Economic Repercussions of COVID 19 and India’s Policy Response

There is every reason to believe that the fall out of this pandemic would be much deeper in the global economy as compared to Financial Crisis of 2008 and in case, the International Monetary Fund’s (IMF) estimation of global economy shrinking by 3% during 2020 turns out to be true; this period would mark the steepest downturn since the ‘Great Depression’ of 1930s.

 Great Depression started with a stock market crash in United States of America and it soon had almost the entire world in its clutches. In mid crisis period, John Maynard Keynes published his book titled “General Theory of Employment, Interest and Money” in the year 1936. Later Keynes came to be known as the father of ‘Macroeconomics’ since he was the one to provide the solution to the crisis which eventually worked.

Present crisis situation is unique in the sense that we are not only witnessing a massive demand shock but also a supply shock due to disruption of supply chains across the world. In the present situation, the policy makers have to be cautions while adopting expansionary fiscal policy as “too much of money” in the economy may lead to rise in prices in a situation where supply is not forthcoming.

The Keynesian prescription of expansionary fiscal policy by government interventions is still seeming to be the only way to prevent countries from sliding into depression,  as the economic activity comes to a screeching halt; owing to the widespread lockdown policies being adopted by countries to delay the spread of corona virus.

Depending upon the anticipated rate of damage and unemployment figures, countries in the world have announced relief measures as stimulus packages ranging from 11 percent of GDP in U.S.A, 16 percent in Malaysia, 5 % in  Germany ,3 % in Canada  and in Japan, a staggering USD 1.1 trillion which comes out to be more than 20 percent of it’s GDP. On same lines, Hon. PM Modi also announced during his address to the nation on 12^th May 2020, that Indian government would put together special financial relief measure worth 20 lakh crore –approximately 10 percent of India’s GDP.

These economic stimulus packages being announced by countries including India are a slew of monetary and fiscal policy measures like direct benefit transfers, unemployment benefits, aid for ‘gig’ economy workers, support for the worst affected industries like airlines, loan moratoriums for farmers, Micro, Medium and Small Scale Industries (MSMEs), medical insurance for frontline corona warriors etc.

The details of the 20 lakh crore package in India were announced by the Finance Minister over a period of five days and the break up was as under:

1.92 lakh crore –PM Garib Kalyan Yojana announced earlier.

8.01 lakh crore – RBI’s monetary measures

Tranche 1 Policy Measures – 5.94 lakh crore

Tranche 2- 3.01 lakh crore

Tranche 3- 1.50 lakh crore.

Tranche 4 & 5 – 48,100 crore.

The announcements made comprised of some landmark reform measures along with infrastructural spends, increased public expenditure on health, education and privatisation of strategic Public sector undertakings. Some of the reform measures like opening of all sectors to private sector; had long been asked for from the government.

Just as during the crisis of 1991, some critical and long over due, reforms have been initiated by the government during the Corona crisis. MSME sector which is widely recognised as a backbone of any developing economy has been extended full support by the government with measures like 100 percent sovereign guarantee for uncollateralised loans, the defining structure of MSMEs has also been changed. Also, an additional sum of 40,000 cr. has been pumped into MNREGA. Along with relief for farm, infrastructure, discoms, changes in Insolvency and Bankruptcy Code, establishing ‘infectious disease block and labs for testing and treatment’.

The financial package that has been announced in India (through sheer numbers) appears to be one of the largest in the world and it will certainly help in instilling confidence in business community to an extent.

It has been predicted that the lockdowns 1.0 -4.0, necessitated by the COVID crisis will lead to an approximate loss of 3-4 percent of GDP.

If we go by IMF’s recent estimation of 1.9 % growth in Indian economy in Financial Year 2021 (a fall from earlier projected 7 percent growth in October 2019)– it refers to a loss of around 5 percentage points in the growth.

The present package will lead to an approximate of 3-4 lakh crores of fiscal support i.e directly from the government’s balance sheet. This is quite less than expected or needed. The measures announced by government are more medium to long term and mostly monetary in nature, while economists and experts were waiting for demand side relief looking at the existential nature of the crisis.

Shri Rajiv Kumar, Vice Chairperson of Niti Ayog in an interview to India TV on 17^th May said that unlike other countries India cannot afford things like ‘Helicopter Money’ as any excesses with currency may lead fiscal deficit to slip out of control thereby adversely impacting value of rupee, credit ratings as well as FDI.

The debate on whether government should have focused on immediate relief for income support like direct cash transfer scheme or on measures unleashing long term reforms; reminds me of the famous statement made by Keynes when he criticised unrealistic assumptions of the Classical theory….. “ In long run, we all are dead”!!!

Note: ‘Helicopter Money’ – a concept introduced by Milton Friedman in 1969 and popularised by Ben Bernanke, Governor of Federal Bank, when he mentioned the concept in one of his speeches in 2002. Helicopter money refers to the process through which Central bank will print large amount of money and put it directly in hands of consumers to increase their disposable income. This money does not produce repayment liabilities on the government as in monetisation of deficit by printing bonds.

 

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