Black swan events are rare, usually come as a surprise and have a massive impact. These properties make them impossible to predict. The spread and the subsequent impact of the novel coronavirus is certainly one such event.
In India, without meaning to over-dramatise the fallout of the pandemic, we are probably in the midst of a supply chain and demand crisis simultaneously, a labour market crisis, an equity market crisis, a currency crisis and a brewing banking crisis (the only one not attributable to the virus).
The exact economic impact on India will depend upon the intensity of the pandemic and our reaction to it. The prediction for India is that the cumulative number of cases on March 31 is between 379 and 2,507, on April 15 between 4,836 and 28,925, and on May 15 between 58,643 and 915,000. The large difference in the range highlights both the unpredictability and the importance of corrective action.
Impact of COVID-19
The fall in annual GDP growth rate for 2019-20 is estimated to be between one and two percentage points for India, or could be higher depending on our responses. For an already struggling economy with 4.7 per cent GDP growth rate recorded in the previous quarter, this pandemic couldn’t have come at a worse time (not that there is ever a good time for a pandemic).
Financial markets have reacted sharply the world over, as they are expected to do in a time of crisis. Portfolio investment has largely exited emerging markets and are searching for safe havens in the US dollar. The Indian equity market Sensex was at around 41,000 points on the first day of the year, and now it has slipped to around 26,000 points, eroding away trillions of rupees of investor’s wealth. The Indian rupee has depreciated significantly and is now at about Rs 76/$.
The tragedy, however, is that the coronavirus has moved from the trader’s screens to the real economy. India is a country that largely relies on consumption driven growth and service sector jobs. Both of these, unfortunately, are the first targets of the virus. People have massively clamped down on spending – they are urged not to go out. As the spending decreases, businesses will feel the pinch and will have to either close down or operate at minimum capacity. This would necessarily mean loss of jobs, at a time when labour force participation rate and the unemployment levels in the country were already unhealthily high for an emerging market.
Multiple sectors are already reeling, either because of a drastic demand slowdown or a supply chain breakage. The entire FMCG sector, usually a sector with consistent growth in an emerging market such as India, will see a significant slowdown due to the closure of malls and supermarkets, and consumers deferring all non-essential purchases.
Aviation, tourism, and the hospitality industry will be clearly hit, in the wake of suspended visas, shutting down international flights and restrictions even on domestic flights. The entire tourism industry could see significant negative growth rates in the next couple of quarters. As railways and buses are shutting down, hotel occupancy rates across the country will fall drastically. Restaurants, pubs, and bars will clearly see prolonged periods of inactivity, though liquor takeaway counters could see increased activity, as people have to increasingly “work” and party from home.
The disruption of global supply chains and the closing down of many international ports will have an effect on Indian industries. The automobile industry, which was struggling even before the start of the crisis is set to see darker days. China accounts for a large part of India’s automotive parts imports and the closure of factories and ports there will disrupt the supply.
Consumer durable products, such as ACs, refrigerators, washing machines, televisions, and microwaves, are going to witness a shortage of supply, a corresponding increase in price, and a fall in sales. According to a CRISIL report, India imports 45 per cent of completely built units of consumer durables from China, apart from a bulk of components that are assembled here. Similarly, supply of mobile phones, where nearly 95 percent of the parts are imported from China, will see severe disruptions.
Quick, decisive and meaningful response
Extraordinary situations such as these require extraordinary responses. This is not the time for fiscal prudence. Countries across the world which have been affected by the virus have announced large economic packages to help people and businesses tide over these times. France announced a €45 billion grant for businesses facing bankruptcy, Italy has a €28 billion package for small businesses, New Zealand and the UK announced $8 billion and $39 billion spending packages respectively, Germany announced a package of €550 billion to offer ‘unlimited’ credit to keep all businesses, companies and jobs afloat.
India missed a golden opportunity in both fighting the spread of the virus and the disastrous economic slowdown. The virus came to our shores later than many other countries – this should have given us the opportunity to put in place measures to combat the effects.
Going ahead, there are a number of economic measures that the government can take to mitigate the worst effects of such a dramatic shock to the economy. To begin with, India should dispel worries about the fiscal deficit for now – it had conveniently dispelled it when it mattered. Public spending can make a difference at times such as this. It can be financed by government borrowings and an accommodating monetary policy.
The biggest part of the spending should urgently go towards public health. The need of the hour is to increase testing for COVID-19 in any way possible. Subsidise private labs testing for the disease instead of asking them to provide it for free. Increase the number of quarantine and isolation beds, mobilise healthcare workers, subsidise or directly procure masks and sanitisers, as might be required for the healthcare workers.
For businesses, the union government should think of delaying GST payments, tax credits, and any other policy that could support employers to keep their staff on board. As on March 24, the Finance Minister, Nirmala Sitharaman has announced a few measures to ease the compliance and regulatory burden for businesses: increasing the threshold of default that triggers the insolvency and bankruptcy proceedings from 1 lakh to 1 crore, easing some of the rules for corporate affairs, and extending the deadline to pay excise and customs duty and GST. Government should ensure that the flow of critical supplies and services are uninterrupted, including food, healthcare, security, groceries and other provisions, electricity, telecom, ATMs and banking.
Most importantly, we need to think about how to protect the unorganised and informal workforce. While the salaried class, small as it may be, can afford to work from home and be assured of payments at the end of the month, the daily wage earner does not have the same luxury. A limited form of targeted Basic Income (not universal) using the JAM (Jan Dhan-Aadhaar-Mobile) trinity could be used to ensure sustenance. The union government can use the unexpected bonanza from the lowering of oil prices to fund some of these programmes.
It is important, however, that any policy made for these emergency purposes come with sunset clauses. If not, the extraordinary measures to combat the disease and its impact will linger on far after the disease has faded from human memory.
(Anupam Manur is an Assistant Professor at the Takshashila Institution)
The views expressed above are the author’s own. They do not necessarily reflect the views of DH.
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