The news about the spread of the Covid19 pandemic is getting worse by the day. More and more countries are coming under its grip and those already suffering from it are reporting a deterioration in their situation. Countries, like China and Singapore, which had reportedly managed to control its first round of proliferation are now reporting a second round of spread.
Countries like, India and USA, had advance information about it but did not do enough to control it and now are seeing an exponential rise in the spread. The accumulated knowledge about it from China and South Korea has not helped the countries where it is spreading now. Perhaps it was believed that it would not get so bad – but it is getting worse as in the case of Italy, Iran and Spain.
The rapid spread is now at least two months old since the middle of January when China first admitted that an epidemic had broken out in Wuhan city in Hubei province. Lockdown is spreading and with that economic activity is grinding to a halt in large parts of the world
economy. Not only are there supply shocks leading to grinding down of production but there is also a decline in incomes as people are not able to work and have reduced purchases to a bare minimum. China, the largest car market in the world, has reported an 80% drop in sales.
Not only business sentiment is down as reflected in the collapse of global financial markets but there is also a decline in consumer confidence resulting in reduced demand. The two feed into each other. Most analysts have been arguing that the world economy which was already slowing down before the crisis had hit in January, is headed into a recession. China, India and so on were slowing down officially while Japan and German economies were close to zero or negative rates of growth in January 2020. The US was the one major economy that was still robust but now large parts of it are in lockdown with decline in production and purchases by consumers.
In an optimistic scenario, if the situation comes under control in a month and there is a slow recovery, one third of the year would have passed with severely curtailed production. One does not have numbers to go by but if output is down only 50% for two months and then goes back to the pre January levels, the rate of growth for entire 2020 would be in negative territory.
Since we do not know enough about the disease as yet, no time frame can be given as yet. We neither have a medicine against it nor a vaccine and according to experts these may take more than a year. We thought it mostly affects the infants and the elderly but now it is clear that not many children are getting affected but the young are vulnerable. It was thought that heat would kill it but its spread in tropical climates suggests that one cannot depend on that either.
The situation in countries facing lock down is worse than during a war. During a war, production of armament rises but now production is collapsing as people are not able to move around and go to work. Only some can still work from home and that too at reduced efficiency. During a war, demand is high but now it is collapsing, since incomes are falling with retrenchment and layoffs and salary cuts. People are only buying the bare essentials and even hoarding them. Huge swaths of the economy are not working as the drastic fall in demand for energy shows. This is corroborated by pictures from space which show considerable reduction in pollution levels. In a pessimistic scenario, if the pandemic persists for more than two months and then there is slow recovery after that, the world would have entered into a depression. So, on top of a health crisis there would be a deep economic crisis. Given the poor state of governance in India, the disease is likely to last quite a while.
In a recession many business would fail and especially those that are highly leveraged or those that have small amounts of working capital. Many banks and financial entities would also collapse. Failure of some will lead to a failure of many others since they are all interlinked as we learnt during the global financial crisis starting in 2007. In a depression, there would be widespread business failure and even after the pandemic dissipates, the situation would not recover any time soon.
Even in a short recession there would be serious social effects but in a depression there would be widespread social breakdown since it would be prolonged with work unlikely to be available for long periods and many not having incomes to buy the basics of life. Homelessness and hunger would grow. Many children would be out of schools. Incomes of elderly dependent on pensions and interest incomes on financial assets would collapse. Many would be bankrupt due to the large medical expenses that would have to be incurred.
Many governments have been in denial and did not take early action to prevent the spread of the disease. Now they are declaring emergency and setting up task force to tackle the impact of the pandemic in their countries. They are putting in place a slew of measures like, income support. The PM in his address to the nation announced the setting up of an economic Task Force in India. Its task is cut out. It must anticipate and act in advance to see that India can tackle the prevailing crisis. It needs to plan for various scenarios that may unfold in the coming times.
In India where lock down is partial, the first task is to prevent the general spread of the virus. The infected need to be identified quickly and isolated. Those who have contracted the disease need to be immediately provided free medical assistance. Immediate steps are needed to create more hospital facilities in hostels and stadia anticipating a spread. Production of essential medical supplies like, masks, protective gear and ventilators would have to be ramped up.
In economic terms, it is not like a usual business cycle so monetary policies can only be
accommodative and fiscal policies can slow down the impact but not reverse the decline. An increase in fiscal deficit is going to occur but that should not be a worry. The arbitrary limits on it under FRBM should be given a quiet burial.
Every 1% loss of incomes will mean a reduction in GDP of about Rs.2 lakh crore in India. A
decline in GDP growth by even 5% (likely to be much larger) will mean a loss of Rs.10 lakh
crore of incomes and most of this will be due to the fall in the incomes of the unorganized
sectors which will not be able to weather the gathering storm.
People losing work in urban areas are migrating to their homes in rural areas and the chances are that the disease would spread there as well. So, creation of work in urban areas is important. But the Catch-22 is that if they go out to work then lock down is not feasible. The workers also typically live in congested localities and isolation there is next to impossible, so health facilities will have to be provided for isolation of large number of people.
Simultaneously, business closures have to be effectively tackled so that lay off of workers can be checked. In this context, the cottage and small sectors need special assistance. How the government will reach them is a tough task but this has to be done. Loss of work will occur and demand would fall. So, workers need to be given incomes through cash transfers. Further, given low levels of savings, workers would not have the purchasing power to buy essentials in bulk. They would need weekly supply of basic items through PDS. More shops to distribute essentials would have to be drafted from the private sector.
To prevent hoarding and malpractice by the shop owners, the help of army and police may be needed. There are enough stocks of basic grains in the godowns to give them away free to the marginalized sections. Movement of milk, fruits and vegetables from the farms to the consumer will need to be ensured. Cooking medium to consumers will have to be made available. Government machinery will have to be strengthened by shifting manpower from less essential tasks to ensuring better distribution. Any official or shop keeper found indulging in malpractice would have to be summarily dealt with.
Procedures need to be simplified for the banking and financial system in the country. These have been made needlessly complicated for reasons of KYC and digitization and resulted in manifold increase in paper work and has burdened staff. This is the contrary to the expectation of simplification. Currently when people’s mobility will be impaired, smooth functioning of the financial system is essential. So, all needless hurdles must be eliminated. For instance, working of bank accounts, fixed deposit accounts and especially the Jan Dhan accounts of the poor need to be made easier. KYC requirements every year or two years need to be suspended.
Farmers will face problem of demand as many lose incomes. Just like during demonetization, when demand collapsed and prices of farm produce fell drastically, now also this is the real danger. The Rabi sowing was a record due to the late rains and it is expected that there would be a bumper harvest. This will add to the downward pressure on prices. Farmers’ incomes will be adversely impacted and they will also need greater support. Government procurement and distribution to consumers of various agricultural produce will have to be greatly increased.
One of the problems faced by the unorganized sector producers and also the organized sector producers has been the functioning of GST. Its reform to a simplified last point tax (which it is but collected at various stages of production) is crucial to provide support to the beleaguered unorganized sector. This will immediately simplify procedures, reduce complications and lead to level playing field for all.
In brief, India facing a spread of Covid19 faces a situation worse than a war. While China did not have anyone else to learn from, India has had the experience of other countries to learn from and lessons should be drawn from them. Economics has to be turned on its head since markets will not be able to deliver, massive government intervention will be needed all around and the collective will have to be mobilized to tackle the situation.