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Between Scylla and Charybdis, the impossible choices for policy makers

J Mulraj | Updated on March 28, 2020

In such a global crisis, policy makers need to make impossible decisions, and do so fast. One such is the three-week complete lockdown of the country, necessary for breaking the cycle of spread of Covid-19, and flattening the trajectory of its growth, giving more time for a treatment to be discovered.

Yet there is a severe Scylla and Charybdis situation, two sea monsters in Greek mythology, on opposite sides of the Strait of Messina, which presented captains of ships passing through it an unenviable choice. Because what is necessitated medically is ruinous economically. President Trump has also stated this, by opining that he does not want the cure to be worse than the disease, and gunning for a reopening of the economy by Easter, or mid-April.

The dilemma has been beautifully explained by Jayati Ghosh, Professor of Economics at JNU, in a televised interview with Karan Thapar. The lockdown will have disastrous economic consequences. There are millions of people who are daily wage earners; if they do not earn a daily wage, they will not be able to eat. There is a huge MSME (micro, small and medium enterprises) sector which accounts for some 40 per cent of GDP and 80 per cent of exports. This will shut down, unless aided, due to the lockdown, and will, in turn, create a wave of unemployment.

The MSME sector has an established supply chain. This, too, will be badly damaged in the lockdown with consequent effects, lasting much beyond the end of the Covid-19 pandemic.

Agriculture provides livelihood to 52 per cent of the people, and the standing rabi crop, ready for harvest, was expected to be 10 per cent higher. With agricultural labour having returned home, there is no one to harvest the crop. Without an aid package, there will be another agrarian crisis.

The Government has recognised this. It has planned a ₹1.5-lakh crore aid package which will provide direct benefit transfer to bank accounts of 100 million poor persons. This could be increased. It will also support businesses hardest hit by the lockdown.

The corporate sector is also stepping in. Reliance has opened a 100-bed hospital solely dedicated to Covid-19, equipped with ventilators, and dialysis machines, among others. It is stepping up production of face masks to 100,000 per day, providing free meals in various cities, together with NGOs, and is importing test kits.

The Mahindra group, and Ambuja Eastern have offered their resorts for treatment of patients. The Tata group has pledged full payment to temporary and daily workers for two months. Vedanta’s Anil Agarwal has pledged ₹100 crore in the fight against Covid-19.

The times are not ‘business as usual’ and one hopes that everyone understands this. Take, for example, the insistence by the Supreme Court that telephone companies pay what is regarded as a miscalculated demand for AGR (average gross revenue) share due to Government, payment of which will lead to bankruptcy. Now, mobile telephony is crucial for several reasons. Firstly, and obviously, it is the only means of communication for people locked down and is indispensable. Secondly, mobile technology has been used by countries like China to track and monitor people and so to contain spread by alerting others they contacted. Singapore developed a TraceTogether phone app to help contain Covid.

The Government must also assure depositors about the safety of their bank deposits.It may agree to a deferment of EMI instalments for various products, and that, in turn, can lead to cash flow and NPA problems at banks. Banks would need a capital injection, and depositors would be worried about the safety of their deposits.

The Government would likely forgo fiscal prudence and would need to widen the fiscal deficit to help people and businesses cope with this crisis.

Global stock markets have fallen sharply due to Covid-19 and the economic impact it will have. The message from God is that humankind should work together. Italy has turned for help to Russia and China, and has been given it.

The medical community is working hard to find treatments and it will succeed. One quick and promising treatment is the use of hydroxyl chloroquin, used to treat malaria, and which has been around for decades. This has been found effective and the USFDA is expected to give its approval. Another is a drug made by Gilead Pharma for treatment of Ebola.

Though we will be able to contain it medically, the economic impact will last longer. For equity investors, prices of shares of well-managed companies are available at attractive levels and could be partially bought with a longer-term perspective, since the economy will take longer to recover.

The writer is India Head — Finance, Asia/Haymarket. The views are personal.

Published on March 27, 2020

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