Capital Calculus
2020: The gap year for the world economy, India
- The pandemic has reversed hard won gains against poverty, and deepened inequalities
In its updated prognosis of the world economy, the International Monetary Fund (IMF) has largely stuck to the grim forecast issued in June, despite unexpected recovery in some economies. The World Economic Outlook (WEO), the IMF’s global economic surveillance report, projects contraction at 4.4% in 2020. It has also warned that the economic rebound due next year will wane in 2022—for the first time since the pandemic began, the IMF is releasing medium-term projections on the world economy.
Effectively, it has declared 2020 as a gap year for the world economy—something that we all feared ever since the covid-19 virus first made its appearance in Wuhan, China, and then rapidly engulfed the entire world. It forced governments to initiate lockdowns to try and slowdown the pandemic.
The outcome was devastating. What started as a full-blown health crisis, rapidly morphed into an unprecedented economic catastrophe; the closest would be the great depression the world witnessed nearly a century ago. The biggest downside is that unlike in previous economic shocks, the services sector (dominated by the contact economy such as hospitality and aviation) has suffered more, in some instances, than manufacturing. The supply chain disruptions—complicated by the initiation of uncoupling of the Western economies from China—has only further exacerbated the crisis.
This is a challenge that has made it almost impossible for governments to navigate the trade-off between lives and livelihood. If you try to save lives by declaring lockdowns, you almost certainly jeopardize livelihoods; which in an economy like India, dominated by informal means of livelihood, inevitably threatens lives.
More disconcerting in the IMF prognosis is the structural fallouts. The Fund confirms what analysts have been warning since March; this recession will deeply scar the economies of most nations. “Most economies will experience lasting damage to supply potential, reflecting scars from the deep recession this year,” the WEO said. “The persistent output losses imply a major setback to living standards relative to what was expected before the pandemic. Not only will the incidence of extreme poverty rise for the first time in over two decades, but inequality is set to increase.”
The policy solutions, especially for developing economies like India, are obvious. Funds will have to be eked out to finance the social safety nets for those at the bottom of the pyramid. And, this, at a time when contracting growth is causing a massive shortfall in tax collections. Unfortunately, there is no established playbook for policy planners to fall back upon. The actions have to be out of the box and drawn up on the fly. Something that you can get right, but equally likely that you may get it horribly wrong.
In the Indian context, the IMF has projected a contraction of 10.3%—pretty close to what the Reserve Bank of India (RBI) projected a fortnight ago. In its advisory, it is abandoning its traditionally conservative attitude towards fiscal largesse and is encouraging the Union government to dial up spending; at the same time it is nudging RBI to resume its aggressive role in cutting rates.
Interestingly, finance minister Nirmala Sitharaman had recently signalled her intent to announce a third stimulus package—significant given that the union budget is due in three months.
Clearly then, the first year of the second decade of this millennium has been anything but propitious. It has reversed hard-won gains against poverty; deepened already widening inequalities, both among and within countries. It is not that the haves have benefitted from the crisis, it is just that the have-nots have lost so much more.
Worse, the shutdown of schools has hurt under-privileged children the most; denial of mid-day meals at schools is only adding to their burden by threatening nutrition.
Clearly, while we may be looking forward to the end of 2020, the tragedy is that next year will not necessarily bring cheer. Potentially there is every reason to believe the social equilibrium in societies will be vulnerable as the ranks of the economically disenfranchised grow. A sobering thought indeed.
Anil Padmanabhan is managing editor of Mint.
Comments are welcome at anil.p@livemint.com
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First Published:26 Oct 2020, 07:50 AM IST
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