After the Covid-19 outbreak, a sharp global recession is inevitable. The world economy is said to be at its weakest since World War 2. Massive relief of $6 trillion has been announced in the US. That’s more than twice of India’s GDP.
In India, the economy has been brought to a halt. Except for essentials, the output of large swathes of the economy has dropped to zero. Production at factories, occupancy at hotels, sales in bazaars are pretty much down to zero. Revenue for most businesses is down to zero. But the costs remain — salaries, rent and loan repayments. Naturally, profits will get squeezed, losses will mount.
Because the economy has been in a slowdown since 2018, the national lockdown since Tuesday midnight will add to the stress in banks and financial players, private companies, government-run public transport operators such as Air India and Indian Railways, small firms, unorganised sector units, informal workers and vulnerable individuals, especially daily wagers. Pay cuts, retrenchments, loan defaults, bankruptcies, business collapses, income losses and wealth destruction are inescapable.
The big-ticket stimulus announcements by other countries have muddled the policy debate in India. The growing clamour for a demand stimulus defies logic. In a lockdown, no amount of financial stimulus can boost demand. Neither fiscal nor monetary policy will succeed in spurring consumption. In fact, trying to boost demand defeats the very purpose of a lockdown.
The current economic challenge is very different from that in 2008, when an economic collapse after the global financial crisis (GFC) was averted by giving a demand stimulus, using both fiscal and monetary policy tools. The parallels being drawn with the war economy are also misplaced. While all resources, including labour, can be diverted to a war effort, in a lockdown, capacities and resources remain idle.
The relief package for ₹1.7 lakh crore announced by finance minister Nirmala Sitharaman on Thursday, featured enhanced quotas for Public Distribution Scheme (PDS) rice, wheat and pulses, free cooking gas cylinders and cash transfers through the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme and Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) direct benefit transfer accounts. The steps will soothe people’s anxieties and help maintain order. Providing insurance coverage for health workers is thoughtful.
But the vast majority of informal workers are unlikely to have such accounts. The big challenge for India is that few of the existing policy levers can mitigate the stress in the informal sector. In any case, beyond a point, simply transferring cash may prove inadequate unless essential supplies, especially healthcare, can be made available in villages.
Unlike the vocal and organised, the poor — as in the case of migrant labourers stranded in cities with no means to return to their villages — can’t make themselves heard. Therefore, the relief must be well-targeted, and not squandered on unconditional giveaways to big businesses and well-off consumers. Tax cuts will bypass the informal sector where turnovers are typically below the minimum threshold required for good and services tax (GST) registration, or payment of income-tax (I-T).
At the extreme, as in times of war or emergencies, GoI can let the fiscal deficit expand and ask Reserve Bank of India (RBI) to print money to finance it. Although it is unlikely at this juncture that such a desperate measure would be required.
There’s a lesson here for the government. If it hadn’t already raided RBI’s balance sheet for more than ₹1.7 lakh crore last year in ‘peace time’, then that additional recourse would have been available to it during this emergency.
Money is not the real challenge. Rather, it is choosing the right policy levers and being very clear about policy objectives. All that monetary policy must do right now is to keep the credit markets unclogged. Boosting consumer spending should not be the goal. One big risk is that supply-side disruptions can stoke inflation. Monetary policy will not succeed in cooling prices. Only logistics-side solutions for clearing bottlenecks will work.
The chief policy imperative at this stage ought to be setting up administrative channels for delivering food, essentials, relief and health infrastructure to the remotest corners and the poorest and most vulnerable people. The income shock from the all-India 21-day lockdown will force such people to borrow for basic necessities from informal lenders at steep rates. Many may slip below the poverty line.
Eventually, large corporates will need bailouts and concessions and regulatory forbearance on stressed loans. Otherwise, banks’ non-performing assets (NPAs) will surge. Departing from US-style bailouts after the GFC, India must make such relief conditional on guarantees of no job cuts and reduction in wage inequality, as measured by the ratio of promoters and senior management remuneration to that of lower-level employees.