On March 25, 2020, the Indian economy was put into one of the severest lockdowns anywhere in the world in response to the onset of the Covid-19 epidemic. As a result, an already languishing economy came to a grinding halt. All economic activities except for some very essential ones ceased. The lockdown has completed over 60 days and continues to be in force, but in newer versions of decreasing stringency: Lockdown 1 to Lockdown 4. But there are miles to go before the economy is restored to normalcy. And to reach that point is easier said than done because, as everyone understands now, “shutdown” and “restart” are not just two positions of a toggle switch. In other words, as the consensus to ‘live with coronavirus’ (LWC) builds up with the end of the virus nowhere in sight, the first and foremost problem the economy would be faced with is how to recover from the current frozen state.

Just when public attention was focussed completely on “recovery”, the government has jumped the gun and announced a massive economic policy package for “reform”, on May 12, 2020. While the economics commentariat is engaged in a fruitful discussion on the merits and demerits of the content of the economic reform policy package, an important aspect of the latter — ie, the timing of the launch of economic reform — remains unexamined. A thrust for reform before recovery of the economy is on track is a vivid example of bad sequencing of economic policies. Indeed, it is like putting the cart before the horse.

Policy sequencing

The first time the issue of an inappropriate sequencing of economic policies was highlighted was by John Maynard Keynes in an open letter to Franklin D Roosevelt published in The New York Times on December 31, 1933. In this letter, Keynes argued forcefully that “recovery” policies should precede “reform” policies, and not the other way round. Many decades later, in the 1980s and 1990s, the subject of sequencing was thoroughly discussed again by many authors such as AO Krueger (1986), S Edwards (1990), RI McKinnon (1993) and R Mundell (1995) when multiple nations embarked on economic reforms in Latin America, former Soviet bloc and Asia (including India).

In their writings, the 1933 New York Times open letter of Keynes was not referenced, but nevertheless, the views that emerged in these writings on sequencing of economic policies were unmistakably Keynesian. In other words, appropriate sequencing of economic policies became part of mainstream economics by the 1990s.

Not surprisingly, the 1991 economic reforms package in India was called: “Macroeconomic Stabilisation (MS) and Structural Adjustment Programme (SAP)”, with a clear implication that the former (MS) would precede the latter (SAP). In fact, that was the order in which it was implemented.

The basic underlying features of the 1991 crisis were high inflation and unsustainable fiscal and external balances. Foreign exchange reserves in June 1991 were barely sufficient to cover three weeks of essential imports, and India was on the verge of defaulting on its external payment obligations. MS was accomplished deftly and quickly by restoring fiscal discipline through cuts in government expenditure and managing the balance of payments (BoP) crisis by securing an emergency loan from International Monetary Fund, pledging gold as collateral. These moves helped tide over the macroeconomic crisis temporarily, and kick-started the SAP.

Current crisis

This time around, in May 2020, the economic crisis is of a different kind. There is no soaring inflation, nor is there any BoP crisis of the sort in 1991. This crisis predates the outbreak of the Covid-19 epidemic, and is a psychological one, even though its raison d’être is economic. It is a crisis of confidence (“animal spirits”, as Keynes would say) among private investors — corporate and non-corporate — of the Indian economy.

Private investment (as a percentage of the GDP) has been declining for more than five years now, and the government has not been able to reverse it. Reviving private investment has been a knotty problem for the government, because it insists on searching for a solution within the established paradigm of a supply-constrained Indian economy.

The fact is that India is now equally a demand-constrained economy. Indeed, it is the demand constraint which is the overriding reason for the slump in investment. And with the collapse of consumption demand since the imposition of Lockdown 1 on March 25, 2020, the ‘animal spirits’ of private investors have been completely dulled.

Under such circumstances, the recovery process should, first and foremost, enable the regaining of investor confidence. Only then should the reform be launched. People’s livelihoods are at stake, and they are craving for recovery. To throw big-ticket reforms at them at this juncture is likely to be seen as an exercise in deception. And that is precisely what is happening.

There is plenty of anecdotal evidence that people see this push for reform as a politically-motivated knee-jerk reaction to quell the anger among the public, especially the migrant labourers, who have undoubtedly borne more than their share of hardship and misery on account of the epidemic. This is not exactly the kind of backdrop needed for a successful execution of economic reforms.

Going forward

Admittedly, there are non-believers in the importance of correctly sequencing economic policies. For them, sequencing policies in the right order is a technicality which is unnecessary — in the long run, the intended consequences of “reform” policies would come through. But, to what extent?

If sub-optimal outcomes are acceptable, then the pain of going into details need not be taken. But India desperately needs to take off into a higher growth trajectory of 8-9 per cent GDP growth rate. For extracting maximum benefits from economic policies, the sequencing of policies has to be appropriate: “recovery” policies have to be implemented before the policies for “reform” are applied with full force.

So, how should the economic policies unfold in the coming months? Broad contours of an answer are suggested here. Now that we in India will most likely be in LWC mode within 2-3 weeks’ time, let there be no Lockdown 5. The word “lockdown” is sending depressing signals. A change in phraseology is called for.

Beginning June 2020, policy pronouncements should be made under the caption: Restart 1, followed by Restart 2, 3, and 4 over the next two months. By August 2020, the “recovery” policies would be showing some results, and the coronavirus, hopefully, would be at its lowest ebb. That would be the right time for launching a full-fledged “reform” policy package with a time-bound schedulefor implementation.

The writer is Director, Policy Modelling, Association for

Inclusive Development, a

non-profitthink tank

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