The impact of COVID-19 disease is
being felt across all nations and globalised economies. Developing economies
particularly with large populations and underdeveloped financial systems would
be hit extremely hard. We are staring at 1930s like economic depression
prevailing in many regions of the world.
The concurrent demand and supply
shock hitting everyone at the same time will require an exceedingly long time
to recover from. Systematic disruption of supply chain, impairment of
production capacity and complete collapse in demand for certain products will hit enterprise and industry.
Trade and Investment is will also take a severe hit. The world is expecting to deglobalize further to address
discontents of inequality and improve local opportunities for many more. While
capital may still have global mobility, opportunities are highly likely to
recede for movement of skilled people.
Earning at the top and middle of
the economic pyramid will be seriously affected. Those at the very bottom will
be the hardest hit. They will require to be held and guided through the pandemic
and the economic abyss they will be in.
The world is likely to go into a
collective recession. There are varying estimates, but sub-zero growth is the
most likely global scenario. Even faster growing economies of India and China
will hover under 0.5 % growth rate if they are lucky and do not contract
severely.
Most governments now are
panicking and paddling very hard underneath. Large relief and stimulus packages
have been announced by developed nations, US economy has committed $ 2 trillion
and European nations are committing Euro 500 billion in dealing with the
fallout of the pandemic.
International bodies such as IMF
have committed over $1 trillion of their lending capacity to help over 100 nations
who are in serious distress. The World Bank and other major multi-lateral
lending Institutions have committed hundreds of billions of dollars in lending
for developing nations and those in most distress. Will that be enough is a
question that is still troubling me?
The more troubling questioning
for me is regarding the country of my birth and residence, India. Can an
exceptionally large population of 1.3 billion sustain itself for 6 months in a
state of lock down and economic seize? Do we really have the fiscal capacity to
take care of our population at the bottom of the pyramid? What really can be
done that is different to kick start the economy once we are at the end of the
COVID-19 tunnel?
India has announced several
measures so far. A Rupee 1.75 Lakh Crore relief and stimulus (just over $23
billion) package and a graded plan to start activities according to zoning
rules. For the size of our country the relief package merely amounts to 0.9% of
our GDP. That by no means is enough and an intelligent reader can make that
out. There has been clamour for up to 10% of the GDP to be committed for
relief. Can we afford to spend so much?
There are a whole host of
financial instruments that can be applied right from cash transfer, food
distribution, issuance of bonds, wage subsidies, waiver of loans, interest
subvention to minimum support for the most vulnerable citizens. These must be
exhausted before options such as quantitative easing may be applied, in other
words for RBI to start printing money.
Our fiscal deficit as former RBI
Governor Duvvuri Subbarao recently pointed out will be pushing over 10%.
That means both the Central Government and State Governments are pushing their
finances beyond their capacity to generate revenue through taxes. The Goods and
Service Tax has not been meeting the goal as estimated for several quarters
now. Tax earnings from petroleum and alcohol have also been severely curtailed
during lockdown. Therefore, spending a large sum of money is not prudent
especially when we as a country have not really earned it.
The primary focus now for the
government is targeted cash transfers to farmers, women, elderly and the
poorest. There have been calls to increase this up to Rupee 10,000 per person and
giving away food stock that is in the government warehouses. The Jan
Dhan-Aadhar-Mobile digital infrastructure is available to make that happen
though admittedly it does not cover everyone yet.
India certainly has enough grain
stock (over 80 million metric tonne) to feed the entire bottom of the pyramid
for the next 12 months. The major challenge would be that between 10 to 20 million
people may be without ration cards and are likely to get left out. Existing
ration cards for non-domicile migrant workers must be reformed to allow
accessibility of the stipulated grain allocation anywhere in the country. The
government very promptly started distributing up to 5 kilogram (kg) of wheat or
rice and 1 kg of pulses to the poorest every month.
Is all this enough? Will the
economic package stop an estimated 633.88 lakh (63 million) MSMEs from becoming
insolvent or in simpler terms avoid shutting shop? A workforce of 1109.89 lakhs
(110 million) is at risk and about 30% of India's GDP according to the analysis
by Indian Express.
The spread of MSME enterprises is
51% rural or 49% urban. It would be immensely challenging to keep these
enterprises functioning for more than 3 months in the absence of direct
financial intervention of the government through subsidies, loans with interest
subvention and tax exemptions. The migrant labour relocation and hardship has
added another disruptive shock to the MSME enterprise ability to function.
The government has provided
relief to provident fund contribution of 4.5 million employees for three
months. It certainly needs to do a lot more by means of financial interventions
if it is to save production capacity of supply chains.
The fallout of the pandemic will
make it extremely difficult for the marginal farmer in getting their due for
his or her produce when the supply chain is broken. The absence of money in the
hands of majority of working people and no clarity on future earnings, the demand for
products and services is bound to be hobbled for a sustained period both in
rural and urban India.
The current measures are only
interim in nature. They are no long-term solution in sight, and we must be
honest about that. The COVID19 pandemic and the economic fallout is expected to
last at least 2-3 years. The government must therefore in my view allocate 6% of the
current national GDP for providing relief to our citizens, economy, and
productive capacity.
The amount may be spread by the
government in three packaged tranches over three financial years. The current
financial year of 2020-'21 must focus on relief to three fourths of our
population with 3% of the GDP allocation. In the financial year 2021-'22 , the government must adequately begin the recovery and restructuring of the economy with 2%
of the annual GDP spending. Finally, the government, must commit at least 1% of
the GDP in the third-year post commencement of COVID19 to stimulate dynamism in
rural and urban demand.
We are at a fork in our collective
national destiny where the choices of our leadership will determine whether we
move into the age of economic and environmental progressivism or regress in to
an abyss from which it will be difficult for us to recover for another decade.
These choices must be made very carefully by those who are in positions of
authority today, for the lives of posterity and prosperity in our nation hinges
upon it.
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