Opinion | Unlocking the economy: policy roadmap for India after 14 April

Long before the coronavirus surfaced as a pandemic, the Indian economy was in the midst of a serious downturn. The complete lockdown starting 25 March has shut down most economic activities. The collateral damage is enormous.

The following sectors, taken together, account for more than two-fifths of India’s gross domestic product (GDP): manufacturing (16.4%), mining (2.3%), construction (7.8%), trade, hotels & restaurants (11.8%), and transport (4.9%). These have shut down almost entirely for 21 days, which alone will reduce GDP of the economy over 365 days by 2.5%. The loss in output would be even higher if the shutdown in these sectors reduces GDP in other sectors through backward or forward linkages, which is almost certain, or if the lockdown lasts longer, even partly, which is clearly possible.

The same sectors, taken together, also account for more than two-fifths of total employment: manufacturing (12.1%), mining (0.4%), construction (11.7%), trade, hotels & restaurants (12%), and transport (4.8%). Construction, trade, transport, hotels & restaurants employ a total of 132 million. Of this, only 5% have regular employment, while 127 million are self-employed, casual labour or informal workers. Manufacturing and mining employ a total of 58 million, of which about 25 million are contract workers who might not receive their wages in the lockdown. Thus, the lockdown could have deprived as much as one-third of India’s labour force of their meagre livelihoods.

The economy will be severely hurt by this contraction of output on the supply side and contraction of employment on the demand side. The consequences will extend much beyond this initial impact, as supply and demand interact at a macro-level. The adverse impact on output and employment will be magnified by multiplier effects. The contraction in employment will multiply through the decline in incomes and purchasing power, reducing output and employment elsewhere in the economy through successive rounds of the same multiplier mechanism. Recovery of production systems and supply chains after the lockdown will take time, because economies are not like taps that can be turned off and on.

For the economy, the sooner the lockdown is lifted—even if partial and phased—the better. For the well-being of people, we need to save both lives and livelihoods, just as we need to recognize that in India with so many poor people, a loss of livelihoods, if it persists, could also lead to widespread hunger, reduced immunity and lost lives. In restarting the economy, coordination with state governments and manufacturing firms is essential, while ensuring that migrant workers reach home in time for the rabi harvest, and then return to their work in cities as soon as feasible.

Clearly, whenever the lockdown ends, the economic crisis will run deeper than anything we have experienced so far in Independent India, while its intensity will depend on the duration of the lockdown. Stabilization will be the immediate task of the government. The meaning of stabilization in economics is much the same as in medicine: just as medical treatment seeks to stabilize the health of a patient in critical condition, economic management needs to stabilize an economy in deep crisis.

The short-term focus would have to be on households on the demand-side and firms on the supply-side. Survival through the crisis is essential for the return of poor households and small firms to economic activities. The poor, identified as 50% and 75% of urban and rural households respectively, should be provided with cash support of ₹6,000 per month for 3 months (equivalent of the Mahatma Gandhi National Rural Employment Guarantee Act wage at ₹200 per day). For 20 million households, this will cost ₹3.6 trillion. In addition, the supplementary free ration of 5kg wheat or rice and 1kg of pulses per month for 3 months should be tripled. Government stocks of wheat and rice exceed stocking norms by 55 million tonnes. For micro, small and medium enterprises, most vulnerable in this shut-down, it is necessary to provide liquidity support and bankruptcy protection through Reserve Bank of India (RBI) lines of credit to banks (say ₹1 trillion) with a backstop by the government, also using MUDRA to provide support where possible.

Such support at a micro-level for survival would have to combined with support at the macro-level, through fiscal and monetary policies, for recovery. It is essential for the government to set aside its conservatism, bordering on fetishism, and provide a fiscal stimulus that is in the range of ₹6-10 trillion (3-5% 0f GDP). The enlarged fiscal deficit cannot be financed by market borrowing, which would simply drive up interest rates and nip recovery in the bud. It would have to be financed by monetizing the deficit—RBI buying government T-bills—printing money, now described as “helicopter money”. Monetary policy would need to bring down interest rates by 1-1.5 percentage points, plus quantitative easing through RBI lines of credit to banks to assist large firms, particularly in distressed sectors, inter alia by restructuring debt. Those who worry about the consequences of such expansionary macroeconomic policies should provide their alternative for recovery, while the government should worry about the consequences of not doing this. If the economy is in freefall, the massive slippage in government revenues would balloon the fiscal deficit to similar levels, without any hope of recovery.

The belief of orthodox economists in the strong spring analogy—the harder you push an economy down, the greater the force with which it bounces back—is an illusion. In reality, a weak spring is the more appropriate analogy for an economy, for when it is pushed too hard, it may simply remain there if its restorative forces are destroyed.

Deepak Nayyar is emeritus professor of economics, Jawaharlal Nehru University