A coup de grace for the economy, writes Kapil Sibal – analysis
Any number of hits from Sonny Liston will not eliminate coronavirus disease (Covid-19). It is here to stay. Nineteen deaths in one day and 67 in one week in Ahmedabad do not bode well. Health workers across the country, in the absence of personal protective equipment, have been infected. Doctors, without protective equipment, who have risked their lives to protect people, have succumbed. Over time, the curve will flatten out. The infection will increase as the herd’s immunity is established. By then, familiar with the precautionary measures, India will be ready to deal with infected people. The last remedy is a vaccine that is at least a year and a half away.
But the coup de grace to the Indian economy has serious long-term consequences. The 40-day economic freeze will take several quarters to revive. A global recession may well be just around the corner. The estimated loss caused to the global economy is approximately $ 11 trillion. The economy of the United States (USA) will have a negative growth rate. India will also witness a negative growth rate this year. The fact that this virus originated in Wuhan, China, has geopolitical implications. In these changing global equations, the developed world will want China to lose its primacy as a global supplier of goods. Factories may have to move out of the country. India may not be the most attractive destination for such relocations. Our tortuous regulations, illiberal mindset, and divisive environment, coupled with a lack of quality infrastructure and human resources, are serious impediments to attracting investment for manufacturing.
Our service sector may struggle to take advantage of global opportunities given the mood in the United States to reduce its global dependence on goods and services. The nature of the labor market will change. It will be necessary to restart the impact on the modes of production. The self-sufficiency of which Prime Minister (PM) Narendra Modi speaks is easier said than done. Any change in globalization, which is likely, will impact us.
The government’s political response to the pandemic has been poor. North Block must realize that any issued notice cannot be applied uniformly across the country. The blockade has dealt a fatal blow to our economic renaissance. If this had been carefully planned, and there was sufficient time to do so between January 28 and March 24, India would not face an economic crisis of this magnitude. Trapped in shelters with inadequate food, water, sanitation and other essentials, they are unwilling to return to work. They have suffered unduly during this period.
The instructions issued to the industry to start operations do not take into account the realities on the ground. A seamless manufacturing unit cannot operate at 25% of its capacity. The unit operating cost will not be economical. In the absence of demand, and of a complete unsold inventory, there is no logic in the operation of a unit. This applies to the automobile, steel and some other sectors. The textile industry, which survives on exports, has been seriously scorched. The Chinese are ready to fill the gap. Buyers in Europe and the US If they do not receive service, they will move to other providers. The real estate sector needs special attention and a separate package. Its rebirth creates demand for steel, cement and sanitary ware. Furthermore, this sector generates employment. Micro, small and medium-sized companies, the most affected, need immediate financial support to avoid massive closings and bankruptcies. This pandemic is unique in that it disrupts our economy on both the supply and demand sides. The sectors on the demand side that bear the worst share include commerce, transport, travel and tourism, hotels, sports and entertainment. Financial services are also heavily affected. On the supply side, India is experiencing supply chain failures with respect to imports and exports, with China, South Korea, Italy, Spain, France, Germany, the United Kingdom and the United States. The pandemic has dealt a devastating blow to the economies of these countries that also affect India’s global trade.
At the national level, with moderate revenue collection, India will have to rely on extended loans and non-tax revenue sources. Defer compliance with fiscal deficit targets and develop a substantial stimulus package to boost demand. States, in addition to expanding health care facilities and ensuring food security, must also provide income support to those who have been deprived of their livelihoods. Along with declining revenue share of the Goods and Services Tax (GST), states’ profits from the sale of alcohol and fuel have also dried up. With the close closure of industrial and commercial activity, the demand for electricity has decreased. Real estate transactions are also frozen. All of this has put the states’ finances under real strain. The Union still owes approximately Rs 34 billion to the states as GST compensation for December 2019 and January 2020. The Fiscal Responsibility and Budget Management Act of 2003, which limits state lending, will further hamper state governments in their attempts to revive the economy.
The frequent, often confusing, notices issued by North Block are evidence of the government’s inept handling of the pandemic. The directive for employers to bear the burden of paying employees’ wages during closure, in addition to being illegal, is blind to its differential financial capabilities. We need action plans, mandatory under the National Disaster Management Act, 2005. Decisions must be made after consultation with stakeholder representatives. We need coordination between the Union, state and district authorities that allow monitoring. Different sectors of the economy need separate bailouts.
The path to economic revival is to create demand to whet the appetite of supply chains. Demand can only be created by putting money in the hands of the 800 million poor whose ability to win has been affected. This daunting challenge requires a national response. The government must show both transparency and the will to make decisions based on basic realities. The sensitivities of each sector of society should be considered when formulating a policy framework. That will only help us get back to normal.
Kapil Sibal is a former cabinet minister of the Union and senior leader of Congress
The opinions expressed are personal.