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The collapse of the Indian economy: analysis


Just a few weeks ago, we were talking about the persistent economic slowdown, the income deficit in the Union Budget and the employment crisis. Now that the threatening winds of a pandemic are sweeping the world, literally closing entire countries, one almost feels nostalgic for yesterday, when all our problems seemed so far away.

Phrases like “social multiplier” and “going viral” have taken on more sinister nuances, to be replaced by social isolation and self-quarantine. These are no longer the luxury of prisoners, but a forced necessity for all.

While the direct public health crisis caused by coronavirus disease (Covid-19) and its resulting pressure on the healthcare system are all too visible, its economic impact will also go viral.

First, economic activity has to do with the interaction between people. Trade and commerce thrive in these networks of interactions, making cities more prosperous than villages. But unfortunately, so do viral infections. Therefore, in this situation, the higher the population density and the greater the exposure to the outside world, the greater the risk of contagion. The denser the network of economic relations, both in cities and in villages, the greater the impact.

Second, exactly like an infection, shocks to economic activity spread rapidly through supply and demand channels. As some people stop going to work or reduce working hours because they are poor or isolating themselves, the supply of goods and services is affected. In the short term, buying essentials in panic compounds this problem. Since most goods and services use a complete set of intermediate inputs, supply chains collapse like dominoes within and between countries, causing the initial shock to spread to a much larger group of people, such as a contagion. Again, the more advanced or urbanized the region, the greater the effect.

Third, someone’s supply shock is someone else’s demand shock. Unless you are a salaried employee in a guaranteed job (a luxury enjoyed by no more than 5% of the Indian workforce), if you cannot supply your good or service, your earnings will decrease. This will cause a drop in demand from other suppliers, a replica of the initial supply shock. This slowdown will be reinforced by widespread uncertainty that will cause people to delay shopping and save for an even rainier day.

This, in turn, will delay economic recovery, and stores and businesses will have a hard time staying afloat. They will start firing casual workers and may even file for bankruptcy. The original disruption would now have spread throughout the entire body of the economy, and without a massive political response, it will remain ill for an extended period.

The fact that two thirds of the population lives in rural areas has been a positive aspect for India, as exposure to the virus has been higher in urban areas, with much more influx of people from abroad. . Furthermore, given the high population density in urban areas, contagion spreads faster.

However, health infrastructure is poorer in rural areas and that is an important vulnerability to face the crisis. Furthermore, as economic aftershock spreads throughout the economy, many of the migrant workers in the cities head to their homes in rural areas, opening a channel of contagion.

If we look at the economic impact of the crisis, urban areas will be more affected, since social distancing negatively affects certain types of consumption that tend to be more concentrated in urban areas, such as services, entertainment and transportation. The resulting slowdown in economic activity will affect the informal sector, which employs 85% of the workforce and contributes to almost half of GDP. This is a sector where social isolation will be impossible to meet due to poverty and the need to go out and earn a living. Therefore, economic aftershocks will also extend to rural areas.

As we fight to reach a political response to one of the largest health care and economic crises in our history, we must be aware of these facts. The government’s first priority would be to shore up public health spending to deal with the current crisis, which includes recruiting and training an army of primary health care workers.

This is also a perfect time to make an immediate transfer of direct income to all those who do not have guaranteed jobs or do not file income taxes. Does it sound extravagant? Well, the Donald Trump administration, which is not a stronghold of left-wing liberals, is in the process of discussing a stimulus plan that includes the proposed $ 1,200 cash payment to all Americans.

As we wait for this invisible threat to return to the dark lair from which it sneaked out, creating havoc and death around the world, we constantly remember how interconnected our lives are and how fragile these bonds are. We ignore the plight of others, especially the poorest and most disadvantaged, at our own direct risk. Perhaps that is a positive lesson to emerge from this unprecedented crisis: we sink or swim together. It may not be very visible, like the threat we are dealing with, but we cannot afford to ignore it.

Maitreesh Ghatak is Professor of Economics at the London School of Economics and Director of the Development Economics Program, STICERD.

The opinions expressed are personal.

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