Arvind Gupta, Director, VIF
Prime Minister in his addressed the nation on 19th March announced the setting up of an economic task force under the Finance Minister to formulate India’s response to the ongoing coronavirus crisis.
Covid 19 crisis is being projected as a crisis bigger than the financial crisis of 2008-2009. Global can economic growth is likely to plunge sharply from its present rate of 3% per annum to 1.5 per cent or even less depending upon how long the crisis lasts. In the worst-case scenario, the world may tip into a recession or even an economic depression.
Millions of people are sitting at home fearing job losses. The virus has caused havoc with civil aviation, trade, tourism, entertainment, hospitality, travel, manufacturing, shipping and allied sectors. Job losses at large-scale are happening. Many companies are likely to go bankrupt across the world. Stock markets have plunged across the world. Oil prices have crashed more than a hundred per cent in the last few weeks. Liquidity in the economy is drying up.
The world has seen many pandemics in the last 100 years which caused millions of fatalities. The Spanish flu pandemic in 1919 caused an estimated 55 million deaths. The 2009 swine flu also caused estimated 1,40,000 to 4,40,000 deaths the world over. Covid 19 is more infectious and is likely to impact more people than swine flu. In today’s hyper-connected world, a pandemic can trigger a social and economic crisis of massive proportion.
G7 countries have issued a statement but G-20 countries have been silent. EU countries, badly affected by the virus, are groping for a suitable response. The US has been late in responding to the crisis. Most countries are taking whatever action they think is right for them. While central banks of various countries have coordinated their actions, monetary policy has a limited role in tackling the crisis.
A coordinated global response is missing. This is not surprising because due to of the rise of protectionism, nationalism, extremism, international cooperation on global issues has become that much more difficult. Global crises cannot be handled without global cooperation.
Several countries have announced stimulus packages ranging from tens of billion dollars to $ 1 trillion in the case of the US. These actions or designed to increase liquidity in the market, provide income support to workers, give stimulus to the manufacturing sector. If the virus dissipates, the economies will start to recover. However, if the virus remains virulent, stimulus packages will run their course and a fresh infusion of money will be required.
Health and economic emergencies need to be tackled simultaneously both at the national and global levels. It is important to deal with the health crisis immediately. If the virus is contained, the economy will start recovering.
India
Prime Minister is leading from the front but more comprehensive response to health, economic and financial crisis, has yet to unfold. A strong political leadership, backed by high-quality multidimensional expertise, is essential to deal with the crisis, but, equally important is the cooperation of the people. The people must have complete trust and confidence in the government.
The main theme of the Indian stimulus package should be to mitigate and prevent the spread of coronavirus, protect jobs, address the needs of the workers in the informal sector ease credits, provide direct benefit to the most affected and to revive the job providing sectors.
Like other countries, the government should urgently announce a substantial consolidated stimulus package of up to 3 per cent of GDP (approx. USD 90 billion) which will cover many aspects from: providing basic income support, job reassurances, help to small businesses, assistance to the affected sectors of the economy, direct benefit transfers, interest rate cuts, incentives to industry to ramp up manufacturing, tax payment deferments, debt restructuring, payment of wages in advance to the workers, assistance to states, strengthening women’s self-help groups by enhanced loans at reduced interest rates, government-backed loans for businesses, et cetera. The RBI, Ministry of Finance, Ministry of Commerce, Department of industrial production, Ministry of rural development, Ministry of health, and the relevant institutions and agencies will have to coordinate their actions.
The economic stimulus will have to be carefully structured and sequenced. Sector-specific support packages will need to be worked out after consultation with industry. Labour-intensive sectors such as tourism, travel, entertainment, hospitality, real estate et cetera need to be revived first through appropriate incentives. The economic task force announced by the Prime Minister should quickly work out the details. Time is of the essence.
As a confidence-building measure, the government should be seen to be proactively tackling the public health emergency. India spends about 1.3 per cent of GDP on health which is less than what Pakistan spends. Taking a cue from coronavirus health emergency, India should urgently revamp its public health infrastructure. The government should announce that it is doubling the expenditure on health forthwith. The increased resources will be spent on enhancing the testing facilities for coronavirus, manufacturing protective gear, increasing the production of masks, disinfectants and other medical supplies, creating more hospital beds, training and skilling health workers. Usha and on the naughty workers should also be included in the revamping of health infrastructure in the country.
Indigenous capacity to manufacture medical equipment and supplies needs to be enhanced urgently. We have far too long depended on imports of essential raw materials, active pharmaceutical ingredients and medical equipment. The disruptions in global supply chains have impacted India adversely. The revival of public health will also create demand for skills, training and manufacturing. The present crisis should be used to build capacities in this area. The entire system of medical education, nurses training et cetera needs to be liberalised. Good results can be affected in one year. Addressing the week public health sector will send a positive message of reassurance to the countrymen.
India needs a credible and strong social security system in the country. We have debated it too long without taking determined action. We should use the present crisis to build a basic income support model of social security that has been discussed in the tenure of NDA-1 government. MNREGA, PM Kisan Yojana, Ayushman Bharat and various other schemes can be consolidated to work out a basic income support model which could sustain people during a time of crisis.
Corporate Social Responsibility (CSR) funds are available. CSR rules need to be liberalised. The industry should be encouraged to utilise the CSR funds for building social security for workers.
To provide financial security to the informal sector in rural and urban areas, direct benefit transfers should be announced immediately. This will reassure those who are most affected by the crisis. Else, social unrest in the country will grow.
India has been remiss in neglecting R&D in this country. This is the time to ramp up research and development, starting with public health. A vaccine development fund should be announced. The private sector should be made a partner in this. India’s expenditure on research and development is about 0.8%, which is much less than China’s nearly 3 per cent. We should be able to create high-quality jobs in size are indeed in different sectors. Different sectors of the economy are crying for enhanced levels of R&D expenditure.
To fund the stimulus package, the windfall from the reduced oil prices should be used. Last year India imported nearly $ 110 billion worth of oil. Oil prices have dropped after coronavirus crisis and the plunge is continuing. This may not last too long but whatever relief that Indian economy gets should be ploughed into funding the stimulus package. Fiscal Responsibility and Budget Management Act (FRBM) limits on the government’s fiscal deficit should be relaxed at least for a year. At the same time, the government should try and reduce wasteful expenditure.
Coronavirus has changed the world. It will also change the social and economic models. While it is essential to handle the immediate impact of the virus, we should go beyond the immediate and convert the crisis into an opportunity. India can come up with an innovative model holistic model which addresses all strata of the society, starting from the poorest.
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