A holistic strategy is required to deal with Covid-19

The global economic recession precipitated by the Covid-19 pandemic is unprecedented in its severity. It is far worse than the downturn at the time of the global financial crisis. The lockdowns across the world result in all economic activity coming to a standstill with the exception of the provision of essential goods and services as well as the extent that productive work is feasible digitally from home.

The largest stimulus package in US history of $2 trillion has been approved with remarkable speed and bipartisan consensus. This is well over 10 per cent of GDP. There is relief for everybody; direct payments to the unemployed, small firms and industries like airlines which have been severely impacted.

The present lockdown in India is for three weeks for the entire country. Around 90 per cent of workers are not in the organised sector. Its implications have been seen dramatically over the last few days in urban India where casual workers and the self-employed have lost their daily incomes, have hardly any savings and are choosing to go to their villages for the modest support that their families would provide. The announcement of the provision of free foodgrains by the Finance Minister did not deter the mass exodus that was building up. With hindsight, it has become clear that free cooked meals for the hungry with no money is the way to alleviate distress.

A good start

While a good beginning has been made by the announcements of the Finance Minister and the RBI Governor, going forward a holistic strategy is required along with the continued commitment to do what it takes; free from earlier settled ways of thinking. For this, it is imperative to give up looking at the fiscal deficit till the pandemic is contained and the economic impact of the lockdown is over.

The US decision committing over 10 per cent of the GDP in their relief package is a good example. During the World Wars in the last century, the deficits went up to well over 20 per cent of GDP. The immediate goal now should be to ensure that testing, quarantine and treatment capacities are ramped up as rapidly as possible to be able to cope with the worst case scenarios. The sooner the pandemic is contained the sooner the economy can start returning to normal.

Till then the overriding priority should be given to fulfilling the commitment that nobody would be allowed to go hungry. For those who have to deliver on these, they need to act on the premise and the confidence that there are no budgetary constraints.

To achieve both these objectives, the government would need to adopt processes and procedures used during war time where the state could commandeer all resources for use as well as production. President Trump has had to use such a provision now for production of ventilators. One crucial factor that may not get attention but would be critical is the need for explicit empowerment of those who have to take decisions at various levels to short circuit procedures and rules if required.

Timely delivery of results must be the sole objective. The imparting of confidence that for bona fide decisions there need be no anxiety about possible audit observations or scrutiny by other investigating agencies would be critical. An efficient system of giving immediate sanctions, delegating additional powers and of granting ex post facto approvals would make all the difference.

The challenge of getting the economy back on track after containment of the virus would be a daunting. Factories, shops, hotels, restaurants and transport services have been closed. Workers have gone back. Debt and other liabilities are rising while revenues have been collapsing. This has come after many quarters of a continuing downturn with declining growth rates. Enterprises have been given breathing time with extension of the dates for various returns and compliances. The RBI has injected additional liquidity, lowered interest rates and extended time for debt repayment. Provision of additional working capital at concessional interest rates and moratorium on repayment to the banks till normalcy returns is unavoidable. For this, interest subsidy subvention by government would be required.

V-shaped recover

A lot more would be needed for generating demand for domestic goods and services for a V-shaped recovery. Latent domestic demand in India is large enough for this. Investment needs for mass affordable housing, infrastructure and restoring the environment are huge. At the time of the 2008 financial crisis the stimulus provided was 4 per cent of GDP and it did result in a V-shaped recovery. A bigger stimulus would be in order this time. Without such a stimulus, the economy may well be in for a long period of stagflation.

Given the shock of the present lockdown and the earlier slowdown, neither private investment nor demand is likely to pick up quickly on its own. The lesson from the 2008 experience is the need to start reducing the deficit as soon as the recovery gets going. This should not be difficult. A V-shaped recovery would also be the best way to restore the health of the financial sector with the return of the virtuous cycle of increasing demand for credit by the private sector experiencing a return to profitability. Debt servicing would return to normalcy. The equity markets would also gradually recover. The rupee is fortunately depreciating and the real exchange rate appreciation of the last decade is being undone by market forces.

The RBI should allow this process to proceed as this improves the business case for value addition in India. In addition, minimum levels of value addition for procurement by government could also be stipulated. To illustrate, all Active Pharmaceutical Ingredients (API) would have to be made in India for purchase of medicines by government agencies. Such stipulations were part of the US stimulus of 2008.

The focus should be for an immediate boost in demand for existing idle capacities across the board within the country. This would then create the business case for long overdue fresh private investment.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP. The views are personal

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