AS COVID-19 raged, countries across the world went into an unprecedented lockdown of their economies, triggering the biggest economic crisis since the Great Depression. And, as almost every affected country whipped out an immediate package of relief and support, India under Prime Minister Narendra Modi remains inexplicably committed to fiscal fundamentalism.
A grossly inadequate “relief” package and a monetary policy initiative that is destined to fail have been the only steps taken by a grossly unprepared government.
Heart-rending visuals of masses of migrants walking desperately to their villages hundreds of kilometres away after the sudden lockdown—possibly the biggest wave of mass migration in India since Partition—were not enough to move the government to unleash a more substantive, generous and meaningful set of measures to alleviate the suffering. The abiding feature of the Indian lockdown has been the utter neglect of planning and coordination in the seven weeks’ time the government had between late January, when the first case was reported in the country, and March 24 when the lockdown was announced. This, coupled with the lack of transparency about the government’s intentions, was the perfect recipe for a disaster.
As the accompanying piece by James Wilson asks, why was the government so gracious in giving international travellers four days’ notice while condescending to shut millions of Indians in a lockdown after a four-hour notice?
As the lockdown proceeded, it became evident that the Modi government had bungled on the two major fronts it needed to act on. While it failed to test and trace, which was best illustrated by its “screening” system leaking like a sieve, particularly at the busiest airport in the country, Delhi, it also ignored the elementary rules of planning for the lockdown.
Thus, the Indian response failed to address not only the health emergency posed by the virus but also the cataclysmic impact it would have on lives, livelihoods and productive capacity.
Where is the war room?
Indeed, as the expert virologist T. Jacob John asked a full two weeks before the lockdown ( The Hindu , March 10), “Where is the war room?” Almost a month later, one may well add the question: Where indeed is the war chest to conduct the campaign against the virus and its effect? Insofar as the economy was concerned, it was evident that the government needed to act swiftly on two fronts.
The first required the management and coordination of the productive and distributive capacity of the economy in order to smoothen the impact of the lockdown. The second aspect of planning required it to ensure that speedy relief was provided to the most vulnerable and that the productive capacity temporarily shut did not collapse permanently for financial reasons. It is evident that the Modi government failed miserably on both these fronts.
When the country suddenly went into lockdown people were stranded. Physical distancing—never mind the term having an obnoxious ring to it because of India’s civilisational contribution of caste-based notions of purity—was enforced ruthlessly but selectively at short notice. This resulted in the severe disruption of the supply chain for every conceivable kind of goods across the economy. The very notion of “distancing” means that people have to be at the place safest for them during a lockdown, where they have the elementary social support networks that are needed for a person to remain in isolation for 21 days. It was but logical for migrant workers in Indian cities, where they invariably form the underclass, to drift towards the relative safety of their homes in their villages. And move they did in a desperate effort to reach home.
If the regime had paid attention, it would have been aware of this possibility. The Railways, for instance, ran special trains in the days before the lockdown in which thousands of migrant workers travelled in heavily overcrowded conditions. The fact that migrant workers, just back in the cities after exhausting their savings following the Holi festival in early March, had no other option but to try to return home as they were outside the scope of the public distribution network for their basic food supply.
If the migrant was thus stranded, workers in small establishments or those self-employed, a euphemism for petty trade or small businesses, found their supplies running out quickly. Meanwhile, the lockdown, which happened during (or after, in some States) the harvest, left farmers stranded. While prices crashed at the farm gate, they soared in cities. In hindsight, the Prime Minister’s use of the word “curfew” to describe the lockdown appears to have been careless.
The reports of widespread police brutality against ordinary citizens can perhaps be traced to this utterance since a policeman’s understanding of what a curfew is very different from what the Prime Minister may have intended.
Moreover, the police, used to enforcing the law, would have been utterly incapable of differentiating “essential” commodities from non-essential ones. It was only much later that the government removed this distinction through a notification, but by then significant damage had been done. In all the simple reality of transportation logistics, the fact that smaller consignments of goods typically move in mixed lots escaped the attention of the authorities.
This is an obvious reality at the last leg of the distribution chain, especially because they involve small establishments whose turnover is also relatively smaller compared with large establishments.
It would appear that a nationwide lockdown would have called for a central coordination team, starting at the apex level with the Prime Minister and his key Cabinet colleagues. Instead, every possible decision appears to have been left to Modi, with the rest nowhere in the picture. This has clearly hampered any coordination among the different assets and resources available to the government.
For instance, given the severe disruption of the supply chain, it would have been logical for the government to have roped in the services of the Railways, which now has a huge capacity that has been idle since the lockdown. In coordination with the Indian Army, which has a superbly oiled logistics machinery under its command, the Railways could have focussed on long-distance movement of goods on a priority basis, while leaving the Army to move it from point to point.
“We are well-positioned to move goods over short distances because we have a countrywide presence, and in coordination with the Railways, this would appear to have been a viable option if only it had been planned,” a senior Army officer stationed in north India told Frontline .
The Railways, which normally moves goods traffic at an average speed of 25 kmph, could have moved goods much faster during the lockdown because its tracks were now free of passenger trains.
Burden on informal labour
The “informal” nature of labour engagement in India means that the lockdown imposed a severe burden on this section of the workforce, which, incidentally, is the overwhelming form of employment in India. According to Prof. K.P. Kannan, who served as a member of the National Commission for Enterprises in the Unorganised Sector, headed by the late Arjun Sengupta (https://www.epw.in/engage/article/covid-19-lockdown-protecting-poor-means-keeping-indian-economy-afloat), of the 460-470 million workers, about 369 million (more than three-fourths) are engaged in agriculture or work in micro, medium and small enterprises (MSMEs) employing less than 10 workers each.
Of the remaining, more than half are temporary or casual workers in the organised sector; the automotive industry is a prime example of organised industry employing workers on contract, apart from the government itself employing an increasingly large fraction of its workforce on contractual terms, often through contractors.
Thus, informality is to be seen not just as a transactional relationship but one that is embedded in social relations. The tenuous nature of this relationship could have a significant impact on the nature and extent of the recovery, if and when it happens in the future, to which we will turn to a little later.
One of the biggest failings of the Modi government’s handling of the COVID-19 crisis relates to its failure to coordinate measures with States on the health emergency and its economic fallout. For instance, it placed the onus on States to check the outflow of migrant workers without providing them support. This, despite the fact that States have to undertake almost all the health-related measures apart from providing relief in terms of supplying food and shelter. Many States such as Kerala, Karnataka, Tamil Nadu and Odisha have undertaken significant measures, but the point is that the Centre has not indicated that it is providing any kind of financial support to the beleaguered States.
The ongoing harvest in many States—and its recent completion in some others—meant that States urgently needed to procure the produce at their minimum support price (MSP) levels in order to prevent distress sales where harvesting was possible (in States like Punjab harvesting has not been possible in many places because of the shortage of labour).
Imaginative solutions such as those suggested by more than 600 academics and social activists (https://frontline.thehindu.com/dispatches/article31154962.ece) that the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) be used for harvesting and other operations, while maintaining distancing norms, have been ignored. Obviously, for this the States would have required the Centre’s support, financially as well as otherwise.
In fact, a leading academic urged the immediate release of at least Rs.1 lakh crore through the Reserve Bank of India’s (RBI) Ways and Means advances window, apart from the Centre’s immediate provision of another Rs.1 lakh crore as an outright grant. Obviously, these suggestions found no takers in the government.
Productive capacity and incomes
If the failure to provide urgently needed relief to those hit the most has proved to be a fiasco, very little attention has been given to saving, protecting and salvaging national productive capacity. It is evident that the lockdown imposes the virtual evaporation of national output. How much of national output has been lost permanently?
The first such estimate for India, made by Tejal Kanitkar, who teaches at the National Institute of Advanced Studies in Bengaluru, reckons that a 40-day lockdown would result in a 20 per cent collapse of output (GDP); a 66-day lockout would result in GDP declining by almost a third. These estimates, made using the classical Input-Output methodology made popular by the Nobel Prize-winning economist Vassily Leontief (1973), map out the detailed linkages between every single segment of the economy with every other. In effect, the matrix works on the principle that one segment’s input is another’s output and so on, thus accumulating all the linkages in a single matrix.
Asked if these estimates themselves could be an underestimate, given the extent of informality in the Indian economy, Kanitkar replied in the affirmative. “If anything, these estimates would underestimate the extent of the fall in output given the fact that we know that the lockdown is disproportionately hurting informal activity.” But even this is only the first round of the impact on economic activity. If businesses are unable to restart as soon as conditions become conducive, it will result in a further decline in national output, the second-order impact of COVID-19. With businesses remaining in lockdown, in order to live and fight another day, they need to stay afloat first. For that to happen, businesses need to retain their workforce, or, at the very least their core workforce, so that they can commence operations after the lockdown. But even that is not enough; they need working capital to stay alive between now and after the lockdown. With indications that the Indian lockdown may be lifted in a staggered manner, the uncertainty about the future only adds to the murky visibility for companies and businesses.
If enterprises have shut down only partially, they are not only incurring costs without any profits during the lockdown, but are seriously courting risks with their solvency. In effect, companies that are now facing only a liquidity crunch may well enter the zone of insolvency. A crisis of liquidity arises from the fact that returns on investments are postponed; this can be managed typically through debts. But a crisis of insolvency arises from the very viability of the business as a unit. The failure to quickly enable businesses to tide over the liquidity crisis would push them towards insolvency, the point of no return. If or when that happens, productive capacity would have effectively been destroyed; if played out over the scale of an economy, it implies a further collapse of incomes, hence of GDP.
Across the world there have been suggestions that companies be handed over urgently needed relief so that productive capacity is not destroyed and remains available when the crisis is over. For instance, there have been suggestions that the device of a “negative tax” be used immediately to transfer funds to companies during the crisis. Finance Minister Nirmala Sitharaman has announced tax deferrals and the RBI has announced a moratorium on loans from banks, but these are not of much consequence, especially to smaller firms. Tax deferrals are meaningless to companies whose revenues have already collapsed to zero. Similarly, moratoria are useless because they only postpone (higher) liabilities while earnings have collapsed here and now. Even more critically, neither moratoria nor tax deferrals provide any positive and immediate relief during the crisis.
It is in this context that a negative tax holds much appeal. The RBI’s attempt to tempt banks to lend more by drastically narrowing the gap between the reverse repo (the rate at which banks park funds with the RBI) and the repo rate (the rate at which banks borrow from the RBI) is bound to fail. This is because banks may prefer to suffer a loss by parking in the reverse repo rather than lending in these risky times. Already banks, including public and private ones, have intimated customers that the moratorium will cost them dear.
Ingenious economics
A negative tax has several advantages, the most critical being the fact that it can be delivered directly and immediately to companies. The government already has a vast database on taxpayers based on its GST Network, which give it an insight into the turnover of companies and other data. With this it is possible to identify companies in order to transfer payments directly to them. Since protecting labour may be of importance from a social justice perspective, a stipulation can be made that no worker be sacked. This could be verified by cross-checking the Provident Fund contributions of employers.
However, it needs to be emphasised that the extent of labour absorption need not be the only criteria; several sectors that are capital intensive, such as power, steel, petroleum and mining, may require protection not because they employ labour but because they would be critical to any economic recovery when that happens. Speaking to Frontline, the managing director of a Bengaluru-based SME said: “The problem with the idea of a GST-based identification of companies is not that it is not viable or possible, but whether the government is even thinking about the long-term damage it is causing by not acting swiftly.”
T.K. Ramesh, who heads an SME that is part of the Ace Micromatics group of companies which is focussed on the manufacture of machine tools for industries like automobiles, told Frontline that his company, on the eve of the lockdown, had already been operating with an idle capacity of 35 per cent. The group, which, because of its operations in China, was alive to the possibility of COVID-19 affecting India, had taken some precautionary measures much before the lockdown. “Of course, at that time we only acted from a hygiene perspective, not a disease perspective,” he remarked.
However, after Modi’s first speech of March 19, his company started sending its employees back to their home bases. The group employs about 3,800 persons directly and 2,200 persons indirectly. Ramesh does not expect the situation to improve soon, even if the lockdown is lifted on April 15. “In my estimate, the effect of COVID-19 will last at least 12-18 months,” he said. He believes that the post-COVID-19 world “may well change in ways that will force us to reorient ourselves”. Business travel will certainly be much less, especially because executives have now familiarised themselves with conducting meetings online via video, as will more entrenched practices of working from home, he said.
Even if businesses eventually start operations if and when the crisis blows over, they will need workers to restart operations. This explains why employers are willing to provide some relief to their employees even if they remain idle during the lockdown. The head of an SME who wished to remain anonymous told Frontline that “this is not because of any great sense of altruism but simply because businessmen know that they would not be able to harness labour with the requisite skills for the jobs they were needed for if they fire them now”.
“The popular middle class notion that labour is a homogenous commodity that can be pulled off the shelf is a fiction, in reality no two jobs are the same and you need particular kinds of people to do specific tasks,” he remarked. Ruma Ghosh, who runs a popular bakery in Jamshedpur along with her husband and employs about 25 persons, expresses a similar sentiment. She continues to pay them, not only because they have been with her through good times and bad for more than two decades, but because she says she would never be able to restart operations from scratch if she sacked her workers now.
Collapse of demand
The Modi regime’s lethargic response to the biggest national emergency since its birth as a nation means the ongoing collapse of national output is likely to be followed by a further collapse when capacities fail to fire even when the situation improves. But, meanwhile, a third-order impact could come from the utter collapse of demand in the national economy because of widespread unemployment and the resultant loss of incomes. Every country in the world sees the current expansion of the fiscal space as an insurance against a future drop in output. Put another way, the thinking goes like this: if governments can generate fiscal handouts now, there is at least the possibility that output in the future may not drop as severely as it would in the absence of relief delivered now.
All of them have abandoned all talk of the fiscal deficit because of the realisation that COVID-19 presents an existential crisis. As one friend points out, “You need the state to save capitalism from itself.” This is not the time to worry about the fiscal deficit, seems to be the consensus. After all, a well-directed package that would ensure the greatest bang for the buck would be worth it if it prevented the collapse of national income to the tune of 50 per cent. The fears of any inflationary pressures arising from a monetising of the deficit are irrelevant in a lockdown simply because demand has collapsed anyway. Moreover, even after the lifting of the lockdown, demand in a range of sectors like travel and tourism and many others are likely to be subdued for some time. Additionally, the uncertainty about the future will further dampen demand. As for the pressure on the exchange rate and the possible outflow of capital, these can be managed, especially because oil prices are likely to remain subdued for some time in the future.
As every major economy comes to a grinding halt, the adage that in a recession everyone is a Keynesian has given way to another, that is, in a pandemic, everyone is a socialist. Remarkably, Financial Times , in an editorial (April 3, 2020), calls for “radical reforms” that are needed to “forge a society that will work for all”. It recalled the spirit in the aftermath of the Great Depression and the Second World War and said the “demand for collective sacrifice” from people needed to be backed by a “social contract that benefits everyone”.
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