As the global economy heads for a steep recession amid a self-imposed shutdown to contain this outbreak of coronavirus, countries around the world are injecting massive doses of fiscal stimulus to salvage what they can of their economies. Some hope for a V-shaped recovery once it blows over, though they would perhaps be lucky to get U-shaped returns to their growth trends. But what about India? The relief spending that we have announced so far pales in comparison with the money other big countries are set to pump around. A package of just ₹1.7 trillion has been put forth. This is under 1% of our annual output, and at least half of it looks like budgeted-for cash to be spent earlier than usual. Given how uncertain covid’s path ahead remains, India may need ₹9-10 trillion extra. As of now, we seem over-reliant on social curbs, which have been rated the world’s most stringent among major countries, going by an index created by Thomas Hale and Samuel Webster of the Blavatnik School of Government at Oxford University, UK. Many of the risks ahead relate to saving livelihoods, not just lives. The economy needs a big booster shot, and any delay could prove very costly.
The US, which plans to spend over 10% of its gross domestic product (GDP), has the privilege of printing the world’s reserve currency and faces few fiscal limits. But Japan and Britain have even bolder stimulus shots lined up. Even Malaysia, which took a hard currency knock in 1997 and got over it, expects to spend at least 15% of GDP on surviving covid and reviving its output. And there are good reasons why the risks we face here might be higher. Mass poverty, for one, means the state must aid the needy. Our health set-up is too creaky to handle a drastic increase in covid cases. And if the virus’s spread seems relatively slow, the same could be true of an economic recovery after this shock. Our credit systems had not yet cleared their sludge of bad assets when business was brought to a grinding halt by the lockdown. There were other drawbacks, too. Bankruptcy risks remain higher in India than in many other countries, especially among smaller units, and its knock-on effects could send jobs and consumption into a downward spiral that may not be easy to arrest or reverse quickly. Many of the GDP projection cuts made by analysts, even their worst-case estimates, seem outdated if not overly optimistic. Since the lockdown now looks likely to deliver only patchy results, we may need to brace ourselves for the long haul. And this requires us to take a realistic view of the damage our economy could suffer.
India should abandon its fiscal glide path, rework the Union budget for 2020-21, and summon every source of funds available for the multi-trillion-rupee fiscal expansion warranted by the covid crisis. Even if the rupee gets exposed to depreciation risk, we should issue bonds overseas on a vast scale. Some of the West’s capital flows ought to head our way. Amnesty bonds to scoop out black money have also been suggested, though such a scheme could raise tricky questions. Overall, if India needs the central bank to create money for a sizeable rescue mission, this option should be exercised too. If sufficient production resumes over the next few months, we might be able to minimize the negative impact of such a last-resort action. But a big spending package must go into play. There are no two ways about it. This is a dire emergency.