Here’s a brutal truth. We may have to live with Covid-19 pandemic until at least the second half of 2021. This means forget about any imminent V-shaped recovery. So, how should the Modi government, which even before the pandemic was running one of the biggest public debts and fiscal deficits globally, mitigate the devastating damage being caused by the coronavirus?

These are, after all, uncharted waters. Should it worry less about fiscal caution, throw money at consumers and encourage a Keynesian-style demand-led comeback? Or, should it be supremely conscious of the reality that it has very limited means and certainly not enough to spend in a profligate fashion like the US, Japan and the UK?

Coronavirus infection numbers have been coming down but epidemiologists say even if we’re able to subdue the pandemic to an extent, a second infection wave will return early next year. “That’s the way pandemics work,” says one doctor bluntly. For the economy, that means no broad-based upturn for the foreseeable future even though the government is pressing ahead with a wide economic opening.

Some sectors like software services, e-commerce and fintech, will fare well. Others, like the two-wheeler industry, will also find new buyers among those who don’t want public transport. But there’ll be many companies in the travel, tourism and aviation sectors, restaurants, retail and entertainment sectors that will fold.

For now, hopes are pinned on the festival season for some economic pump-priming. From automobiles to appliances, everyone’s betting on a festival bounce, if only to compensate for suppressed demand of the last few months when everyone was stuck at home. Economists, though, are much bleaker about prospects once the festival spending spree’s over. And, of course, there’s a real risk of shoppers entering crowded stores and spreading infection and a consequent spike.

The government is also very conscious that consumers, nervous about their jobs and futures, may turn back to being tight-fisted. So on Monday, it acknowledged the need to rev up demand and unveiled its first package aimed at spenders. Reactions, though, were much more is needed to spur spenders to splash out. London’s Financial Times panned the package as an “underwhelming $10-billion stimulus for (a) pandemic-hit economy.” The government’s scheme includes a complex advance to government employees that must be spent by December 2021, admittedly a plan unlikely to trigger a spending tidal wave. The demand-bolstering steps, in fact, represent just 0.3 per cent of GDP.

Two schools of thought

There are two schools of thought on what the government should do to step up its Covid game. One’s enunciated by economics Nobel laureate Abhijit Banerjee, who believes poor people should be offered an ‘NREGA Plus’ scheme that would also be available to urban workers who are unemployed or are on reduced wages. Says Banerjee: “Pump money into people’s hands. We should take a cue from what America’s doing.”

JP Morgan emerging markets head Jahangir Aziz also suggests Indians need income support rather than stimulus measures because as long as there are Covid infections and social distancing there is no way to really get demand going. The most important thing, Aziz says, is to mitigate the impact of the coronavirus on corporate balance sheets and staunch rising bad debts that will be a brake on recovery when Covid-19 is finally under control.

Banerjee also suggests the Aadhaar be utilised like a ‘national’ ration card at public distribution shops around the country. As well, he suggests no-questions-asked temporary ration cards should be handed out to anyone who wants one for the coming months. The government’s winning hand on that idea would be that food silos are brimming with rice and wheat so there is no shortage of food to distribute to the needy. On the corporate side, to prevent a tidal wave of bankruptcies, Banerjee suggests debt payments for one-quarter be completely written off though that’s not a suggestion the banks are likely to immediately embrace.

In stark contrast, there’s Morgan Stanley’s Ruchir Sharma, who says he’s very sympathetic to the government’s efforts to keep a lid on spending and that India cannot go throwing money at the economic slowdown like much-richer Western nations.

Sharma told a recent conclave that “to throw caution to the winds and say I’m just going to print our way out of this mess — look at the examples of other emerging countries. Turkish President Erdogan tried that but look at the results he’s getting. The economy’s a complete mess, it makes our economic management look stellar.” He says the stock market, which has kept climbing steadily, has the right take on the pandemic — that “this is not permanent damage” but more a ”natural disaster that comes and goes away.”

Keep in mind that as far as government spending, the administration’s also in a fix due to the Ladakh standoff and needs to spend money hurriedly to sustain our troops in the icy heights through winter and buy armaments to match the People’s Liberation Army’s more sophisticated equipment. (The Chinese have the economic advantage because for now, they appear to have laid low the Wuhan virus and are kickstarting their economy, though as Sharma notes, Beijing is not being as lavish in its measures as before.) China’s “being much more cautious about the amount of stimulus it’s extending in trying to do this because after the global financial crisis, it built up a massive debt bubble,” he says.

Turning to RBI

Okay, turn our eyes finally to the Reserve Bank of India because government fiscal power’s unlikely to come to the rescue. The total demand-boosting stimulus in response to coronavirus now stands at 2 per cent, a tight-fistedness that’s understandable if you take Sharma’s view. As far as the central bank is concerned, we’ve got our old friend inflation to contend with. Inflation was up 7.38 per cent year-on-year in September. The RBI must wait for prices to ease to loosen monetary policy further which may take until 2021 thanks to India’s infamous “sticky inflation”. All this means it will a long while before there’s any revival of the “India story.”

Growth this year is seen contracting 10 per cent, one of the severest falls anywhere, and Sharma predicts we’ll be lucky to take annual growth up to 5 per cent in the years to 2025. Capital Economics figures the coronavirus crisis has wreaked such damage on household and corporate balance sheets that output in India won’t return to its pre-virus path for at least a decade — a decidedly sobering thought.

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