Indian Economy was Rolling down a Hill with Covid-19, it’s Falling off a Cliff Jayati Ghosh

India is on the verge of an unprecedented economic catastrophe as the humanitarian disaster from the Covid-19 pandemic unfolds.

The sheer scale of disruption from the ongoing 21-day national lockdown, announced by prime minister Narendra Modi on March 24 to contain the outbreak, is unprecedented in Indian history.

The disruption is much starker than the global financial crisis of 2008, which hit the Indian financial sector and real demand, but did not bring production to a halt. Besides, at the time, the Indian economy was much better placed to handle the crisis, as it had been growing rapidly in the years leading up to 2008.

By contrast, the Covid-19 crisis comes at a time when GDP growth is slowing. If it was rolling down a hill earlier, now it is poised to fall off a cliff.

Economic havoc

While the lockdown may have been necessary to limit the spread of the coronavirus, it will not solve the problem, as many have assumed. It only provides some breathing space for the government to produce and distribute more testing kits, increase the rates of testing, ramp up supply of ventilators, and ensure the safety of medical workers, among other things. Without these measures, the lockdown will only postpone the problem.

Meanwhile, the most vulnerable sections are bearing the brunt of the crisis.

The greater part of the non-agricultural work force will have no livelihood for at least 21 days (and possibly longer as the lockdown may continue beyond mid-April, given the spike in positive cases). In the absence of massive public intervention, there will be widespread increases in poverty.

Desperate migrant workers crowding into buses or trying to walk several hundred kilometres back to their villages provide only one indication of the severity of the crisis, which is intense even among people who have not tried to move.

Furthermore, this lockdown affects supply. The dramatic curtailment of production and distribution means that relatively soon, all sorts of shortages will appear.

Consumption demand, the bedrock of the Indian economy, will also fall due to the collapse of incomes, and private investors will be shaken and uncertain. Many small entrepreneurs will be wiped out as well.

Construction and services sectors will be affected, and finance will also be in deep distress. Besides banking, which is already grappling with a bad loans crisis, insurance companies may see their business become unviable depending on the claims that will be made when the dust settles.

A complete lockdown is, therefore, unjust, inequitable and, in any case, unsustainable for too long.

Even during a successful lockdown, the supply and distribution of essential goods and services (at the very least, food items, medicines, etc.) should continue unhindered. Putting these items on a list of “exemptions” from curfew, though, is not good enough. It is crucial to ensure their continued production.

What needs to be done

Given this backdrop, the Modi government’s response thus far has been both draconian and inadequate. The restrictions on mobility and economic activity must be implemented for sure, but with more sensitivity and awareness of the living and working conditions of most Indians, as well as a recognition of the economic damage that it will cause.

The $23 billion package announced by finance minister Nirmala Sitharaman, on March 26, is so small that it is embarrassing. The grandiosely named “PM Gareeb Kalyan Scheme” is mostly a tweaking of some benefits of existing schemes.

The new spending proposed in this package would amount to only around 0.5% of estimated GDP—a trivial increase that will do nothing to counter the free fall of the economy. Compare this to other governments that have declared relief and stimulus packages of anywhere between 5-10% of GDP, with more to follow.

The macroeconomic concern now is to stabilise an economy that is in free fall, which requires measures to sustain some demand as well as to ensure supplies. Some state governments—notably Kerala, Delhi, West Bengal, Odisha, Rajasthan, and others—have come up with some necessary measures, but they are all cash-strapped and cannot afford interventions on the scale required.

The onus is on the central government to ramp up its own spending and provide funds to state governments for both public health purposes and for dealing with the economic consequences.

It should immediately clear all its dues with state governments such as pending wages under the rural employment programme MNREGA, for instance. It could direct additional resources to provide shelters, food and community kitchens for migrant workers and other homeless and displaced people; and to enable the necessary expansion of health infrastructure to cope with the crisis and provide proper wages, protection and security to frontline health workers.

The most useful measure from Sitharaman was the announcement of free grain—5 kg wheat or rice per person and 1 kg of pulses per households for three months—though the quantity should have been doubled.

Cash transfers announced by the finance minister were also pitiful in size and will not alleviate the distress. In a situation where people are simply not able to work and earn something, emergency cash transfers are required. An amount of Rs7,000 ($90) per month for at least two months (April and May) could be transferred to MNREGA workers, pensioners, and beneficiaries of other schemes.

India’s central bank also declared some firefighting measures, particularly a moratorium on interest payments for those who have availed term loans, but this is still voluntary. The Reserve Bank of India needs to ensure that banks and non-bank lenders mandatorily implement this, and also make sure that interest does not accrue in this moratorium period, to prevent distress and even collapse of MSMEs.

In addition, it is essential to ensure the supply of essential and basic commodities. This means allowing those producers, factories and processing units, but also recognising their input requirements and backward and forward linkages. In other words, enabling the entire ecosystem of production and distribution.

If production is allowed, which factories and production units will be allowed to function? How will physical distancing norms be maintained? How will distribution be organized keeping in mind the health concerns?

This requires planning and co-ordination between the centre and state governments, as well as fiscal resources to incentivise and enable this. So far, this issue has not been adequately recognised, so that even the regulations on movement are having to be constantly altered just to be sure of adequate distribution.

These issues of both demand and supply have to be addressed quickly. Otherwise we run the risk of complete economic chaos as supplies shrink and shortages emerge, with widespread unemployment and poverty, with associated social and political unrest.

Everywhere in the world, governments are recognising that this is no time to worry about fiscal deficits and the like. Instead, they have to do “whatever it takes” to come out of this extraordinary crisis. It is time for the Modi government to realise this as well, if the health pandemic is not to turn into an economic catastrophe beyond repair.

(This article was originally published in Quatrz India: April 2, 2020)