Introduction
Theoretically
inclined Macro-economists think of an economy in terms of Growth Trends and
Cycles, with latter showing peaks and troughs (recessions) of differing
severity. The Global financial Crisis (GFC), which some refer to as the US
financial Crisis reminded us of the possibility of a third possibility, Depressions,
not seen since the Great Depression of the 1920s. The Global Pandemic set off by the SARS
Coronavirus 2, has brought in a new economic state, a government mandated
Lockdown of whole or part of the economy, which requires a rethinking of the
different levels of economic distress and how to deal with them.
In the context of India, an emerging market
economy, we think of all these in somewhat different way from developed, rich,
mature developed economies (DCs). In normal times, the key issue for Indian economy
is to maintain growth rate at is potential.
India’s equivalent of the DC Recession is a “Growth Recession, which have
historically been driven by droughts, but were increasingly driven by oil
shocks and demand shocks. The Indian equivalent of the Depression (or
near-depression) is an Economic Crises, like the BOP crisis of 1990-1991[i] [ii],
the external shock (GFC) induced Growth crisis of 2008-2009[iii] [iv]and
the crisis induced by the SARS CoV 2 pandemic. The Growth recession of 2019 was
particularly severe and could be described as a Great “Growth recession”. The
issues connected with this have been analysed in the author’s research papers.[v]
A completely new element has been added to
Crisis management and Crisis handling, by promulgation of Medically driven, Government
mandated lockdowns of economic activity.
This requires further analysis and refinement of Crisis handling
approaches.
External Shock Induced Crises
What are the lessons learnt from handling
Financial crisis & external shocks, with particular reference to India? In this note we try to minimize economic
jargon and put these lessons in simple terms that the general public,
politicians, media and generalist bureaucrats can understand. This is done by
applying a few popular analogies to explain how to deal with the current crisis
There are five basic lessons, aspects and
steps, needed to address the pandemic affecting India. (1) Slow and Stop the
Pandemic from spreading. (2) Stop the Real Dominoes from falling and setting
off a chain of Dominoes, (3) Stop Financial contagion from spreading through
the Financial Network and freezing the network. (4) Treat the Welfare-Social
aspects as you would a Flood or Tsunami. Move the threatened people to higher
ground if possible, help those whose houses, farms & shops have been
destroyed, rebuild their houses & livelihoods after its passed. (5) Create
the Economic environment for rapid recovery of the overall economy, so that
it's not trapped in low level growth equilibrium for years afterwards:
Medical
Pandemic
Dealing with the
medical elements of the crisis requires advise from medical experts who know
Indian health and are fully up to date on information & knowledge emerging
from rest of world.
Spatial
separation of people from each other and from those infected with the SARS CoV
2 virus has been the critical element in slowing the spread of the virus. In
successful countries like Singapore, Hong Kong, Taiwan, S Korea, Japan this
involved widespread use of Masks (outside home). We should not obsess about the
quality of Masks, even a home made mask is better than nothing, though
production & distribution of better quality masks must be stepped up.
Stopping congregations of people in public, commercial & work spaces and
for social interaction is another essential element. Non-family members must
compulsorily practice spatial distancing (of 1-3 meters) and wear masks when
physically closer, even to friends and colleagues. The third element was the
identification and isolation of infected people in homes or special facilities
depending on symptoms. A combination of electronic (mobile phones) and physical
(police/administrative checks). And finally the health infrastructure was
geared up by procuring & providing appropriate protective gear to health
workers, necessary equipment like ventilators and expanding ICU capacity.
Lockdowns
are a last resort as they have a devastating impact on the economy &
economic well being. As SARS CoV 2 is imported Into India through international
travel ie was carried by Foreigners or Indians coming from infected countries.
It's therefore a middle class (top 30%) phenomenon. Socio-Spatial distancing is
needed in this category. We should be very careful in imposing lockdowns which
affect production and trade within the 70% and their interaction with the lower
middle class (next 10-15%). Lockdowns must be limited in time &
geographical space (eg Urban concentrations).
Real Economy (Dominoes)
It's clear that the Travel & Tourism, Restaurants,
Retail Trade & Entertainment Services industries which involve Contact with
other people are most directly affected by the Pandemic. Govt's Fiscal and
other action, has to identify Companies/firms in these sectors, which are
fundamentally solvent, from closing and setting off a chain of Closures
bankruptcies(Dominoes) This involves suspension of rules & regulations, tax
reductions, temporary tax exemptions, permissions to delay tax payments,
interest subventions, loan guarantees, quicker payment for services etc. .[vi]
These imperatives and the responsibility of Govt, multiplies manifold, during a
Govt mandated lockdown.
Financial Markets and System Stability
The nodes, channels
and networks through which real problems translate into financial crises and
propagate are well known since the Financial Crisis. The RBI has to provide
sufficient short, medium and long term liquidity to ensure that the Banking and
other critical financial institutions, all critical markets (e.g. Govt Secs) continue
to function smoothly and key instruments which are normally liquid and widely
used, remain largely so. RBI also has to
identify borderline institutions and devise specific measures to ensure that
they don't collapse and set of contagion, and systemic failure.
In this context,
Real Repo rates are a very important tool for signaling & giving confidence
to solvent financial agents, that the RBI will do whatever it takes to ensure
system stability. They must be negative for duration of crisis. This is also the
best (rational and easiest to implement) way to provide a cushion to solvent borrowers,
including cash strapped ones. In this time of Govt mandated lockdowns and
pandemic related shutdowns.
Contract Workers in & Self-Employed
Contract workers in
services facing Direct demand collapse and self-employed (street vendors, hawkers
etc.) associated with them. As is well known by know, the most directly
affected services are Travel(Air, rail, bus) and Tourism, Hospitality (hotels
& restaurants), Retail, Entertainments. The key lesson is that help must be
targeted to those directly affected. Expending highly limited Government
resources/funds on poor people or workers in other sectors and geographies is
not just pointless but socio-politically harmful.
Those Households in
which a member is affected by Corona Virus infection, can easily be given an
additional cash transfer for meeting normal expenses. For the rest of the poor and lower middle
income ones affected by broader Pandemic crises and/or lockdown, the States
must quickly invite all affected people to register for assistance with details
of their Aadhar, Voter ID, mobile & bank account details, work type &
place. A simple form can be devised which can be filed through multiple
channels; By email, at a digital portal or at a Ration shops. These can then be
provided Direct Cash transfer for duration of Crises/ Lockdown.
Post-Crisis Recovery
The speed and extent of recovery from crisis
depends critically on the policy & institutional changes made during and
after the crisis. Those countries which have used crisis as an opportunity to
reform policies which were slowing growth, even before the crises, have
recovered relatively quickly and in a more sustained way. The Indian Economy
was at the bottom of U (~5% GDP growth) before the pandemic. The pandemic could
push it even lower. It's imperative to re consider the policies that we have
suggested in the light of the new threats and opportunity and to reprioritize
them for urgent action.[vii]
Lockdown Economics
A lockdown is a complete Government mandated
shut down of economic activity (with exemption for “essential goods & services”,
like food & beverages & Pharmaceutical products and health services). This
is a crisis event the World has never seen before. World Wars have seen a
massive redirection of economic activity towards war fighting but never an
almost complete shutdown of production. If 90% of production is shut, this
means an end to the profits, wages and rents earned and the consumption of
these products. All those who earned their income from the locked-down sectors
have to use their cash/liquid savings (SB acts, current acts) to by essential
commodities produced by the remaining 10%. The latter continue to earn income,
but won’t have anything to buy besides essential commodities, and will
therefore become net savers of cash.
The longer the lockdown
lasts the more Households in the Lock-down sectors will run out of cash and
fixed deposits. Even those which have other assets like bonds and equity, will
become poor rapidly given the collapse of asset prices in the markets. It therefore
become imperative for Government to identify these marginal households on a
real-time basis and keep increasing the Direct cash transfers to the affected
households. This can rapidly extend from the conventionally poor to the the
lower middle class in the lock-down geographies/sectors, particularly in
sectors which were already stressed and cash starved.
Conclusion
During a crisis
Govt's emergency action has to be targeted at affected workers, firms,
industries & sectors, as best as possible, without obsessing about leakages;
Nor do we have the luxury (unlimited funds) of indulging our pet schemed, issues
& approaches (e.g. UBI, NIT, tax reduction for salaried, Uniform GST,
MNREGA, MSP), which may be very relevant for normal times. The second order of
business is for Govt to put those Institutional/administrative and policy
reforms in place which will lead to rapid recovery of GDP growth to its Full Potential.
The tragedy of crisis must be dealt with first and foremost, but a Crisis is a terrible
thing to waste, from the perspective of a sustainable fast growth and sustained
Welfare improvement.
Arvind Virmani
[i]
Virmani, Arvind (2020), India: Crises Reform and
Growth, Economic and Political Weekly, Volume
XXXII, No. 32, August 9-15, 1997, pp. 2064-2068. In Planning Commission I analyzed
the BOP crisis and advised on it and then moved to DEA, MOF in November 1991 to
advise on post-crisis economic reforms. Subsequently dealt with other external
shocks like the Latin and Asian Crisis.
[ii] As
Economic Advisor from 2007-2009 I dealt with a surge in Capital inflows, and
the big spike in oil prices and the severe shock of the Global Financial Crisis
on the Indian economy. Virmani, Arvind (2009), “Macro-economic
management of the Indian Economy: Capital flows, interest rates and inflation,”
Macroeconomics and Finance in Emerging
Market Economies,Vol. 2, No. 2, September 2009, pp 189-214. Arvind Virmani
(2007), “Macro-economic
Management of Indian Economy: Capital Flows, Interest Rates and Inflation”,
Working paper No. 2/2007-DEA, Ministry of Finance, November 2007. http://www.finmin.nic.in/workingpaper/index.asp, http://www.finmin.nic.in/workingpaper/2_2007_DEA.pdf
.
[iii] The 2008 GFC shock was so unexpected and so unique that even
the most brilliant generalists were dumbfounded and gave an opening for me not
just to devise & suggest polices but to go public in media to explain why a
host of fiscal measures were necessary and along with monetary measures,
sufficient to deal with the crisis. It was also the one and only time in my
Govt career that I directly cautioned the PM (through email) about a few
measures taken by RBI which I didn't agree with.
[iv] After the
crisis was successfully dealt with by October 2009, I spent 3 years as
executive Director on IMF Board, the only economist on the Board, who had dealt
personally with many crisis. I utilized this golden opportunity to study,
discuss and writing about the Global Financial Crisis and the actions taken by
the USA, EU, Greece, IMF and a host of other countries and World organizations
to deal with its effects and the after-effects.
[v] Virmani, Arvind (2020), Growth Slowdown,
Reforms and Recovery, January 2020, Policy Paper, Foundation for economic
Growth (EGROW). https://egrowfoundation.org/research/growth-slowdown-reforms-and-recovery/
. Virmani, Arvind(2020), "Growth Recession: J Curve of Institutional
Reform, Working Paper No.1/2020, Foundation for Economic Growth and Welfare,
February 2020, GrRecession_Jcurve_WP2020Feb.docx
.
[vi]
Finance minister has announced a list of items on which deadlines are extended
and Regulatory forbearance is given in laws, rules and regulations under the
charge of the Finance ministry like taxation, Company affairs an Banking.
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