Impact on the economy

Economic burden

Print edition : April 10, 2020

Businesses closed in Chennai’s shopping district T. Nagar following a State government order aimed at preventing the spread of COVID-19. Photograph on March 20. Photo: K.V. Srinivasan

Prime Minister Narendra Modi. His address to the nation on March 19 had nothing on what the government proposed to do to handle the crisis. Photo: PTI

As the global economy heads towards an unprecedented collapse in demand, India under Narendra Modi sticks to fiscal fundamentalism when even diehard right-wing governments are trying to boost fiscal spending.

Even as the Coronavirus pandemic unleashes an unprecedented global assault on lives and livelihoods, driving the world towards a downturn which, in terms of scale, could well be reminiscent of the Great Depression, India appears to be the odd one out in its handling of the crisis. The leadership of every major economy, including the ones that have been singing paeans to globalisation, are undertaking some kind of government intervention and expansionist fiscal policy. Countries as far apart as the United States, the United Kingdom, Italy, Germany, Japan, Singapore and Australia and also the European Union have announced either significant fiscal expansion or spending drives as a countercyclical measure. India, under PrimeMinister Narendra Modi, remains steadfast in its stoic resistance to any such move.

To be sure, there is a great deal of uncertainty about the virus and what impact it will have on the economies of the world. Nobody knows yet what the impact will be on output, jobs, lives and public health, but all agree that the world’s productive capacity is going to suffer a major dislocation as supply chains break down, spending priorities shift for people and governments, and people around the world cope with some form of lockdown. Recent estimates by J.P. Morgan reveal that China’s gross domestic product (GDP) is likely to contract by a whopping 40 per cent in the first quarter of the year, while the U.S. economy is likely to shrink by 14 per cent in the second quarter. The European economy is expected to contract by almost 25 per cent. As the pandemic’s epicentre shifts westward from China, with Italy, Spain, Germany, the U.S. and the U.K. being the new flashpoints, the global economy is entering a zone that will make the global financial crisis of a decade ago appear as a minor blip. The only certainty in the short term is that exports from most major economies will be severely hit by a combination of collapsing demand, broken supply chains and a significant reordering of national priorities dictated by a renewed emphasis on health care.

Demand collapse

The Indian economy, already in a prolonged slowdown, is likely to suffer a more serious shock for two reasons. First, although the Modi regime is in deep denial, despite evidence of a severe slump in demand—preferring to describe it in the words of its policy wonks as a “cyclical” problem—the economy is likely to suffer a severe compression as Indians prepare for their version of social distancing and isolation and possibly worse as the virus takes hold. For instance, it is already obvious that work-from-home will have an impact on an entire ecosystem that was clustered around organised enterprises. Many such businesses cannot survive for long and may well shut shop forever, as had happened after demonetisation in 2016 or the implementation of the goods and services tax (GST) the following year. Many small and informal businesses will not be able to climb back into the ecosystem after a sudden and forced exit. The closure or the significant scaling down of a range of establishments providing services is likely to further lower demand.

But it will be a mistake to view the problem as one affecting only small or informally run businesses. For instance, the Indian Railways cancelled 155 pairs of trains in the week starting March 16. It carried 55 per cent fewer passengers than it did a week earlier, and earnings fell by almost 50 per cent during this period. The Indian automobile industry, already in its longest-ever slowdown, has lost hope of recovery. A component supplier to Tata Motors, with operations at Jamshedpur and Pune, told Frontline that the lockdown brought his operations to a “complete halt”. “I was expecting a recovery in about six months, now I dare not predict when it will happen.”

A large part of the Indian organised industry, while appearing to exhibit characteristics of large enterprises in terms of their productive capacity, actually exhibit characteristics of small-scale informal enterprises in terms of the way they engage and pay labour. Thus, a large proportion of the labour force in the auto industry is engaged as casual workers with little or no benefits and no security of tenure. As the crisis spreads and deepens, more workers are likely to lose jobs. The most immediately vulnerable are those working in informal occupations. A lockdown is like a death sentence to people who work as domestic help or the hundreds of services that form the livelihoods of millions in urban localities— hairdressers, rickshaw-pullers, “watchmen”, drivers whether part of the gig economy or otherwise and those engaged as delivery agents for companies such as Amazon. Every conceivable livelihood of this kind now hangs by a thread. Narendra Modi’s appeal to every Indian to stay indoors, accompanied by his exhortation to private employers to continue to pay their workers, is not going to make an iota of difference to the lives of these people.

The second significant aspect of the crisis is the extensive dislocation of the economy’s supply chains. Industries that are dependent on imports, or those that are export-based, such as garments, will feel a severe compression in demand. This is likely to unleash a chain reaction; garment units, for instance, are going to see the collapse of their entire supply chains as spinning and dyeing units shut shop. Industries, such as machine tools, which depend on a countrywide network of suppliers of parts and inputs are likely to suffer a major dislocation that will make it difficult for them to jump-start at short notice as and when there are signs of a demand recovery.

Distancing, not abandonment

Social distancing need not mean abandonment. It is not possible to enforce a lockdown of any kind without providing people with a humane solution. Since such a lockdown is a purely temporary measure, just two aspects need to be taken care of for the most vulnerable: a measure of income support and the assurance of basic supplies of essentials. Both these are perfectly possible. The Modi government already has extensive information about the bank accounts of citizens; surely the practical aspects of putting some money into these ought not to involve any great logistical problem. If the Centre had engaged with the State Chief Ministers instead of the engaging in a high-profile interaction with SAARC representatives, it would have been able to establish a working protocol for cooperative best practices to achieve these two objectives.

The Kerala example

Indeed, if Modi had paid attention to Kerala Chief Minister Pinarayi Vijayan’s announcement made just prior to his own speech on March 19, he would have noticed a completely different approach. The Kerala government announced a Rs.20,000-crore package, which ensures not only income support but also health, food and material supplies to its citizens during this emergency. Even a relatively poor State like Odisha has announced measures that have an income-support dimension and are backed by the delivery of essential services to those most affected by a lockdown.

Across the world it is clear that fiscal measures have been the weapon of choice for governments, even those led by diehard right-wing regimes. Some nations, like the U.K., added quantitative easing to the package. The unwillingness to countenance a fiscal package that has a significant component aimed at the most vulnerable is not only irresponsible but also sure to leave the economy in a state from which it cannot recover even when things improve. Modi only announced a task force headed by Finance Minister Nirmala Sitharaman that will oversee a relief package.

There have been indications that small enterprises may be allowed deferred payment of their loans, or that the NPA (non-performing assets) classification norms may be relaxed significantly. There is also speculation that direct cash credits may be used as a means of providing income support. The last-mentioned is a tricky one, especially in an emergency, going by the experience of thousands of poor people who have been unable to authenticate their identities through the Aadhaar system. Moreover, the experience with the PM-Kisan scheme has been patchy, with many beneficiaries not getting the promised amount that is due to them as relief. In an emergency such as the ongoing one, it would have made better sense for the Modi regime to have involved the States in the actual delivery of services and support because they are better positioned to do it.

The kind of measures that the regime appears to be willing to implement can hardly be effective. For instance, extension of loan repayments is not going to enable a small unit to continue operations if it is not even operational. In the situation of collapsing demand, neither lower interest payments, engineered through monetary policy, nor a relaxation of terms of loan payments, facilitated by a relaxation of banking regulations, is going to keep the small unit afloat. A demand collapse of the kind that is likely to happen very soon requires income-generating measures. For instance, the Mahatma Gandhi National Rural Employment Guarantee scheme can provide a demand boost, even in a time such as now when no work is actually possible. Similarly, health care expenditures undertaken, especially now, through the deployment of paramedics and medical professionals would achieve a similar purpose. All it requires is a little imagination, one that pays attention to the nature of livelihoods, and a little empathy to figure out what works best in the circumstances for those affected most. Of course, this method is not foolproof and mistakes may well be made in striking the right priorities, but nobody would blame a government that is trying for not trying even more in such a situation.

The case of China

There is no hint that the regime has learnt anything from the way China has handled the impact of COVID-19. Despite being the first economy to take a massive hit, China not only kept the effects confined mostly to a single province, but also sharply escalated investments in infrastructure to engineer a revival of demand. It has relied fundamentally on fiscal measures, issuing local government bonds to the tune of $394 billion, to back this strategy. The emphasis is clearly on reviving domestic demand in a situation where the external environment is unlikely to improve in the immediate term.

Meanwhile, the Indian emphasis on Make in India, ostensibly to produce in India for the global market, remains hopelessly riddled with contradictions. The Modi regime’s utter inability to even concede a collapse of local demand, let alone put in place measures to revive it, makes sure that India is at a dead end.

Modi’s address: the silences

Modi’s televised address made a touching appeal to Indians to prepare to face the health crisis boldly and with fortitude. But the most significant aspect of his speech lay in what he did not say. Nowhere in his speech did he reveal what his government had done in the several weeks since it became evident that India was not going to escape the wrath of the virus. Why, for instance, has the Indian government not established a transparent testing protocol that would check for evidence of community transmission of the disease so that the disease can be countered at an earlier rather than later stage? Those defending the regime were quick to argue that this would be too costly. A back-of-the-envelope calculation reveals that at a cost of Rs.2,000 a test, one crore Indians could be tested for a total of Rs.20,000 crore—possibly much less if bulk orders are taken into account. Compare the reluctance to spend on this to the alacrity with which the government appears to be considering a plea from private airlines for a “relief” package of Rs.12,000 crore.

The biggest danger now staring at India is of the country going into Stage III of the pandemic, when community transmission of the virus takes root. At that point, access to higher levels of treatment—involving the availability of hospital beds, ventilators and ICU facilities—becomes crucial.

The Modi regime’s handling of the epidemic suggests that it has bet too high on its luck. If India gets to that stage, the costs for the economy and its people could become significantly higher. In such an eventuality, India would undergo not only a severe implosion of demand, but also a dislocation of production and supply networks and chains so extreme as to be impossible to recover from.

If past record is anything to go by, it is likely that the task force will provide special relief packages of the kind it has offered in the last several months at considerable cost to the exchequer. Tax breaks to the rich have been substantial. The telecom industry czars are already queuing up; the ones from the airline industry may be next; and many more sectarian interests, all playing the COVID card, will queue up for relief. If anything, the Modi regime’s response to the epidemic has confirmed that the callous disregard for ordinary Indians that it displayed during demonetisation and GST implementation is exactly what we are going to see now.

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