Pandemic Economics: Q& A 2

Answers to Questions received from, Shantanu Nandan Sharma, Senior Editor, The Economic Times

Q1. Do you feel the green and orange zones will be able to fire up the economy? 

A1: The division of the country into COVID threat zones is appropriate for issues of "Social Lockdown" and severity & strictness of Physical Distancing rules and regulations for society during the Pandemic. Policy formulation requires that primary focus be on the distinction between MMCAS (Manufacturing, mining, construction & Allied Services) and the Contact Services (Tourism, hospitality, retail trade). The division into color zones is suitable for Contact Services, but not MMCAS. Differential treatment of MMCAS in different color zones will fragment the supply chains and create localized supply-demand imbalances which will slow recovery.

Q2. Should the lockdown be further relaxed to boost the economy? What should be done in industrial/commercial hubs in the COVID-hit red districts.

A2: We estimate that MMCAS constitutes about 50% of total GVA and about 35% of employment. This segment of economy must be freed up entirely, even in red zones, but with stricter physical distancing, and testing requirements for employers, employees, and customers (in red zones). This will ensure that national function smoothly, while restricting physical contact within red zones and between red zones and other. This is critical to smooth and quick recovery of the National economy.

Q3. As migrant workers are leaving the industrial hubs, do you foresee a situation of labor shortage in the short term? 

A3: Migrant worker with families in villages, go back every year, form urban and industrial locations, to help their families with harvesting. In 2020, some left in late March, but others were stranded when the lockdown became much stricter in April. Even those who do not migrate every year during the harvesting season, wanted to return, as economic activity was shut by the lockdown. If State Govts plan appropriately, and Union govt helps coordinate between states, migrant workers will happily return to industrial or commercial hubs, when economic activity resumes and job opportunities re-emerge. Co-ordination between Government, industry, and Social organizations would greatly facilitate the matching of demand & supply for migrants during the transition period when information is scarce and public transport must be specifically allowed/arranged.

Q4. What is your immediate prescription for the Indian economy?

A4: One, State Govts must ensure that no one starves because of Govt mandated lockdown. The best way to do this during a Pandemic (deadly communicable disease) is through an Aadhar linked, mobile payments based, direct cash transfer system, which puts money directly into the hands of every poor women in every habitation/village. Union Govt can help States & UTs expedite the setting up of such a system. Two, Union Govt, along with RBI, must ensure that there is no epidemic of mass bankruptcies; All legal financial obligations of private industry & commerce to Govt, must be suspended during the lockdown & the transition to normalcy. On the other hand, govt must clear all its dues quickly as this helps private sector w/o worsening fiscal sustainability. Three, Union & State Govts must over the next 9 months( up to and including the next budget), roll out a series of reforms in every area & every sector under their constitutional authority (tax, expenditure, agriculture, land, labor, external, skilling, bureaucratic controls, construction, legal, textiles). This will be critical to reducing the economic losses during FY21 and quick recovery of economy in FY22, to India's growth potential.

Q5. Anything you would like to add?

A5: Conventional discussions of fiscal policy, sound to me like a Kabuki on TV theater. Any conventional discussion of stimulus is meaningless when 60% of the economy is shut down by Government Fiat and we can only produce, sell and buy, essential commodities (40% of GVA, 55% of employment) . Even the poorest person, would not be able to spend his full normal income as nothing else can be bought. The saving rates of Govt servants and salaried professionals, who are getting their full salary, has likely doubled, or tripled.

Post lockdown there will be a transitional period during which, the issue of Bankruptcy resulting from asymmetric legal obligations and Force Majeure, will become acute. State Governments and courts should not add to the problem by ordering firms to pay 100% of salary and wages to 100% of their employees. A fair and reasonable compromise is to temporarily reduce wages to the point that all can meet their essential requirements, but no more.

Most of the increase in Fiscal Deficits of States and Union Govt in FY21, will occur from a decline in government revenues due to zero economic activity during shutdown & the transition to normalcy. This is known to macro-tax experts as an "Automatic Stabilizer". In the Global financial crisis (when I was CEA) this constituted ~1/3rd of the "fiscal stimulus". In the pandemic crisis this may constitute half to 2/3rd of the increase in fiscal deficit. There also be will be a simultaneous slowdown of govt development expenditures due to lockdown. This provides a golden opportunity for revenue negative tax (GST, PIT/DTC) and expenditure (Subsidy & Welfare transfer) reform.

Last, but not least, the collapse of Global supply chains due to the Pandemic, has a big silver lining for India. It provides a once in a century opportunity to attract Global supply chains to India, by increasing our competitiveness. Both Union and State Governments must implement the well-known and long pending reforms of labor, land, agriculture, external sector, and other reforms.