More countries are coming under the grip of the COVID-19 pandemic and those already suffering from it are reporting a deterioration in their situation. Countries like China and Singapore, which had reportedly managed to control its first round of proliferation, are now reporting a second round of spread.
Countries like India and the US had advance information about the disease, but did not do enough to control it. They are now seeing an exponential rise in new cases. The accumulated knowledge about it from China and South Korea has not helped the countries where it is spreading now. Perhaps it was believed that it would not get so bad – but it is getting worse, as in the cases of Italy, Iran and Spain.
It has now been over two months since China admitted that an epidemic had broken out in Wuhan city in Hubei province, in mid-January. As countries begin announcing lockdowns to limit the spread of the virus, economic activity is grinding to a halt in large parts of the world economy. Not only are there supply shocks leading to reduced production, but there is also a decline in income as people are not able to work and have reduced purchases to a bare minimum. China, the largest car market in the world, has reported an 80% drop in sales.
It is not just business sentiment that is declining – as reflected in the collapse of global financial markets – but also in consumer confidence, resulting in reduced demand. The two feed into each other. Most analysts have been arguing that the world economy, which was already slowing down before the crisis had hit in January, is headed into a recession. China, India and so on were slowing down officially while Japan and German economies were close to zero or negative rates of growth in January 2020. The US was the only major economy that was still robust, but now large parts of the country are in lockdown and there has been a decline in production and demand.
In an optimistic scenario, if the situation comes under control in a month and there is a slow recovery, one-third of the year would have passed with severely curtailed production. One does not have numbers to go by, but if the output is down only 50% for two months and then goes back to pre-January levels, the rate of growth for entire 2020 would be in the negative territory.
Since we do not know enough about the disease as yet, no time frame can be given as yet. We neither have a medicine against it nor a vaccine and according to experts, developing these may take more than a year. Initially, the disease was thought to affect infants and the elderly, but now it is clear that though not many children are getting infected, the young are vulnerable. It was thought that warmer weather would stop the virus, but its spread in tropical climates suggests that one cannot depend on that either.
The situation in countries facing a lockdown is worse than during a war. During a war, production of armaments rises but now, production is collapsing as people are not able to move around or go to work. Only some can still work from home and that too at reduced efficiency. During a war, demand is high but now, it is collapsing, since incomes are falling with retrenchment and layoffs and salary cuts. People are only buying the bare essentials and even hoarding them. Huge swaths of the economy are not working as the drastic fall in demand for energy shows. This is corroborated by pictures from space, which show a considerable reduction in pollution levels.
In a pessimistic scenario, if the pandemic persists for more than two months and there is slow recovery after that, the world would have entered a depression. So, on top of a health crisis, there would be an economic crisis.
In a recession, many businesses would fail and especially those that are highly leveraged or those that have small amounts of working capital. Many banks and financial entities would also collapse. Failure of some will lead to a failure of many others, since they are all interlinked, as we learnt during the global financial crisis 2007-08. In a depression, there would be widespread business failure and even after the pandemic dissipates, the situation may not recover any time soon.
A depression will result in widespread social breakdown, since work is unlikely to be available for long periods and many will not have income to buy the basic necessities. Homelessness and hunger would grow. Many children would be out of schools. Incomes of elderly people dependent on pensions and interest incomes on financial assets would collapse. Many could be bankrupt due to medical expenses.
Several governments did not take early action to prevent the spread of the disease. Now, they are declaring an emergency and setting up a task force to tackle the impact of the pandemic in their countries. They are putting in place a slew of measures like, income support. Prime Minister Narendra Modi, in his address to the nation, announced the setting up of an economic task force, which must anticipate and act in advance to help India tackle the crisis. It needs to plan for the various scenarios that may unfold in the future.
In India, where the lockdown is partial, the first task is to prevent the general spread of the virus. The infected need to be identified quickly and isolated. Those who have contracted the disease need to be provided immediate and free medical assistance. More hospital facilities, even in hostels and stadiums, are needed. Production of essential medical supplies like, masks, protective gear and ventilators should be ramped up.
In economic terms, it is not like a usual business cycle so monetary policies can only be accommodative and fiscal policies can slow down the impact but not reverse the decline. An increase in fiscal deficit is going to occur but that should not be a worry. The arbitrary limits under the Fiscal Responsibility and Budget Management (FRBM) Act should be given a quiet burial.
Every 1% loss of incomes will mean a reduction in GDP of about Rs 2 lakh crore in India. A decline in GDP growth by even 5% (likely to be much larger) will mean a loss of Rs 10 lakh crore of incomes. Most of this will be due to the fall in the incomes of the unorganised sectors, which will not be able to weather the gathering storm.
People losing work in urban areas are migrating to their homes in rural areas and chances are that the disease would spread there as well. So, the creation of work in urban areas is important. But the Catch-22 is that to provide work, the lockdown would become unfeasible. Workers also typically live in congested localities and isolation is next to impossible, so health facilities will have to be provided for the isolation of a large number of people.
Simultaneously, business closures have to be effectively tackled so that laying off workers can be checked. In this context, the cottage and small sectors need special assistance. Reaching them will be a tough task for the government, but necessary. Because of loss of work and fall in demand, workers need to be supported through cash transfers. Further, given low levels of savings, workers will not have the purchasing power to buy essentials in bulk. They will need weekly supply of basic items through PDS. More shops to distribute essentials will have to be drafted from the private sector.
To prevent hoarding and malpractice by shop owners, the help of the army and police may be needed. There are enough stocks of basic grains to give provide them free of cost to the marginalised sections. Movement of milk, fruits and vegetables from the farms to the consumer will need to be ensured. Government machinery will have to be strengthened by shifting manpower from less essential tasks to ensure better distribution.
Banking and financial procedures need to be simplified. They have been needlessly complicated for reasons of KYC and digitisation and resulted in manifold increase in paperwork. This is contrary to the expectation of simplification. Currently, when people’s mobility will be impaired, smooth functioning of the financial system is essential. So, all needless hurdles must be eliminated. For instance, working of bank accounts, fixed deposit accounts and especially the Jan Dhan accounts of the poor need to be made easier. KYC requirements need to be suspended.
Farmers will face a problem of demand, just like during demonetisation, when demand collapsed and prices of farm produce fell drastically. The Rabi sowing was a record due to the late rains and it is expected that there will be a bumper harvest. This will add to the downward pressure on prices. Farmers’ incomes will be adversely impacted and they will also need greater support. Government procurement and distribution to consumers of various agricultural produces will have to be greatly increased.
One of the problems faced by the unorganised sector producers, and also the organized ones, has been the functioning of GST. Its reform to a simplified last point tax (which it is but collected at various stages of production) is crucial to provide support to the beleaguered unorganised sector. This will immediately simplify procedures, reduce complications and lead to a level playing field for all.
In brief, the spread of COVID-19 sees India facing a situation worse than war. India should draw lessons from the experiences of other countries. Markets will not be able to deliver and massive government intervention will be needed all around and collective will is required to tackle the situation.
Arun Kumar is Malcolm S. Adiseshiah Chair professor, Institute of Social Sciences