How do you see the global economic shock because of the Covid-19 impact?
Covid-19 is a major health crisis and the first priority must be to deal with the health problem. In the absence of a vaccine or proven curative therapies, social distancing and lockdowns are the only way we can slow the spread of the infection. This is bound to have a very negative effect on the global economy.
Delaying action is not a solution. Both the US and Europe were late to act and both have seen an alarming rise in infections. Some estimates suggest that infection rates in the US could range between 20% and 60% of the population. Fatalities will of course be much lower but infection rates on anything like that scale will be a disaster.
Sample testing thus far shows no evidence of community transmission in India, so we are continuing to focus primarily on containing cross-border transmission, tracing contacts of those infected who have come from abroad, and trying to quarantine them. We are also resorting to social distancing and limited lock downs—closure of schools and universities, cancelling or postponing major sports events, closing cinemas and restaurants and even closing temples. These measures are essential, but they will be disruptive and impose economic costs.
What will be the impact on the global economy?
The IMF (International Monetary Fund) is the usual source of projections about the world economy and in January it projected that GDP growth for the world would be better than in 2019. It has not produced a revised estimate, but people expect a much worse performance with recession in many countries.
US treasury secretary Steven Mnuchin is reported to have told the US Congress that in the absence of corrective steps, unemployment in the US could rise to 20%! He did not clarify exactly what corrective steps would prevent such an outcome. But many independent economists believe a recession is unavoidable.
From the standpoint of a shock to the economy as well as the markets, how similar or different do you think the outbreak fallout is vis-à-vis the global financial crisis of 2008.
The two are totally different. The 2008 crisis arose because of weakness in the financial sector in developed countries, which spilled over into the real sector. The global economy was quite robust before the crisis and the solution was seen in fixing the financial system, while also resorting to monetary and fiscal stimulus to counter the negative impact. The global community was also quick to respond and the G-20 started meeting at the Summit level to handle the crisis. Things are completely different today. The global economy was limping before the crisis, with threats of trade wars and protectionism. The earlier consensus on how to manage the global economy had evaporated. And we have to tackle a health crisis which will impose severe shocks in both the developed and developing countries.
Will the current crisis play out longer than the 2008 financial crisis or will it be a shorter one?
We cannot assume it will be short term because we do not really know how long the health crisis will last. The first vaccine will take at least a year to be approved.
We also do not have specific curative therapies. In this situation lock down measures and social distancing are the only way of limiting the spread of infection.
If these continue for months rather than weeks, the economic disruption will be significant. There will be supply shocks in the form of disruption of both domestic and global supply chains. There will also be demand shocks. Both exports and private investment will be subdued. Sectors such as aviation, and travel and tourism related sectors such as hotels, restaurants, etc. may see an actual decline for several months.
The fall in stock prices all over the world, will have a negative wealth effect, depressing consumer demand. Uncertainty about future incomes will also depress consumer demand even from those who have not lost jobs until there is a clear sign of return to normalcy.
What measures should India undertake to fend off the new economic challenge? The present government has consciously tried to desist from giving a fiscal stimulus, not to repeat the “mistakes" of 2008. In the current circumstances should this maxim be revisited?
The Covid 19 response team under the finance minister will no doubt define an economic strategy after consulting all ministries and stakeholders. Ideally, they should share the ideas that emerge in draft form for discussion and the final strategy that emerges should be widely publicised and its implementation monitored.
On the fiscal deficit, I don’t think the fiscal stimulus in 2008 was a mistake. The mistake was in not pulling it back after 2010. For the same reason, I have no doubt that concerns about the fiscal deficit should not constrain us in 2020-21.
Most people already expect that the fiscal deficit will be much higher than targeted. GDP growth will certainly be much lower than assumed in the budget and tax revenues will therefore fall well short of projections. Disinvestment revenues are also unlikely to come up to targets. The collapse in oil prices if it continues will give some relief in shoring up tax revenues, but the net effect will be a higher fiscal deficit.
There is no case for cutting expenditure to meet the fiscal deficit target. In fact, there is an urgent need to help the states to expand health facilities to deal with new infections that are bound to surface. Expansion in health facilities is needed in any case, and we will only be doing what should have been done by the states earlier. To meet shortages of health personnel, state governments should consider re-employing doctors and nurses retiring in the course of the year. The central government could offer to foot the additional bill on this account.
The central government could help by expediting payments of bills and tax credits which may have been held back to help contain the fiscal deficit. Such actions only impose liquidity constraints on business, with the smaller businesses being hit the most. Businesses engaged in travel, tourism and recreation are likely to be very badly hit if the lock down continues for months rather than weeks. This could lead to a build-up of NPAs in the banking system which it may not be able to handle. Some temporary regulatory relaxation may be needed for select sectors.
Employment in the small scale and informal sector is bound to suffer and there is already evidence of workers returning to their homes in rural areas. This calls for expanding some of the existing social safety nets such as MGNREGA for the current year. Other schemes, especially old age pensions, maternity benefits, etc can also be used to provide additional support for this year. All this leads to a higher fiscal deficit in 2020-21. We need not worry. It will not crowd out private investment since that is unlikely to rebound in any case until the Covid-19 fears subside and the economy is seen to turn around. That will be the time to embark on a credible medium-term fiscal consolidation path with a full disclosure of the real deficit. For the present, the focus must be on preventing a downward spiral which would impact the weakest sections of our population.