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Sunday, April 11, 2021

COVID-19: Global Recession and India’s comeback.

Much to the universal apprehension, the United Nations Conference on Trade and Development (UNCTAD) has forecasted a loss of trillions of dollars of global income, leading to the most feared global recession. A global recession caused by COVID – 19 pandemics, will snare most of the developing countries of the world, leaving out India and China. UNCTAD provided no details regarding this likely exception. 

The UN has announced a USD 2.5 trillion rescue package for two-thirds of the world’s population living in the developing countries facing unexpected economic damage.

China, along with other advanced economies, in the coming days, is bringing together enormous government packages. These packages, according to a group of 20 leading economies known as G20, will extend a lifeline of USD 5 trillion to their economies. The world economy, even with this help, will face a global recession.

A four-dimensional approach by UNCTAD

In the wake of the deteriorating global conditions, the monetary and foreign exchange constraints are likely to be more rigid. Thus, UNCTAD estimates a financial gap of around USD 2 to USD 3 trillion, for the developing countries during the next two years. UNCTAD, to build an international economic harmony, has put forth a four-dimensional strategy. The most important being the following:

A USD 1 trillion liquidity immunization by way of canceling the debts, for one year, owed to International Monetary Fund (IMF) by these developing countries. An additional 500 billion dollars Marshall Plan for health recovery assistance, which though promised but has yet to be delivered.

The ‘Liquidity’ Mantra

IMF, the world’s premier bailout institution, is planning to double its financial capacity in the wake of the global recession across the globe, as notified by the IMF chief Kristalina Georgieva. This decision is the effect of the mantra called ‘liquidity’ cited as the only weapon to combat this growing economic crisis. From the IMF chief to the RBI chief Shaktikanta Das, all those in the financial realm strongly believe in it.

‘The Tribune’ has chosen to use the word ‘recession’ and not ‘depression’ in its reports, which in turn raises the hope of an economic rebound. The consideration that the world economy will recover by 2021 will come true, only if the world overcomes the temptation to make profits, alleviates public health, and keep the agriculture and related sectors robust and adaptable.

Here, a reminder is essential to look back upon the problems which arose soon after the 2008-09 world financial crises. The eager implementation of the IMF’s formula of easy credit by many countries, including India, has jeopardized the economic scenario and shadows them till date.

Back to Work for Indians

The 2008-09 financial crises lesson is good enough for India to become alert towards the problems which would surface after the 21-day lockdown. India needs a cautious comeback after the lockdown. India, unlike developed nations, does not have a choice to remain fully functional either by way of running routine operations or by providing unemployment incentives to laid-off workers to keep them on the payroll even during the pandemic.

Though India has countless welfare programs from MNREGA to Jan Dhan Yojana, it is a debatable issue whether the migrant and poor workers have access to these schemes. The sub-Saharan nations, also facing such hard times; also social distancing being unsuitable for poor, crowded societies has not imposed a lockdown. 

In such conditions, if India continues to follow its policies, it will, in turn, carelessly widen the already large deposits and infatuate the already high-interest rates. This aimless pursuit will further sabotage the value of Indian currency and enhance the financial crisis. 

India has to think about the ways to ease down the country-wide lockdown expiring on April 15. For the firsts, India has to relax the restrictions imposed on the young and healthy population. This population can go back to work as soon as possible with extensive safety measures.

Speeding up of the economy

‘The Indian Express’ has manifested that the real purpose of the lockdown was to restrict physical human contact and maintain social distancing to contain the spread of the virus. Blocking the movement of goods has defeated this purpose by overcrowding and skirmishes at check posts.

For curbing physical interaction, there was no permission given to the functioning of not only transport but also industrial establishments during the lockdown. As against this, the Punjab government suggested a workable step to permit the operation of all factories irrespective of whether they produce essential or non-essential goods. They want the state to start factories with a condition to provide in-house lodging, food, and medical facilities to workers at the same time preventing overcrowding in the units. The fact is that the staffing of a majority of the industries and factories across the country uses migrant laborers in northern and eastern states.

The economy of any country is like a living machine. Just like a machine, the economy has to be kept alive and kicking. Resumption becomes very difficult when there is a total mechanical shutdown. To meet the demand once the system resumes, rebuilding a broken supply chain can be possible only if the things are allowed to operate even at a low note.

Resumption though limited in nature

The export industry has expressed their concern to the government that if soon they don’t find a way to re-start the manufacturing units, the Chinese counterparts will replace the Indian products. Also, citing the example of banning pharmaceutical exports, they fear that if soon they are not allowed to export medicines, then the global markets will be taken over by China.

Ajay Sahai, Director General of the Federation of Indian Export Organisations, has voiced that once China captures the global market, it will be challenging to enter it. Furthermore, there is a demand to start production with 50 percent or even less workforce, following the norms of social distancing and health and sanitation. 

Top Industrialists, too, have asked for resumption with limited movement of people and are also ready to pay wages to the workers, pointing out the liquidity crunch faced by the industries due to the lockdown.

Strategic lockdown eases off with proper testing.

Strategic easing of the lockdown is a strong recommendation by Bina Agarwal, Professor of Development Economics and Environment, University of Manchester, UK.

She further adds that, according to scientists, 80 percent of the infected population can recover without hospitalization. These people develop immunity towards the virus, immaterial of them being symptomatic or asymptomatic. Also, there is an antibody test, a serological test, which only requires a blood sample to detect whether somebody has already recovered from COVID – 19. The test is easy to administer, availing the results in a couple of minutes.

All the workers who have antibodies and are thus immune enough to start working are required to undergo this antibody testing thoroughly. This strategic testing will facilitate beginning operations in factories and production units, which are manufacturing and delivering medical and hospital equipment.

Such strategic antibody testing can protect our doctors, nurses, and caretakers. With the increased availability of antibody test kits, we can widen our parameters of measurement. Strategic testing will thus open the doors of the production units to provide re-employment to both formal and informal workers.

Greater Fiscal response is a must

PM Modi has been asking the state chief ministers to come up with an exit plan. With the nation being eager for the center’s response after the 21-day lockdown and the states asking for more funds, there is already a resource crunch.

The government thus needs to seriously revise its rescue package of 1.7 lac crores to support the industry and other sectors of the economy. There is a dire need for more fiscal measures to lessen the burden of the nation. ‘The Indian Express’ insists that the fiscal responsibility of the Indian government should come out in two tiers. 

  • First, to ensure that there is adequate cash for the liquidity crisis faced by the contrived households who also require a continuous supply of essential goods and services during the lockdown.
  • Secondly, to come out with a bold and high-octane package to be implemented after the lockdown.

Though the government has already put forth a package considering the contrived households, it needs to expand the size of the fiscal stimulus further. The uncertainty of the situation over the spread of the virus and its counter effect on the economic activity being the main reason for such a response 

The magnitude of economic damage to determine policy support

Though economics asks to do more, the question arises how much more. Trying to find a solution, Jahangir Aziz, Chief Emerging Markets Economist, J.P. Morgan, remarks that the extent and nature of economic damage should decide the size of the support which the government will extend. Fine-tuning or adjusting this policy support would further deepen the crisis.  

For this purpose, understanding the current situation is a must. The issues are large scale economic damage, extensive damage to the households’, disparities in the balance sheets, and the recovery could be delayed or even weakened. There is a requirement of comprehensive income support from government programs like Jan Dhan, which aims at expanding affordable access to financial services such as bank accounts, remittance, credit, insurance, and pensions. Mudra banks (Micro Units Development and Refinance Agency), a public sector financial institution that can provide loans at low-interest rates to microfinance and non-banking institutions, further providing credits to MSMEs and SMEs. Also, there is an anticipation for temporary tax cuts, deferments to the large corporate, and a substantial decrease in the GST (indirect taxes).

Therefore, preparing the policy support with preconceived limits of affordability and existing arrangements or practices is a waste. Only the extent of economic damage can determine the scope and size of the support. It may so happen that in the process of providing adequate support, India may widen the fiscal deficit to a large extent. The knowledge that India does not have enough fiscal space to deliver any material economic support as against the standard benchmarks of financial requirements leads to unusual jolt. Hence the cautioned response of India.

Lockdown – an opportunity to strengthen the economy

An interesting debate between Arvind Subramanian (former economic adviser) and Devesh Kapur (professor, John Hopkins University), brought forth a revolutionary idea. The current crisis is, in a way, an opportunity to experiment and try new things which are suitable not only for the present but also for the days to come. They discussed and concluded on the measures below:

  • Macro-fiscal framework – FRBM (Fiscal Responsibility and Budget Management Act) needs a revamping. If the pandemic continues, then massive expenditures will be incurred by the center and the states. The macro-fiscal framework can breakdown against the crisis. Thus the crisis is an opportunity to revisit the structure and rebuild it entirely.
  • The remaking of finance is the need of the hour as it is that the corporate and the financial sector are under extreme stress. Add to that, the consumers plus small and medium enterprises have made it to the list due to the crisis. The banks, to return to their normal working state, have to re-structure their current takeover of bad loans and the inadequate bankruptcy process. Also, the banks can open their doors to a new lending model proposed by Nandan Nilekani. The model is technology-driven lending that uses data with deep digital footprints (for example, GST invoices), to procure loans from the new financial players.
  • Leveraging JAM (Jan Dhan, Aadhar, and Mobile) to empower citizens, to access finance and other bank-related services from anywhere. JAM is one of the significant achievements. They are elevating it with a reduction in the flaws of the system. The government, therefore, needs to identify and fix the weaknesses in it.
  • Indian Agriculture needs re-shaping in two ways. Firstly, there is a need to create a single market to maintain supply chains even during the crisis. Now to create such an exchange in one place, many acts and legislations require elimination. Secondly, using the facilities created by JAM and direct transfers. They are encouraging PM-Kisan and various state-level schemes for using fertilizers and power, phasing out over 5 to 6 crop cycles.
  • An excellent opportunity given by the crisis is ‘Make in India.’ It needs immediate implementation with smart trade policies, regulatory help, and industrial policy-incentives. Make in India will revive India’s manufacturing capability.
  • The Majority of the Indian industries are manned by migrant workers. By establishing them as full citizens, will improve the condition of these migrant workers. For the purpose, requiring full support and strengthening of JAM along with PDS (Public Distribution System), Ujjwala (LPG connections to the women of low-income families), and Ayushman Bharat (Insurance based health scheme) is a must to enable the migrants with all the possible benefits.
  • Upgrading and strengthening the Indian health infrastructure is highly needed to fight pandemics. India needs to create an apex institution like the US Centers for Disease Control. It has to have a network across all the states. Also, these centers should invest in medical gears, setting up diagnostic labs, be able to gather and analyze real-time data, and so on.
  • The government should think of building a National Solidarity Fund with a one-time annual contribution from the affluent people and the employees of the organized sector. This contribution can be via wealth tax for wealthy people, while the salaried class can contribute via small progressive taxes on salaries and pensions.

These measures are good examples to prove how a crisis can transform itself into an opportunity to not only strengthen the Indian economy fundamentally but also protect the impuissant.

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