Coronavirus, a tiny virus, has been causing chaos across the world since January. Countries are going into lockdowns, international travel has been banned, businesses are shutting down and healthcare systems are coming under unprecedented pressure. The virus has led to a global standstill and thus, to a global slowdown of economic growth, if not a global recession. Policymakers are now considering or already taking quick large steps to both ease the health care challenges and stem the economic pain. The Economist Intelligence Unit (of The Economist magazine) estimates a negative growth rate of 2.2% of the GDP in countries of the G20 group for 2020. Amidst this crisis, one probably would have come across the talks about the trade-off between the lives of the people and the economy. No doubt, lives are of utmost importance, but not paying attention to the economy will critically affect the lives of the people once the crisis is over. The crisis will have an adverse impact on India which is already on the path of a slower growth rate. In this context, what has India done? And what can it do?
The Indian Prime Minister has announced a nation-wide lockdown from March 23, 2020, for a period of 3 weeks, till April 15. Following this came the decisions to ban international travel and shut the state borders, with an exception to vehicles transporting essentials. All of the non-essential businesses (manufacturing, construction, IT, etc) have come to a grinding halt and this has led to a supply and demand shock to the economy of India. It is crucial to note that 92% of the Indian workforce is engaged in the informal sector and one could find hordes of people migrating across the country in search of a job. These people are largely construction workers or people working in farms and survive on their daily wages only. Two days after the lockdown was announced, the Central Government announced a package of ₹1.7 trillion to help the poorest sections of the society. The wages under the National Rural Employment Scheme (NRES) were increased to ₹202 (i.e. about $2.69) from ₹182 (i.e. about $2.42). The Central Government, among other things, has also announced an allowance of 5 kg rice (or wheat per person) and 1 kg of pulses per family each month for 3 months. Some Indian states have announced cash transfers to all subsidy cardholders, in addition to the Centre’s cash transfers
However, these two measures have some problems. First, the objective of a total lockdown is to practice social distancing and thereby, no one is allowed out. Now, transferring cash through NRES wouldn’t work because people cannot come out to work; and even if they did, they will form a gathering and hence, defeat the purpose of a lockdown. Second, the average daily minimum wage in India in 2014 was ₹272 (i.e. about $3.62 in todays money). For simplification purposes, let us assume it to be ₹200. Now, if a person works for, say, 5 days a week that person would earn ₹1,000. This would total to ₹4,000 a month. What this means is that they earn more than what is being offered now, and the ₹1,500-₹ 2,000 (Central plus State Governments) per month given to these migrant workers is simply not enough of an incentive for them to stay indoors, thus once again, defeating the purpose of the lockdown.
Another thing worth considering here is the prices of essential commodities. Given the shortage of supply, prices of some essentials are likely to increase. This will slash the real value of the money being distributed to the beneficiaries and would not be able to support them. Therefore, the government should increase the amount (Amit Seru, a prominent economist from Stanford has said this should be 5-6% of the GDP) disbursed to the targeted groups, not restricting the scope of the beneficiaries. That a large proportion of people are in the informal sector makes the transfers difficult, but India has the mechanism to carry out these transfers. It is also imperative to note that without much emphasis on the accurate number of beneficiaries, India must rather focus on transferring the amount because time is of the essence.
As mentioned above, due to the crisis there are demand and supply side shocks to all the economies. A majority of the economists polled by the IGM Booth panel, however, opined that the economic effects of demand side shocks are larger than those from the supply side. As the businesses shut, the income of the people fell and so did the demand for goods and services in the economy. This is a critical cycle where income and demand depend on each other and when one falls it drives down the other and this is accompanied by a sharp rise in unemployment (in the informal sector mainly).
The economic crisis entailing the global pandemic is the textbook example of the good old Keynesian economics. And the conventional cure to this problem is fiscal expansion. Fiscal expansion, by way of government spending, will yield results with immediate effect. One cannot be concerned about the rise of fiscal deficit, given the seriousness of the current situation and it should be allowed to rise both at the Centre and the state level. The Fiscal Responsibility and Budget Management Act (FRBM) can be amended or an ordinance can be issued to that effect. A greater degree of autonomy should be given to the states by means of allocation of funds or disbursal of the welfare schemes, as it is much faster to implement all these at the state level. For this, the contributions to the newly started PM-CARES should be distributed on war footing starting from the worst affected states. The government can also consider cutting down income tax rates (preferably, the lower brackets) and GST slabs at least for some period to boost the revival of the economy.
The Governor of the Reserve Bank of India (RBI), the Indian central bank, has also announced a slew of measures by employing the tools of monetary policy alongside the government’s fiscal measures. The RBI cut down the repo rate by 0.75% and Cash Reserve Ratio by 100 basis points to 3%. The Reserve bank estimates these measures would result in an injection of ₹3.74 trillion into the economy. However, this should not be taken as is. For we do not know if the banks will slash the lending rates even as the RBI slashed the repo rate. Additionally, the demand is bound to increase after the lockdown is lifted. However, the question one must ask is will the demand be sufficient for the businesses to borrow money from the banks. Hence, we do not know whether the reduced interest rates would lead to an increase in investment.
Finally, one thing is clear. This crisis is not conventional in the sense that the economy cannot be rescued in these times. This is because the non-essential services are shut down and cannot be opened until the lockdown is lifted. Even if India reopens, many businesses might find it difficult to start production because of the disruption of supply chains owing to the lockdown in other countries. Hence, growth will slow down. All India can do is take measures to revive demand once the world settles down.
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