Following the announcement of relief and stimulus package, the debate began over its various aspects. This article assesses the various aspects of the package and draws comparison with the package announced by the other countries. So, how does India fare compared with other countries?

Fiscal component of  stimulus package

• According to the IMF-PT (policy tracker), the fiscal component of the Indian package is estimated to be at least 3.5 per cent of GDP as expenditure for poor households, migrant workers and agriculture.
• There is an additional 0.5 per cent of GDP for states to spend unconditionally, bringing the fiscal package excluding loans to businesses to at least 4 per cent of GDP.
• The support for businesses (MSMEs) is estimated to be 2.7 per cent of GDP.
• Of this, at least 2 per cent of GDP is in the form of 100 per cent credit guarantees and equity infusion.

Comparison with major emerging economies

• Among major developing economies, only Brazil -8 per cent of GDP– and Peru -7 per cent of GDP– have a fiscal stimulus higher than the 5 per cent level for India.
• The Brazil estimate includes about 3 per cent of GDP as working capital loans to businesses and households.
• The fiscal support level for some important emerging economies is — China 2.5 per cent of GDP and Indonesia 3.5 per cent.

Why it is difficult to segregate the stimulus package?

• While comparing the fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs.
• Which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to fund.
• Access to fund is ensured in the nature of credit guarantees to financial institutions and non-financial enterprises
• A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture.
• Hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
• Most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure.
• And includes three broad items — a direct “above-the-line” component, a “below-the-line” component and guarantees of various forms primarily credit.
• The choice of using only one component of the fiscal stimulus is selective and highly inappropriate.

India as a positive fiscal stimulus outlier

• To put the packages into perspective, the average of all fiscal measures in the G24 developing economies is equal to 3.6 per cent.
• No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations.
• The stimulus is close to the largest among major emerging market economies.

So, how much rich countries are spending?

• The rich nations are spending more — they can afford to. Japan announced what may be the upper limit to the expansion — 21.1 per cent of GDP.
• However, this does include large elements of loans and credit guarantees.
• Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc.) the US has pledged close to 13 per cent of GDP.
• The European Union, on average, has pledged 4 per cent of GDP.
• The average for advanced countries is around 6 per cent of GDP.

Significance of monetary policy change made by RBI

• The monetary policy change in India is quite significant.
• The change paves the way for internationally competitive monetary policy.
•  That is, real interest rates comparable to those prevalent in competitor economies.
• The repo rate now stands at 4 per cent, with inflation well contained.
• This is substantially a much different, and much-improved RBI response than that what occurred in 2008-09.
• At that time, as a monetary counter to the financial crisis, the RBI reduced the repo rate by 425 basis points to 4.75 per cent.
• This was done over seven months and the prevailing CPI inflation rate was 10 per cent.

Economic reforms as a part of stimulus package

• India has announced several economic reforms as a part of the stimulus package.
• These are long-awaited — freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come.
• This is not an empty promise — the Centre will advance another 1.5 per cent of GDP to states to expand spending.
• This advance will be conditional on them for undertaking long-pending reforms.
• The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures.

Conclusion

The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures. We should use the crisis to re-orient India towards its long-awaited destiny.

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Disruption of the supply chains lies at the heart of the decline in the output amid lockdown. And the government has announced the fiscal stimulus to revive the economy. How effective will be the fiscal stimulus to streamline the supply chains? The focus of this article is on tackling this question.

Disruption in supply chains and decline in output

• Much of the decline in output is due to supply chain disruptions generated by the lockdown.
• Government spending can do little to alleviate this.
• Putting money in the hands of people can increase the demand for goods but cannot increase the supply of goods and services.
• In modern economies, the production of goods happens through complex supply chains that traverse geographical boundaries.

Let’s understand how supply chains work

•  Upstream sectors like ‘mining’ produce metals that are in turn used to produce machines.
• These machines are used to sow seeds, harvest crops, and transport fuel.
• Finally, the harvested crops are used by downstream sectors to produce flour and bread.
• At each step, machines and labour combine to produce goods which are the inputs for sectors further downstream.

So, how lockdown affected the supply chains?

• Under the lockdown, numerous inputs have not moved from their producers to their users.
• These disruptions may not at first generate a reduction in consumer goods like bread.
• However, the availability of consumer goods will begin to decline as bakers run out of flour, and mills exhaust their stocks of wheat.
• And there is no way to guarantee the flow of essential goods while suspending the production of non-essential goods.
• Automotive spare parts may be non-essential in the short run, but become essential as food-carrying trucks begin to break down.(i.e. in the long run)
• How far is the long run? This is difficult to say; there may be some variation across goods.

Impact of labour shortage on supply chains

• The supply chain disruptions are going to be amplified by labour shortage as workers remain at home.
• Countries like India are likely to experience a greater reduction in output on this count than, say, Europe or the U.S.
• This is because of the higher labour intensity of production in India.
• To understand this, think of the difference in unloading of goods in the port at Rotterdam and the port at Kochi.
• Is it viable to substitute labour with capital? Poorer countries are less likely to be able to substitute locked down labour with capital because of the dearth of capital in these nations.

Adapting and Adjusting to the new reality

• As economies emerge out of the lockdown, entrepreneurs, workers, and consumers must adjust to the new reality.
• The world supply chain must adapt.
• Firms may choose to source inputs from suppliers in their geographical proximity to minimise the risk of future disruptions.
• But this involves building productive capacity at new locations, all of which requires investments fuelled by savings.
• Furthermore, the investments must be guided by price signals.
• Within a market economy, the movement of prices provides the incentive and information needed to adapt and grow.
• As economist Ronald Coase put it, prices are bundles of information wrapped in an incentive.
• As the prices of some inputs rise, the buyers of these inputs look for alternate suppliers, and firms which did not hitherto produce the good have an incentive to do so.
• The key to economic recovery lies in millions of such adjustments.
• Through such adjustments, firms locate new providers of inputs, new buyers of their output, and build factories at new locations.

How fiscal stimulus would disrupt the recovery of supply chains?

• Market adjustment processes are likely to be disrupted by government stimulus packages.
• Governments spend by printing money, raising debt, or increasing taxes.
• Irrespective of the way in which the expenditure in funded, resources are transferred from private entrepreneurs to government bureaucrats.
• When governments print money, they draw resources through inflation.
• Bureaucrats tend to be less efficient than profit-motivated firms in allocating scarce resources.
• Bureaucrats have little incentive or information to bring about the granular supply chain adjustments necessary to revive growth.
• As the stimulus package kicks in, economic efficiency is likely to decline and so are the chances of a timely recovery of output.

A lesson from West Germany after WW II

• The experience of West Germany after World War II has a useful lesson for India.
• Beginning mid-1944, Allied bombing disrupted the German supply chain by targeting bottleneck sectors like electric power generation.
• This destruction of the supply chain devastated the German economy.
• Per person food production fell to about half of its pre-war level.
• Two years later, this changed after Chancellor Ludwig Erhard lifted price controls and cut taxes.
• West German entrepreneurs re-established a thriving supply chain through which goods went from upstream sectors to final consumers.
• By 1950, per capita income in West Germany had reached its pre-war level.

Consider the question “Supply chain disruption has been at the core of economic consequences of the corona pandemic. New adjustment in the supply chains would be the norm in the aftermath of the pandemic. What these readjustments would entail? Suggest the measures to help the supply chains recover.”

Conclusion

The recent supply chain disruptions are likely to last long. The path to recovery lies in cutting government expenditure, removing price controls, and opening up trade.

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What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

Why stakeholders are not happy with the package?

• Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
•  Marketing reforms and infrastructure creation are distant promises.
• MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
• In their experience, lenders are not always supportive in extending loans.
• While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
• What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
• Corporate sector: There is nothing for the corporate sector in manufacturing or services.
• The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
• Ironically, there is little for public health, already in a dilapidated state.
• Even stock markets, characterised by irrational exuberance in the past month, have dropped.

Government expenditure in the fiscal stimulus

• The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
• This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
• Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
• The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
• Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

Focus of the package: supply side

• It is clear that the design of this relief package seeks to focus on the supply side.
• Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
• Focus is not on the demand side by stepping up government expenditure.
• This is done with the aim of minimising the cost to the government.
• The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

So, let’s understand why focus on supply side is flawed strategy

• This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
• Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
• Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
• At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
• In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
• For this reason, the fiscal stimulus should have been much larger.

Excessive concerns over fiscal deficit

• The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
• Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
• The conclusion drawn, wrongly, is that there is no fiscal space.
• The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
• In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

Monetising the deficit  and issues involved in doing so

• This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
• Such market borrowing would simply drive up interest rates and nip recovery in the bud.
• It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
• Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
• In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
• Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
• For one, their ethics and integrity have seen steady erosion.
• Moreover, how many sovereign governments will they downgrade?
• In fact, we might be better off without the footloose and volatile portfolio investment inflows.

Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”

Conclusion

If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.

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The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.

The good and the bad of India’s GDP story

• India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
• That will leave only America and China ahead of us.
• But India’s per capita GDP story is on a different track.
• We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
• The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.

A take on Economic empowerment

• Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
• Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.

Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj

• The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
• ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
• The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
• The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
• The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
• The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
• RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
• The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.

How ANBA maintained fiscal health?

• ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
• Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
• But for now, it marginally raises our already difficult fiscal deficit.
• It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
• The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
• There is a recognition that RBI has lending powers, not spending powers.
• It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
• It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
• It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
• It creates new openness to ideas, investment, and trade.

What is on agenda for ANBA 2.0?

• The unfinished agenda for ANBA 2.0 includes following-
• Civil service reform-the steel frame has become a steel cage.
• Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
• Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
• Urban reform-having 100 cities with more than a million people rather than 52.
• Education reform-our current regulator confuses university buildings with building universities.
• Skill reform-our apprentice regulations are holding back employers and universities.
• Labour reform-our capital is handicapped without labour and labour is handicapped without capital.

Welfare state and free economies

• A modern state is a welfare state with formal private jobs.
• The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
• The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
• Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
• And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
• People suggest the US can sustain its welfare state because it has the world’s reserve currency.
• But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
• New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
• The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
• Its per capita income is $55,000.
• India’s welfare state does not lack intentions but lacks resources.
• No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
• This is what ANBA hopes to achieve.

Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”

Conclusion

India missed the manufacturing export train that China boarded but another may be coming.  Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.

Back2Basics: Just in time inventory

• The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
• Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
• This method requires producers to forecast demand accurately.

Just in case inventory

• Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
• This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
• The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
• A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.

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Not all financial crises are the same. And this is more so about the two crises that we have been witness to – the 2008 Global Financial Crisis (GFC) and the current Corona Financial Crisis (CFC). The author points out the four key difference in the two crises. These four difference also mean that the solution for 2008 GFC may not be the solution for the present CFC. But why is it so? Read to know more…

1. Origin of the two crises

• The GFC originated in the financial sector.
• In GFC, banks and financial intermediaries got carried away by irrational exuberance and recklessly piled on risk.
•  CDS, CDO, MBS, ABS and various other became the villains in the GFC drama as it unfolded in the rich countries.
• As people lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped.
• The contagion, which originated in the financial sector, spread to the real economy.
• In contrast, the CFC came from outside the economic system.
• The first impact came by way of a supply shock as China-centred supply chains broke down.
• And then as countries ordered lockdowns and economies shut down, demand slumped.
• The ensuing distress in the real economy led to distress in the financial system.

So, how origin of the crisis matter for its resolution?

• Restoring the faith in the financial system was key to the resolution of GFC.
• Which meant rescue and rehabilitation of banks and other financial institutions.
• Once that task in the financial sector was accomplished, repair of the real economy fell in place.
• The demand came back, supply resumed and growth picked up.
• In contrast, the central challenge in the resolution of the CFC is to beat the pandemic, and that solution has to come from science.
• Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies.
• We are seeing that even during this crisis, just like in 2008, governments are coming out with fiscal stimulus packages and central banks with monetary stimulus packages.
• But these are not solutions to the pandemic; they are just holding operations till the central problem is resolved.

2. No one country hold key to solution

• The second difference between the two crises arises from the asymmetry of the solutions.
• The GFC originated in the subprime mortgage sector of the US and then, rapidly engulfed the world.
• The CFC originated in the Hubei province of China and rapidly engulfed the world.
• But the similarity ends there.
• For the resolution of the GFC, restoring financial stability in the US was necessary, and a sufficient condition for restoration of financial stability everywhere.
• But the situation with the CFC is different.
• Every country needs to control the pandemic within its borders.
• But that is not sufficient because the virus can hit back from across the border.
• No country is safe until every country is safe.

3. Policy interventions involve a dilemma

• How the policy interventions interact with one another makes for the third difference between the two crises.
• During the resolution of the GFC, solutions in the financial sector and in the real economy reinforced each other.
• For example, to mitigate the crisis, the RBI cut rates and intervened in the forex market, the government extended special concessions for housing and real estate sectors to provide stimulus in the real economy.
• There was synergy in these actions.
• In contrast, in managing the challenge of the CFC, what we are seeing is tension between the various sets of policy actions.
• The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector.
• The more stringent the lockdown to save lives, the more extensive the loss of livelihoods.
• Managing this tension is by far the biggest dilemma for governments battling the crisis.

4. No single large economy to keep the world afloat

• The global financial crisis, although it was called “global” did not affect all countries equally.
• China was less affected even as all rich countries were in a financial meltdown.
• In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.
• In contrast, now all rich and big economies are weighed down by the virus, and there is not a single large economy to keep the rest of the world afloat.

Consider the question “Analyse the key differences in the Global Financial Crisis of 2008 and the financial crisis caused by the Covid-19.”

Conclusion

If pandemics are going to be more frequent, as is now suspected, it is all the more important that there is a more enforceable global protocol on early warning and information sharing. For all their differences, the GFC and CFC are similar in one respect — they both teach us life-enhancing lessons. The GFC forcefully reminded us that greed and avarice will only bring tears in the end. The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.

Back2Basics: Credit Default Swap (CDS)

• A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks.
• The buyer of a CDS makes periodic payments to the seller until the credit maturity date.
• In the agreement, the seller commits that, if the debt issuer defaults, the seller will pay the buyer all premiums and interest that would’ve been paid up to the date of maturity.

Collateralised Debt Obligations (CDO), MBS and ABS

• To create a CDO, investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt.
• These assets are then repackaged into discrete classes or tranches based on the level of credit risk assumed by the investor.
• These tranches of securities become the final investment products: bonds, whose names can reflect their specific underlying assets.
• For example, mortgage-backed securities (MBS) are comprised of mortgage loans.
• And asset-backed securities (ABS) contain corporate debt, auto loans, or credit card debt.
• CDOs are called “collateralized” because the promised repayments of the underlying assets are the collateral that gives the CDOs their value.
• Mortgage-backed securities played a central role in the financial crisis that began in 2007 and went on to wipe out trillions of dollars in wealth, bring down Lehman Brothers, and roil the world financial markets.
• In retrospect, it seems inevitable that the rapid increase in home prices and the growing demand for MBS would encourage banks to lower their lending standards and drive consumers to jump into the market at any cost.

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Various projections of growth paint a grim picture of the Indian economy as well as the global economy. This article analyses the sector-wise impact and comes with the GVA projections for 2020-21. The government has to deal with serious challenges like financing huge fiscal deficits. So, what will be the growth rate for 2020-21 and what will be the size of GVA? Read to know!

Projections of growth and uncertainty

• Various institutions have assessed India’s growth prospects for 2020-21 ranging from 0.8% (Fitch)to 4.0% (Asian Development Bank).
• This wide range indicates the extent of uncertainty and tentative nature of these forecasts.
• The International Monetary Fund (IMF) has projected India’s growth at 1.9%, China’s at 1.2%, and the global growth at (-) 3.0%.
• The actual growth outcome for India would depend on: 1) the speed at which the economy is opened up 2) the time it takes to contain the spread of virus, and, 3) the government’s policy support.

Health of India economy before the crisis

• India slid into the novel coronavirus crisis on the back of a persistent economic downslide.
• There was a sustained fall in the saving and investment rates with unutilised capacity in the industrial sector.
• In 2019-20, there was a contraction in the Centre’s gross tax revenues in the first 11 months during April 2019 to February 2020, at (-) 0.8%.
• These trends continue to beset the Indian economy in this crisis.

Growth prospects for 20-21 from the output side

• In 2019-20, which would serve as the base year, India may show GVA growth of about 4.4%,
• This is well below the Central Statistics Office’s second advance estimate of 9%.
• The IMF’s GDP growth estimate for 2019-20 is at 2%.
• GVA is divided into eight broad sectors. Although all sectors have been disrupted, some may be affected less than the others. We divide the output sectors in four groups.
• Group A- This group is likely to suffer minimum disruption.
• Agriculture and allied sectors, and public administration, defence.
• Despite some labour shortage issues, agriculture sector may show near-normal performance.
• The public and defence services have been nearly fully active, with the health services at the forefront of the the COVID-19 fight.
• For the group A sectors, it may be possible to achieve 90% of the 2019-20 growth performance.
• Group D- This group is likely to suffer maximum disruption.
• This includes, trade, hotels, restaurants, travel and tourism under the broad group of “Trade, Hotels, Transport, Storage and Communications”.
• This sector may be able to show 30% of 2019-20 growth performance.
• Group B
• This comprises sectors which may suffer average disruption showing 50% of 2019-20 growth performance.
• These sectors are mining and quarrying, electricity, gas, water supply and other utility services, construction, and financial, real estate and professional services.
• Group C
• In this group come manufacturing which has suffered significant growth erosion in 2019-20.
• It is feasible to stimulate this sector by supporting demand.
• In this case a 40% performance factor on the average growth of the preceding three years is applied.

So, what are the estimates for 2020-21 GVA?

• Considering these four groups together, a GVA growth of 2.9% is estimated for 2020-21.
• Realising this requires strong policy support, particularly for the manufacturing sector which has a weight of 17.4%.
• It is also based on the assumption that the Indian economy may move on to positive growth after the first quarter.
• In the first quarter, GVA growth will be negative.

Policy support for the growth

• Monetary policy initiatives undertaken so far include a reduction in the repo rate to 4.4%, the reverse repo rate to 3.75%, and cash reserve ratio to 3%.
• The Reserve Bank of India has also opened several special financing facilities.
• These measures need to be supplemented by an appropriate fiscal stimulus.
• Cash-constrained central and State governments have taken expenditure reducing measures by announcing freezing of enhancements of dearness allowance and dearness relief.
• This may result in savings of ₹37,000 crore for the Centre and about ₹82,000 crore for the States, together amounting to 6% of GDP.
• There is also talk of substantially reducing non-salary defence expenditure.
• With lower petroleum prices, fertilizer and petroleum subsidies may be reduced.
• These expenditure cuts are contemplated to keep the fiscal deficit under some control.

Fiscal stimulus and fiscal deficit

• Fiscal stimulus can be of three types:
• 1) Relief expenditure for protecting the poor and the marginalised.
• 2) Demand-supporting expenditure for increasing personal disposable incomes or government’s purchases of goods and services, including expanded health-care expenditure imposed by the novel coronavirus, and,
• 3) Bailouts for industry and financial institutions.
• The Centre had earlier announced a relief package of ₹1.7-lakh crore.
• The Centre’s budgeted fiscal deficit of 3.5% of GDP may have to be enhanced substantially to 1) make up for the shortfall in budgeted revenues; 2) account for a lower than projected nominal GDP for 2020-21, 3) provide for a stimulus.
• Thus, the Centre’s fiscal deficit may increase to 6.0% of GDP.
• Expenditure on the construction of hospitals, roads and other infrastructure and purchase of health-related equipment and medicines require prioritisation.
• These expenditures will have high multiplier effects.
• Similar initiatives may be undertaken by the State governments which may also enhance their combined fiscal deficit to about 0% of GDP to account for 3.0% of GDP under their respective Fiscal Responsibility Legislation/Law and to provide for the shortfall in their revenues and some stimulus.

Challenges

• Financing of the fiscal deficit poses a major challenge this year.
• On the demand side, the Central (6.0%) and State governments (4.0%) and Central and State public sector undertakings (3.5%).
• These together present a total public sector borrowing requirement (PSBR) of 13.5% of GDP.
• Against this, the total available resources may at best be 9.5% of GDP.
• The gap of 4.0% points of GDP may result in increased cost of borrowing for the Central and State governments.

Consider the question, “Examine the sector-wise damage caused to the economy due to Covid-19 pandemic. What were the fiscal and monetary measures taken to mitigate the damage and challenges faced by the government in meeting the required revenue demands.”

Conclusion

The gap in requirement of resources and availability may be bridged by enhancing net capital inflows including borrowing from abroad and by monetising some part of the Centre’s deficit. The monetisation of debt can at best be a one-time effort. This cannot become a general practice. 

Back2Basics: What is GVA?

• GVA it is a measure of total output and income in the economy.
• It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
• It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
• While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
• Both measures need not match because of the difference in treatment of net taxes.
• GDP = GVA + taxes on products – subsidies on products

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This editorial spells out the size of the stimulus package that would be required to restart the economy. It also discusses the possible sources that the government could tap to raise the revenue. Such huge expenditure is likely to result in the huge fiscal deficit which would necessitate that the stimulus is time-bound and transparent.

Prospects of substantially negative growth

• Arvind Subramanian has likened the current economic situation to a “pralay (deluge)”.
• A deluge in which the government should spend more than even what it ought to in a rainy day.
• India, the former chief economic adviser said that India must plan for a “substantially negative” growth this year that might require an additional fiscal expenditure of Rs 10 lakh crore.
• Corporate indebtedness was already high before the lockdown.
• Insolvency cases will mount further.
• Even companies facing no significant cash flow issues wouldn’t invest in uncertain public health as well as the demand-constrained environment.
• Banks, too, aren’t going to lend, no matter how much liquidity the Reserve Bank of India (RBI) may infuse.
• The burden of non-performing assets, which is set to get heavier in the coming months, makes it impossible for them to finance an economic recovery.
• Last, but not the least, are faced with layoffs and pay cuts, they would rather save and will be afraid to spend.

Importance of government spending in the current situation

• Under the circumstances, the onus for ensuring that the wheels of the economy start moving lies on the government.
• There’s no guarantee of it happening even with all lockdown restrictions being lifted.
• Without somebody to spend, the economy is in real danger of contraction, which will, in turn, worsen the problem of businesses going bust, joblessness and loan defaults that can spread to the entire financial services industry.

No “3F” constraints and risk of deflationary shocks

• The one consolation today is that India is not saddled with its traditional “3F” constraints — food, fuel and foreign exchange — which were triggers for inflation and balance of payments crises.
• On the contrary, public foodgrain stocks are at an all-time high, global oil prices have crashed and there is no run on the rupee, unlike during the “taper tantrum” period of May-August 2013.
• Risk of deflationary shock: The risks, if at all, are tilted more towards demand-side “deflationary shocks” than supply-side inflation concerns.

How will the government manage the resources?

• The finances of both the Centre and states are in a mess, with receipts from tax and non-tax sources hardly covering even existing expenditures.
• But governments enjoy sovereign borrowing powers that allow fund-raising at rates below that of triple A-rated instruments issued by private corporates, more so in the present risk-averse scenario.
• Also, there is the option of deficit financing (“printing money”) through the RBI subscribing to primary auctions of government securities.
• There are, of course, costs in such powers being exercised.
• Past precedents — whether the issuance of ad hoc Treasury Bills to the RBI prior to April 1997 or the stimulus package post the 2008 global financial crisis — do not inspire confidence.

A question based on the stimulus package and its consequences can be framed, for ex- “Do you agree with the view that a stimulus package by the government to restart the economy is necessary? What are the options with the government to raise the money for such a package? What could the consequences of such a package on the economy in the future?”

Conclusion

This is the time to design clear rules for departure from accepted norms of fiscal prudence. Any stimulus has to be transparent and time-bound.

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The article discusses the fiscal response of the government to deal with the corona crisis. Fiscal response to the 2008 financial crisis was higher in terms of GDP percentage. Also, a comparison with emerging peer economic indicates that India might be running the tighter fiscal policy in the time of crisis. The article suggests higher spending by going beyond the traditional fiscal space.

A possible explanation for moderate fiscal response by the government

• The Indian government has till now come up with an insipid fiscal response to the ongoing economic crisis.
• Long battle: One view is that the government does not want to fire all its bullets in what threatens to be a long battle. It wants to time its interventions.
• Weak public finances: The other possible explanation for this fiscal timidity is that India has entered this crisis with weak public finances.

Comparison with finances at the 2008 financial crisis

• The combined official fiscal deficit of the Union plus state governments was at its lowest level in many decades.
• The economic boom of the preceding four years had led to higher tax collections pouring into the treasury.
• The massive increase in spending announced in the budget of February 2008 was with an eye on the national election scheduled a year later, rather than in anticipation of a coming storm.
• Then followed the second wave of fiscal expansion after the North Atlantic financial crisis hit Indian shores seven months later.
• Back then, India’s effective fiscal stimulus over two years was a substantial 4.3% of gross domestic product (GDP).
• In 2020, the crisis-driven spending plan announced by the government so far is less than 1% of GDP.
• There could yet be a big fiscal push in the coming days.

Tighter fiscal policy in crisis compared to other emerging economies

• Some of the budget estimates released a few days ago by the International Monetary Fund are telling.
• In 2018, the total fiscal deficit of the Indian government as a proportion of GDP was 2.4 percentage points higher than the average for Asian emerging markets.
• India is expected to end 2020 with a total fiscal deficit that will be 2.5 percentage points lower than Asia’s average.
• In other words, India ran a looser fiscal policy compared to the rest of Asia in normal times, but is likely to run a tighter fiscal policy than its regional peers in a crisis year.
• Something similar can be seen in estimates for public debt.
• Asian public debt as a proportion of GDP is expected to go up by nine percentage points in 2020.
• The comparable figure for India is 2.9 percentage points. (These estimates are being cited with full knowledge that forecasting models break down during extreme events.)

Funding extra expenditure through money creation

• Lack of traditional fiscal space should not hold the government back in a crisis situation.
• There are many options outside the consensus macro playbook.
• Money creation: A commonly cited option right now is funding extra expenditure through money creation rather than borrowing.
• The size of the Reserve Bank of India (RBI) balance sheet as a percentage of nominal GDP is close to its 35-year average.
• There is scope for printing more money right now.
• Lower inflationary pressure: And the inflationary consequences are likely to be muted because of the lower velocity of money amid a demand collapse.
• Public finances in the future: Getting public finances back on track is a battle that lies in the future.
• A rapid recovery in economic activity would be the best solution.
• Otherwise, history tells us that countries have brought down their public debt numbers through some combination of financial repression, austerity, higher taxes and inflation.
• Some element of capital controls could also be back in play.

Need for increasing discretionary government spending

• The collapse in tax revenues as the economy is shut down will automatically lead to a rise in India’s fiscal deficit.
• However, there is a need for an increase in discretionary government spending as well.
• Economists have shown that spending multipliers are higher than tax multipliers in India.
• In other words, the increase in economic output for every unit increase in the fiscal deficit is higher when the government spends rather than changes tax rates.
• State’s spending Vs. Union spending: Spending by states gives more bang for the buck than equivalent spending by the Union government.

“Below the line measures” to support the economy

• Also, there are options other than direct spending to support the economy.
• Countries such as Germany, the UK, Italy, France and South Korea have complemented traditional fiscal expansions with “below the line” measures such as loans and guarantees to companies.
• In an excellent recent study, analysts estimate that more than half of Indian corporate balances sheets will be unable to meet expenses with zero revenues.
• They are careful to point out that their analysis is based on extreme assumptions that there is no fall in their wage bills, no revenues, and no access to fresh credit.

One of the common suggestions we have been coming across is the spending by the government by printing money. In this article, the second important suggestion is below the line measures. Take note of these measures and options available with the government.

Way forward

• The poor need income support for their very survival. That should be at the top of any democratic government’s list of
• However, protecting Indian companies from a financial collapse also matters, because otherwise, the economy will see a reduction in its capital stock, which will be needed both for a rapid recovery as well as job creation once the worst is over.
• There are contagion risks in financial markets as well, going by what has happened to some mutual funds that were invested in bonds.

Conclusion

These are extraordinary times that require extraordinary measures. The danger from a delayed fiscal programme is that hysteresis may set in, as companies run out of money and supply chains are broken, damaging our economic prospects in the medium term.

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The article discusses the issue of migrant labourers and the problems eastern states could face due to the return of labourers and the lack of employment opportunities in these states. The return of migrant labourers may lead to the mechanisation in the states where they worked. A relief-cum-stimulus package at least 5% of the GDP is suggested by the author.

IMF’s projections for the economy

• The IMF’s projections for GDP growth for this year seem to be either in the negative or below 2 per cent for almost all major countries of the G-20 group.
• India could do a little better compared to the other BRICS nations, but its growth will most likely be below 2 per cent.
• This, of course, is under an optimistic scenario.
• Many experts reckon that India could also go into negative GDP growth this year if it does not reboot the economy properly and in time.

The problem of collapse in demand

• The Centre and the Reserve Bank of India are trying to remove all roadblocks so that factories and farms can resume operations.
• The focus is largely on the supply side — how to ease restrictions and how to increase liquidity in the system for resuming production.
• It may not take too long as the real problem is the collapse in demand.
• And that demand may not pick up easily as the virus is likely to stay with us for quite some time.
• We could have lockdowns again if there is a surge in infection.
• This will surely limit our travel and restrict our shopping for non-essentials.
• However, there is one demand that can easily revive — that of food.

Why food demand matters?

• The NSSO survey of consumption expenditures for 2011-12 revealed that about 45 per cent of the total expenditure of an Indian household is on food.
• For the poor, the NSSO reckoned, this figure was about 60 per cent.
• We do not have information about the consumption patterns in 2020, guess is that about 35-40 per cent of the expenditure of an Indian household is on food and for a poor household, this figure is around 50 per cent.
• Herein, lies the scope to reboot the economy.

Labour shortage and mechanisation

• The sudden announcement of the nationwide lockdown gave labours no time to go back to their families.
• They lost their jobs and incomes and having spent whatever little savings they had, these workers have been reduced to penury.
• The Centre and states, despite their best efforts, have not managed to address the problem of hunger of these workers.
• Even civil society has not managed to bridge the gap.
• The migrant labourers may well have lost their trust in the state, and once the lockdown is lifted, most of them are likely to rush back to their families in villages.
• And, it could be some time before they are back in the cities — that is, if they return at all.
• So, farms and factories, especially the MSMEs in the relatively developed states of western, southern and north-western India are likely to face labour shortages for many months, perhaps years.
• This could lead to more mechanisation of farms and factories in these states.
• In Punjab, for example, most of the wheat harvesting is already done by combined harvesters.
• Now even paddy harvesting could be done by mechanised harvesters.

The double challenge for states which are home to migrants

• However, eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, and Odisha, from where much of the migrant labour comes, will face a double challenge.
• Their agriculture, with tiny farm holdings, is already saddled with a large labour force — this comprises 45 to 55 per cent of the total labour force of these states.
• Non-farm income from wages and salaries, through migrant labour, was an important source of income for households in these states.
• This is now severely hit. In all probability, the per capita rural incomes of these states could shrink, at least in the short run.
• This could lead to poverty and increase hunger and malnutrition.
• How does one then reboot the economy and also address hunger and malnutrition?

The lockdown and the subsequent plight of the migrant labourers brought to the fore uneven development in the country. The points mentioned below suggest the ways to address this problem. A question based on this issue could be asked by the UPSC, for ex- “The issue of migrant labourers amid Covid-19 pandemic highlighted the uneven development in the country. In this context, state the reasons which led to the uneven development of various regions of the country. Suggest ways to address the problem”.

The requirement of a special investment package for eastern states

• A special investment package — like the Marshall Plan of USA in 1948 — for the eastern belt of India is required.
• Investment should be used to build better infrastructure, agri-markets and godowns, rural housing, primary health centres, schools and enhances people’s skills.
• The package will go a long way to revive the economy and augment the incomes of the migrant workers.
• Rising incomes will generate more demand for food as well as manufactured products, giving a fillip to the growth engines of agriculture as well as the MSME sector.
• Building better supply chains for food directly from farm-to-fork, led by the private sector, will enhance the export competitiveness of agriculture.
• It will also ensure a higher share of farmers in the consumers’ rupee.
• Long-term demand-driven growth: Such broad-based development in a relatively underdeveloped region of the country will lay the foundations of a long-term, demand-driven, growth of the industry in India.
• The all India relief package of Rs 1.7 lakh crore announced by the central government earlier, which is about 0.8 per cent of the country’s GDP, is too small to reboot the economy.

Conclusion

If India has to bounce back quickly, it needs a much bigger relief cum stimulus package — certainly not below 5 per cent of GDP. And, it should focus more on the eastern belt, where the issue is that of survival.

Back2Basics: Marshall Plan, 1948

• The Marshall Plan, also known as the European Recovery Program, was a U.S. program providing aid to Western Europe following the devastation of World War II.
• It was enacted in 1948 and provided more than $15 billion to help finance rebuilding efforts on the continent.
• The brainchild of U.S. Secretary of State George C. Marshall, for whom it was named, it was crafted as a four-year plan to reconstruct cities, industries and infrastructure heavily damaged during the war and to remove trade barriers between European neighbours – as well as foster commerce between those countries and the United States.

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The article elaborates on the central role played by the States in the fight against Covid-19. The article emphasises the role that States can play in the implementation of the various measures to tackle the epidemic and economic revival of the country. It also highlights the lack of resources at the States’ disposal and reasons for the lack such as revenue loss in the lockdown and lower devolution by the Central Government. In the end, there is a suggestion to increase the borrowing limit of the States’.

Time to relax fiscal constraints on the States

• The speed of economic revival will depend on how long it will take to revive economic activities and the volume of stimulus through public spending the government is able to provide.
• It now appears that the lockdown will be lifted in stages and the recovery process will be prolonged.
• The country is literally placed in financing a war-like situation.
• The government will have to postpone the fiscal consolidation process for the present, loosen its purse strings and finance its deficits substantially through monetisation.
• This is also the time for the government to announce relaxation in the States’ fiscal deficit limit to make them effective participants in the struggle.

The following points highlight the importance of States in dealing with the crisis. The federal structure of India comes to the fore here. The UPSC can aks question on this theme, for example, “Discuss the important role played by the States in dealing with the Covid-19 and how it underscores the federal character of the Indian polity?”

The important role played by the States

• Prioritise health spending: It is also important for the States to realise the importance of health and prioritise spending on health-care services.
• Being closer to the people, the States have a much larger responsibility in fighting this war.
• Public health, as well as public order, are State subjects in the Constitution.
• Acts invoked for lockdown: Some States were proactive in dealing with the COVID-19 outbreak by involving the Epidemic Diseases Act, 1897, even before the Government of India declared a universal lockdown invoking the Disaster Management Act, 2005.
• Of course, the Centre under Entry 29 of the Concurrent List has the powers to set the rules of implementation which states, “Prevention of the extension from one State to another of infectious or contagious diseases or pests affecting men, animals or plants”.
• Implementation at the ground level: While Central intervention was done to enable, “consistency in the application and implementation of various measures across the country”, the actual implementation on the ground level will have to be done at the State level.
• Furthermore, States are better informed to decide the areas and activities where relaxations should be done as the coronavirus curve is flattened.
• Coordination: Hopefully, there will be better coordination between the Union and State governments instead of claiming credit and apportioning blame.

Covid-19 has made clear the neglect and poor state of health in India. The UPSC can frame the question based on the health infrastructure and expenditure on it. The question can be framed on the following lines “Covid-19 has highlighted India’s lack of preparedness and the poor health infrastructure in the country. What are the reasons for it? Give suggestions to improve it.”

Neglect of the health-care sector in the country

• The pandemic has underlined the historical neglect of the health-care sector in the country.
• Expenditure on health as a percentage of GDP: The total public expenditures of Centre and States works out to a mere 3% of GDP.
• In 2017-18, in per capita terms, the public expenditure on medical and public health varied from an abysmal ₹690 in Bihar and ₹814 in Uttar Pradesh to the highest of ₹2,092 in Kerala.
• The centrally sponsored scheme, the National Health Mission, is inadequately funded, micromanaged with grants given under more than 2,000 heads and poorly targeted.
• The focus of “Ayushman Bharat” has been to advocate insurance rather than building wellness centres.

Economic revival by the States

• Besides protecting lives and livelihoods, States will have to initiate and facilitate economic revival, and that too would require substantial additional spending.
• Hand holding small and medium enterprises which have completely ceased production, providing relief to farmers who have lost their perishable crops and preparing them for sowing in the kharif season are other tasks that require spending.
• In fact, States have been proactive. Kerala came out with a comprehensive package allocating ₹20,000 crores to fight the pandemic.
• Almost all States have taken measures to provide food to the needy besides ramping up health-care requirements.

Lack of resources and revenue loss suffered by the States

• While the requirement of States for immediate expenditures is large, they are severely crippled in their resources.
• In the lockdown period, there has virtually been no economic activity and they have not been able to generate any revenue from State excise duty, stamp duties and registration fees, motor vehicles tax or sales tax on high-speed diesel and motor spirit.
• The revenue from Goods and Services Tax is stagnant and compensation on time for the loss of revenue has not been forthcoming.
• As the recovery process will be staggered, it is doubtful whether tax revenues will register any positive growth in 2020-21.
• Not surprisingly, the State has decided to monetise land through auctions to get money besides regularising unauthorised constructions by paying high fees.

Lower tax devolution from the Centre

• The position regarding tax devolution from the Centre is even more precarious.
• To begin with, the tax devolution in the Union Budget estimate is lower than the Commission’s estimate by ₹70,995 crores.
• In fact, the Budget estimate for 2020-21 itself is a huge overestimate when seen against the 11-month actual collections in 2019-20.
• The required growth to achieve the Budget estimate is 33.3% over the annualised actual collection.
• The projections are that the growth of nominal GDP in 2020-21 will be just about 4%.
• And if the tax revenue increases by the same rate, devolution to the States would be lower by ₹2.2-lakh crore than the Finance Commission’s estimate.
• This results in a loss of ₹9,173 crores for Tamil Nadu, ₹9,000 crores for Andhra Pradesh, ₹8,000 crores for Karnataka, ₹4,671 crores for Telangana, and ₹4,255 crores for Kerala.
• Supplementary report by the Finance Commission: There is a strong case for the States to go back to the Finance Commission with a request to make and give a supplementary report.

Of late, the poor fiscal health of the States has been in the news. Following are some of the factors that are responsible for it. A question can be asked with relation to this problem like “The States are facing fiscal constraints owing to the lack of revenue. What are the reasons for it? What are the options available to help the States to deal with such a situation?”

Problems faced by the States in raising resources

• There is only a limited scope for expenditure switching and reprioritisation now.
• Limited space for borrowing: Their borrowing space too is limited by the fiscal responsibility and budget management limit of 3% of Gross State Domestic Product (GSDP).
• High yield no the State bonds: Faced with an acute fund crunch, Kerala floated 15-year bonds but was faced with a huge upsurge in the yield to 8.96%.
• Increase in the WMA limit: The announcement by the Reserve Bank of India on the increase in the limit of ways and means advances by 60% of the levels prescribed in March 31 could help States to plan their borrowing better.
• But that is too little to provide much relief.

Conclusion

It is important for the Central government to provide additional borrowing space by 2% of GSDP from the prevailing 3% of GSDP. This is the time to fiscally empower States to wage the COVID-19 war and trust them to spend on protecting lives, livelihoods and initiate an economic recovery.

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The article discusses three fronts on which actions are required viz- health, economy and geopolitics. How much the global economy is going to be affected? how the US-China rivalry would affect the recovery? what the lack of global coordination means? all such questioned are discussed here.  It also suggests actions that India should take to deal with the crisis.

Many unknowns than knowns about Covid-19

• The virus currently has many more unknowns than knowns.
• We don’t know for sure how it spreads, whether people can get re-infected, whether it is mutating, whether the hot weather kills it, and what the real fatality rate is.
• We don’t know for sure how far we are from an anti-viral.
• We know that we are at least 18 months away from having a vaccine that works and is available at scale.
• Till an anti-viral is found, economic activity will be constrained, and this will affect people, industries and countries in disparate ways.

The extent of damage to the global economy

• Loss of ten trillion dollars: The global economy is set to lose close to ten trillion dollars because of the “self-induced coma” it has been put into — to use Paul Krugman’s evocative phrase.
• Loss of effectiveness of monetary policy: The preceding global financial crisis (GFC) has exhausted the efficacy of monetary tools.
• In addition, corporates globally are leveraged to the tune of $12 trillion.
• The slump in demand: The accompanying oil price collapse, beginning due to a spat between producers Saudi Arabia and Russia have been compounded by a precipitous slump in demand.
• The Chinese economy can’t help as it did during the GFC, as it is hemmed in itself.
• Even if it could, there is too much global suspicion of China to allow it to do so. So, countries will largely be on their own.

Tensions between the US and China

• The tensions between the US and China have escalated into a full-scale superpower crisis after the virus spread.
• Since 2010, there has been great concern in the US about China’s rise.
• China’s muscular foreign policy together with its aggressive stance on multiple issues, most importantly on technology and technology standards, has created conflict.
• The coronavirus is spreading in the US in an election year and smashing its economy.
• The virus infected over three-quarter of a million people in the country and killed more than 40,000.
• After this, China could be seen as enemy number one in the US.

No global coordination

• No wonder then that at a time when the world yearns for global coordination, there is almost none — in healthcare responses and economic coordination.
• Multilateral agencies, especially the WHO and UN, suffer a complete loss of credibility.
• India needs to chart its own course in these turbulent times.
• If India takes the requisite actions it may come out well.

Following suggestions are important from the UPSC perspective. The suggestions deals with three fronts-health, economic and geopolitics.

How India could come out of the crisis?

• India needs to act at three levels — health, economic and geopolitical.

1. Actions at the health level

• The Union Ministry of Health and Family Welfare has done well to stem the spread of the infection.
• It has sensitised the public, introduced the concept of social distancing and isolation in the most challenging situations.
• Now it must test at scale and isolate.

2. Actions at the economic level

• Indians cannot afford to stay locked much longer.
• We are too poor and too many of us live on a day-to-day basis — not even on a paycheck to paycheck basis.
• Economic activity will be subdued in the near-term, but it must be “unlocked”.
• The current IMF projections suggest that India will have the highest growth rate in the world this year.
• Oil prices have collapsed, really helping our balance of payments.
• Our food stocks are plentiful, the rabi crop has been good, and the prognosis for the monsoon is positive.
• Low inflationary pressure: This, together with the fact that aggregate demand is down, will dampen inflationary impulses.
• The “new RBI” has acted boldly and strongly.
• It has taken prompt actions to reduce rates, increase liquidity, adjust prudential norms, allow moratoriums, and protect financial entities.
• Indian is better placed: The weakened rupee will help our exports and with a debt to GDP ratio of about 73 per cent, along with better growth prospects, India is relatively better placed than several other countries.
• We should, therefore, not unduly worry about our credit rating. This both allows and actually requires the government to act on the fiscal front.
• The government needs to implement the following four steps to spur the economy.
• (1) It should do so by “printing money” given the moderated inflation
• (2) It needs to provide additional direct benefit transfers of Rs 2,000 every month for three months to Jan Dhan accounts, together with foodgrains release from the FCI, to the tune of around Rs 65,000 crore, to alleviate people’s miseries.
• (3) It needs to protect MSMEs directly by providing them working capital (with an RBI backstop) and, like in the UK, provide 80 per cent of the salary to employees of the “GST-paying MSMEs” for six months.
• (4) It needs to launch a massive public works programme outside the Budget as suggested by the chairman of CII’s National Committee of Infrastructure and PPP, Vinayak Chatterjee.
• This fund should be earmarked for infrastructure and a quarter of its budget should be set aside for strengthening and upgrading primary health centres.
• The allocation should not be less than Rs 200,000 crore.
• Push through pending reforms: The government should take advantage of the crisis to push through much needed pending reforms in agriculture-especially those pertaining to APMC), power-pricing and discoms, banks-government ownership at 30 per cent and bad banks.
• Revenue from private gold: Given the paucity of tax revenues, the government could also consider having the PM making an appeal for private gold from people and temples.
• It could target 1,000 tonnes of gold worth $30 billion and offer a five per cent tax-free return repayable ($1.5 billion a year) after 10 years, in rupees or gold.

3. Actions at the geopolitical level

• India can come out ahead if we act now.
• Super-power rivalries will create opportunities to replace China as a major supplier to the US and Japan.

Conclusion

The battle to deal with the corona disaster has to be fought on many fronts. India must form a strategy and act on various front i.e. health, economic and geopolitical- to be victorious at the end.

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