand, allowing new players or new technologies to emerge. Undoubtedly, some Indian manufacturers should be able to benefit from these changes in supply chains.
The Reserve Bank of India has promised to step in to create some liquidity in the markets. However, since some general-purpose monetary stimulus is unlikely to work, we will need to see strong liquidity measures targeting vulnerable industries and borrowers such as small and medium-sized businesses, travel companies, and mortgage borrowers. You should also see some regulatory tolerance for recognizing unprofitable small-entry assets. This may mitigate the cash flow challenges that these entities will face due to declining economic activity.
This crisis calls for arms to restore our health care system with insufficient investment. Indian health care is maintained by private professionals, from small rural doctors to tertiary care. Government spending of 1.4% of GDP is among the lowest in the world.
The current government appears to have been proactive in its response to the virus, but one wonders why it did not do so, at first including major private institutions in conducting the required tests. Its decision to establish mechanisms to involve 51 private laboratories is welcome, but this has not yet been implemented. One hopes that it is not a case of too little, too late. Covid-19 is an opportunity to gain political consensus for the expansion of the healthcare system nationwide.
Economic recoveries depend heavily on sentiment. The feeling, during a crisis, depends on the perception of good governance and communication. The secrecy surrounding the Chinese response has been criticized, although, once Beijing acted, it was able to demonstrate remarkable progress amid stories of heroism from the country’s medical fraternity. In India, better communication and better management can help build trust among citizens. If the information provided by the government is believed to be accurate, treatment is fast, and the healthcare system is competent, there is likely to be a greater willingness to invest in the future. One would expect this pandemic to drive further investment toward research on lesser known and neglected tropical diseases.
Most critically, the pandemic demonstrates that an interconnected world needs closer coordination, part of which includes stronger multilateral institutions. Containing this pandemic is a global activity and each country has the responsibility to solve this problem. This crisis offers an opportunity for the nations of Europe to invent some form of coordinated fiscal policy, which has been eluded for years. The United States, with one of the world’s most powerful medical health systems and unrivaled research capacity, can once again demonstrate the leadership we saw in the 20th century. Maybe it could start by funding the World Health Organization and some sort of Manhattan Project-type team to speed up the vaccine. We will see thousands of canceled international contracts and the overwhelming force claims will need an aligned legal approach. It may be necessary to create the type of institutions (Fannie Mae / World Bank) that can accelerate the provision of financing. All of this can only happen when nations act together.
In 2008, in response to the economic crisis, the leaders of the G20 nations quickly gathered in Washington to give a strong response. Surprisingly, we are still looking for that kind of leadership. Only Prime Minister Narendra Modi has contacted South Asian countries for some form of coordinated action. One hopes that this pandemic can create a template for progressive multilateral action in an increasingly isolationist world.
Govind Sankaranarayanan, former COO and CFO of Tata Capital, is currently Vice President of ESG Fund ECube Investment Advisors
The opinions expressed are personal.