The new trinity that presides over our economic future4 min read . Updated: 25 Oct 2020, 09:07 PM IST
Much hinges on the US election result, vaccine availability and capital markets’ relationship with reality
The truth needs to be repeated, lest it’s drowned by gratuitous babble: This pandemic is not going away in a hurry. Total elimination of the novel coronavirus is unlikely anytime soon, and only a successful, universal vaccination programme can induce mass immunity; such a process will have its own stretched timelines, assuming there is no political interference. Meanwhile, economic activity will have to revive to save lives and livelihoods. Some efforts are already under way and hopefully more government action will be forthcoming.
Three key events will determine the nature and shape of the economic revival.
The first is the presidential election in the US. Polls so far show challenger Joe Biden in the lead, with incumbent Donald Trump trailing. But then, US elections are often known to spring surprises. How the global economy moves ahead from here will depend a lot on who gets elected. If Trump wins, here’s what’s likely: Fresh barriers to global trade and cross-border investment, renewed assaults on multilateralism, and further suspension of climate change policies. If \Biden gets elected, the Chinese economy will presumably be back in play but with speed-governors. Latest data from the International Monetary Fund (IMF) shows that China’s economy has already overtaken America’s to emerge as the world’s largest. The IMF’s October edition of the World Economic Outlook estimates China’s 2020 gross domestic product (GDP) at $24.2 trillion, compared with the US’s $20.8 trillion, based on purchasing power parity.
In either case, India will have to put on its scenario-planning hat and thrash out a suite of strategic options, especially on China.
The second pivotal event is how the current divergence between main street and Dalal Street plays out over the next few months. At a time when India’s GDP has shrunk significantly, jobs have been lost and consumption demand has dissipated, stock market indices are touching new highs daily. After touching a low of 25,639 points on 24 March, the day Prime Minister Narendra Modi announced a nationwide lockdown, the market’s benchmark index Sensex has risen by over 58% in just seven months. This begs the question: Are capital markets disconnected from reality?
One common explanation is that markets are forward-looking; thus, expectations of an early vaccine and eventual end to the slowdown are driving valuations back to pre-pandemic levels. An article by McKinsey consultants (mck.co/2TiWAKS) validates market exuberance and lists three reasons, of which one might resonate with India: The bulk of the Indian labour force is employed by companies/organisations that are not listed on the market, and therefore their collective woes do not find adequate expression in market sentiment. Harvard professor and former IMF chief economist Kenneth Rogoff points to the accommodative monetary policies followed by central banks as a key factor.
If we are willing to momentarily set aside the obsession with indices, there’s some good news: Many companies have been able to raise capital during the past few months, enabling payment systems to remain liquid and creditworthy. As always, bad news is close behind: If markets are indeed forward-looking, they cannot be unmindful of interest rates going up and liquidity tightening sometime in the future. This risk event seems inevitable, whenever it happens, and Indian companies need to start preparing for this eventuality today. This will be critical for maintaining the momentum of India’s economic revival.
Finally, vaccine availability will have a profound impact on human health and ability to participate in the economy. So far, vaccine “nationalism" seems to be shaping geopolitics, with development limited to a handful of nations compared to its universal requirement. This contestation has not yet assumed crisis proportions, but is a distinct possibility with the current profusion of delusional “strong" national leaders.
However, a joint intervention by India and South Africa at the World Trade Organisation (WTO) offers a ray of hope, subject to rich countries setting aside their commercial concerns for the nonce. Both nations have asked the multilateral trade body’s general council to consider waiving key sections of TRIPS, or the Agreement on Trade-Related Aspects of Intellectual Property Rights. TRIPS is a legal agreement between WTO members that sets out minimum regulatory standards for enforcing intellectual property rights. TRIPS has been a perennial source of trade conflict between developed nations (the US, UK and Japan, among others) and developing or poor countries.
Both India and South Africa have requested “a waiver from the implementation, application and enforcement" of certain sections of the agreement. They have also suggested that the waiver stays in place till there is widespread vaccination and a majority of the world’s population develops immunity. This will be key to reviving the global economy and stemming pandemic-related deaths, which had already crossed 1 million globally by 1 October.
Even if vaccine geopolitics manages to behave itself, what about domestic politics over it? Signs of it are already evident in Bihar’s election campaigns. Vaccines should be treated like national commons and not weaponized for political favouritism. Vaccine politics will ultimately prove counter-productive for a country battling to regain its economic momentum.