Business Today

Jumpstarting Post-coronavirus Economy

P. Chidambaram, Meghnad Desai, Bimal Jalan, D. Subbarao, and Junaid Ahmad on how to get the GDP going
Team BT   New Delhi     Print Edition: May 3, 2020
Jumpstarting Post-coronavirus Economy
Illustration by Raj Verma

The only way to control the raging global coronavirus pandemic, the biggest health crisis of our times, is to switch off the global economic engines through a complete lockdown and social isolation. The resultant economic pandemonium, though, is the last thing that governments want - or can afford. The dilemma leaves nations performing a balancing act, of finding answers to a very complex problem that needs health, social and economic solutions, all at the same time.

Business Today brings together five renowned names in macroeconomics, public administration and public finance for their views on how to re-start India's post-lockdown economy when restrictions are lifted, even as the country continues to fight the disease outbreak. Here are their prescriptions.

"Give credit, working capital, export sops, fiscal incentives. Not sequentially, but simultaneously"

The minimum amount required immediately is Rs 5-6 lakh crore. We may need more

P. Chidambaram, former finance minister

What can be done to restart the economy? What should be the first steps post-lockdown?

The first step will be to ensure that the poor are adequately remonetised, i.e., they have enough cash in their hands to sustain themselves until they resume their jobs or self-employment. Secondly, provide enough support, including loan waivers, to micro and small enterprises to resume production and supply. Thirdly, address the needs of medium and large enterprises (organised sector) in terms of credit, working capital, export incentives, fiscal incentives, etc., to quickly ramp up production and supply. These steps have to be taken, not sequentially, but simultaneously.

What should be the ideal stimulus? How do we raise resources? Is re-allocation of ministry resources an option?

The minimum amount of money that will be required immediately is Rs 5-6 lakh crore or about $80 billion. This is about 3 per cent of nominal GDP. We may need more. Resources are available within the country - through re-allocation, ruthlessly cutting wasteful and vanity expenditure, higher borrowing, and monetisation of part of the deficit. The IMF has given $1 billion.

How severe will be the lockdown's impact on Indias GDP? Are we staring at a recession?

It is too early to conclude whether there will be a recession. (Technically, a recession is when the GDP records two successive quarters of negative growth.) The growth in Q1 (April-June) will be very low, maybe even close to zero. Q2 growth will depend on when the lockdown is lifted and when economic activity resumes and gains momentum. It will also depend upon the fiscal steps the government will take - so far, there are none. The worst case scenario is zero growth in the first half (Q1+Q2) of FY21. The best case scenario will be that we see green shoots from July onwards. In either scenario, FY21 will record one of the lowest growth rates in recent years.

How do you see the governments and the RBIs responses so far? Are they enough to manage the health and the economic crises?

The RBI can only play a supporting role and, in my view, the measures taken by it are satisfactory. As far as the government is concerned, the record is mixed. On the health front, after some false starts, they seem to be getting their act together in containment and testing. On the economic front, they have failed miserably. They have been timid and hesitant. The situation calls for bold and decisive action, especially on (1) livelihood support to the poor and vulnerable; (2) protecting current levels of employment and wages; (3) providing financial support to MSMEs; (4) maintaining supply chains of goods and services, especially essential household goods and services; (5) allowing states to borrow more in order to be able to spend more; and (6) designing a package of measures and incentives to re-start the engines of economic growth. The heavy lifting must be done by the central government but they are, inexplicably, loath to do so.

"A Universal Income scheme for all"

India's informal sector is large. So income loss is heaviest for the poor

Meghnad Desai, Emeritus Professor of Economics, London School of Economics

The coronavirus is a classic black swan event. It was totally unanticipated. It is global, though perhaps more because the authorities in Wuhan did not immediately try to suppress the spread. Like all governments everywhere , they suppressed the bad news instead and allowed people who had been infected to travel. If anyone still needed proof that the world had globalised, this would be it. Someone meeting a person from Wuhan, either in China or in Singapore, travelled to a ski resort in the Alps and brought it to the UK. No doubt, others he came in contact with within Singapore or on the ski slopes carried it to Italy and Spain.

The disease has struck richer countries earlier and harder than poor countries thus far. International travel is a luxury and relatively rich people from rich as well as poor countries enjoy its pleasures. That has provided the fast global conduit for the disease to spread. The virus may be similar to others, SARS, for example, but scientists are not unanimous so far on its cure or even on strategies for slowing down its spread - mitigation or suppression. But now we have enough observations to know that its incidence takes the form of the well-known Bell shaped curve and 10 or 20 countries that have had the virus for some weeks since early January exhibit the standard pattern of a cumulative version of the Bell curve.

India has been a late arriver on the scene as it got it from travellers, many of them Indians who had got it from Americans or Britishers. By mid-March, it had been clear to European countries that the technique of social distancing (lockdown) is effective if it can be enforced. Though Indias death count is low thus far, there is no reason to be complacent. Like many European countries India can be expected to have deaths in five figures. The US will score higher still - in six figures.

That at least is the safest assumption on which to proceed. India has launched a lockdown anyway. There is some complacency in India about the low figures for death but it is early days yet. The pandemic will not be gone this side of July at the earliest.

The difference the virus makes is in the economic impact. Not so much in the macro impact. GDP will go down by 25-30 per cent everywhere. But in India, the size of the informal sector is large and the ratio of womens participation in the labour market is also low compared to other similar countries in Asia. This means that income loss is heaviest for the poor. As many of the informal sector workers are migrants, their first reaction has been to move back to their native villages. They find they are not welcome as they come from rich traveller infested areas and were in any case surplus to requirements, which is why they left in the first place.

All countries have thrown the principles of fiscal rectitude and monetary restraint to the winds and focused rightly on saving lives. Since physical proximity has to be reduced , economic activity - consumption, production, trade, distribution - has suffered massively. Even labour in formal and MSME sectors has been laid off. Higher up the scale, corporations relying on financial markets for funding have suffered from share price collapse. They need liquidity at low cost.

The government has already begun to act on these fronts. The Rs 500 was a great idea (credited to Jan Dhan account holders for three months). A bolder step would be to extend it for six months for all women. My favourite recipe is a Universal Income scheme for all voters at Rs 1,000 per month for six months. It will be easy to implement. The better off can give up the claim like they did for the gas subsidy but it should not matter. It is a universal catastrophe. Let all be covered.

"Increase fiscal deficit by two percentage points; transfer money into hands of people"

Take measures to boost demand. If unorganised or organised sector is not working, it has a recessionary impact

Bimal Jalan, former RBI governor

How do we generate demand in the economy?

We should be willing to increase fiscal deficit by 1.5-2 percentage points. The government has to pump money into the system. To create demand, it has to transfer some money (into the hands of people). The RBI also has to take steps to reduce borrowing rates. These are good measures, but it does not mean that the growth rate won't decline. We will, however, be able to ensure that we don't get into a recessionary condition.

If the government is ready to increase deficit, where should this money be spent?

The usual things, wherever the government is spending, such as public services. It needs to increase direct expenditure in public sector units, and other agencies. So whatever is in the government's domain, it should do. What is in corporate sector's domain, it should do that. Corporate sector spending can be boosted by reducing interest rates.

But (I am again saying) that does not mean we will be able to meet the entire impact of coronavirus on growth rate. The situation is difficult all over the world.

Won't sovereign ratings suffer due to higher fiscal deficit?

No; we are also reducing interest rates, and if demand is not high, inflation won't increase that much. We are in a situation where we should take some measures to boost demand. For example, if the unorganised or organised sector is not working, and they have no sales, and salaries have been cut?all these have a recessionary impact.

Rating agencies will understand India's compulsion as the same is affecting all countries.

Some states have been announcing packages. Will this lessen the fiscal burden of the Centre?

States' and Centre's roles are not overlapping. States have a different role to play. They have their own administration for which they have to pay, they have their own schemes. The Centre has its own areas and schemes (where it should spend). There is no conflict between the two.

"Govt should target job-intensive and stressed sectors..."

...such as construction and real estate and sectors that are most stressed like airlines, power, shipping and transport

D. Subbarao, Former RBI Governor

How do we restart the economy?

I gather about two-thirds of the manufacturing sector has closed during the lockdown. This will have to be restarted consistent with the phased lifting of the lockdown. Restarting has to happen not by sectors but by supply chains. Both large and small firms will need cash to restart. One way to do that is for the government and PSUs to pay all dues they owe to private corporates. The targeted LTRO (long-term repo operations) of RBI (whereby banks get access to long term money from the RBI for buying corporate bonds) is another way to put cash in hands of corporates.

What should be the first steps post the lockdown?

The lockdown would have hit both supply and demand. The measures mentioned earlier address the supply side. There has to be stimulus on the demand side so that supply and demand normalise in tandem. One way is to expand payments under PM's Kisan Yojana, and expand MNREGA.

Should India give sector-specific stimulus (government seems averse to this) or across the board as it has been doing?

The government's resources are limited. To get maximum bang for the buck, the government should target sectors that are job intensive like construction and real estate and sectors that are most stressed like airlines, power, shipping and transport. If done transparently, the political backlash of such a targeted approach can be minimised.

Does the government have the resources for these big expenditure commitments?

That is a huge challenge. Our fiscal (condition) was already overstretched. Add to that just the loss of revenue because of the shutdown and the combined fiscal deficit of the Centre and states will exceed 10 per cent of GDP. The expenditures we talked about will be on top of this. There is a view that the government must spend whatever is necessary to fight the pandemic regardless of the adverse economic impact. As much as I am sensitive to minimising the human cost of the pandemic, we must recognise that millions of people in the informal sector will be forced to the margins of subsistence in an extended lockdown. There is an equally compelling humanitarian dimension on both sides. Besides, a blue sky approach to spending will take a heavy toll down the road by way of inflation and exchange rate volatility. In the interest of efficiency and transparency, the government must pre-set a fiscal target, maybe 2 per cent or 3 per cent of GDP, and work within that. The target can be revised later if necessary.

How do we save SMEs?

SMEs operate on very thin margins. They are the worst hit. Mandate large corporates to pay up their dues to SMEs from what they receive from the government. Another option is a dedicated line of credit from the RBI to banks to lend to SMEs. Since banks might be wary of the credit risk, the government will have to guarantee these loans. A similar government guarantee scheme should be channelled through MUDRA to support small unorganised enterprises.

Loan restructuring will be necessary in many cases. Banks may be diffident about restructuring even cases that can get back on their feet. To neutralise that, the government may have to come up with a TARP-like programme to give capital support to firms. (The Troubled Asset Relief Program was created and run by the US Treasury in the wake of the 2008 global financial crisis.) This programme can also be used for large firms, especially in key sectors like travel, hospitality and logistics, to enable them to raise domestic and foreign equity.

How is the coronavirus financial crisis (CFC) different from the global financial crisis (GFC) of 2008-09?

First, the GFC originated in the financial sector and then the contagion transmitted to the real economy. In the CFC, the causation is in the opposite direction. The second difference is that the level of uncertainty is much deeper in CFC because of the number of known unknowns about the coronavirus. Third is in available solutions. In the GFC, solutions to the real economy and in the financial sector worked in tandem. In the CFC, there is a trade-off - the stronger the measures to contain the pandemic, the bigger is the hit to the economy.

"India has space to invest 3-5 per cent of GDP"

Health, social protection and economic stabilisation measures critical

Junaid Ahmad, Country Director, India, World Bank

In 2008, you had a financial shock. The current one is a supply shock. You have to deal with where the supply problem emerges, which is the health sector. When you engage in social distancing, you have to slow down the economy. When you do that, you need to create a bridge through which you provide social protection funds to the vulnerable, and to the small and medium enterprises. Once India begins to move away from the lockdown, economic stimulus should come. Interventions like lines of credit to small and medium enterprises, credit enhancement for businesses, etc. will stabilise the economy.

Were in unchartered territory. The key is to respond to whats happening on the ground. One of the lessons from the 2008 crisis was that as firms shut down, and people were laid off, it took seven to 10 years for people to come back into the labour force. The economy cant afford that. Thats why you have to work on health as well as bridging support to stabilise households as well as pockets of the economy. The government has already moved ahead. The RBI's lines of credit, stabilisation, regulatory forbearance are all enabling stability.

Paul Krugman, the Nobel Prize winner economist, said hes very worried that theres going to be a significant downward trend globally. We are entering into a world of slow growth, and in many places, negative growth. All these interventions are precisely to ensure that this downward trend is arrested, before it can pick it up. It's hard to predict when were going to see an end to the health crisis.

The state is back in the picture in a big way. The US is putting in 10 per cent of GDP, and Europe around 5 per cent. India's debt is not huge and it is in local currency and long term. So, India may have the space to invest 3-5 per cent of GDP into health, social protection and economic stabilisation measures.

(As told to Joe C. Mathew, Dipak Mondal and E. Kumar Sharma)

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