Urgently needed: A G-20 joint effort

Concerted Action: A global response is needed to mitigate the economic impact of the pandemic

The Coronavirus (COVID-19) pandemic, which has affected more than 182 countries and over 6 lakh people worldwide by now, has forced many countries to go in for partial or complete lockdowns, thereby severely affecting economic activity across the globe. The economic and welfare cost to the world economy is huge and, in fact, the world economy is heading for a crisis. Though the top priority at this moment is to contain this pandemic and ensure public safety, a well-coordinated fiscal and monetary stimulus by major economies like the G-20 countries, similar to the one followed after the global financial crisis (GFC) of 2008, is the need of the hour.

The pandemic’s impact on the world economy and welfare loss is more than we can imagine. The top 10 economies, having a share of 66% of the world economy, have been severely affected and isolated. The unexpected worldwide outbreak of Coronavirus has halted trade and given the biggest shock to the global value chain after the GFC. As projected, global growth will be near-zero and the world economy will lose output worth as much as $2.7 trillion. In terms of international trade, about 45% of world trade will be severely impacted. Specific sectors like manufacturing and services such as travel, transportation and tourism are the worst affected, having huge implications on employment and welfare.

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The worst affected regions, including the US, China and the European Union, account for more than 70% of world manufacturing exports and 60% of such imports. These countries are the epicentres of global production networks, thereby affecting global industrial growth and millions of jobs. Similarly, labour-intensive services such as transport, travel and tourism are severely influenced, resulting in massive loss of revenues and employment. The total trade in transport services accounts for around 17-22% (over $1 trillion) of total trade in services. Travel services accounted for around 25% of the total services trade in 2018. With strict travel restrictions along with self-restraints, which are necessary, airlines across countries have grounded flights and the estimated global revenue loss for airlines is over $115 billion.

A significant fall in international travel and transport services adversely affects the tourism and hotel services as the former facilitates the end-use of the latter services. The tourism industry – a highly labour-intensive sector -- currently accounts for 10% of global GDP. The World Travel and Tourism Council (WTTC) estimates that 50 million workers, around 30 million in Asia and 7 million in Europe, may lose their jobs because of COVID-19.

Overall, the worsening slowdown will affect the aggregate household spending, thereby leading to deflationary pressures and further slowdown of the global economy, possibly pushing it into a recession. The severe slowdown, along with employment loss, as a large number of businesses cease to operate, may lead to a crisis situation unless systematic and coordinated fiscal-monetary stimulus is quickly implemented.

A few countries have already initiated unconventional monetary policies and fiscal stimuli. There has been a flurry of interest rate cuts across central banks; however, the rates are already at a very low level and stimulus packages are not sufficient. Therefore, we need a well calibrated and coordinated big stimulus to deal with a pandemic as this. Structural policies are needed both in short and long-run. In the short-run, sector-specific bail-out packages, tax cuts and incentives, reduction in import tariffs and subsidies to exports, higher government spending, etc., are the need of the hour to stop employment loss and fall in demand.

So far, India has not been severely affected but if the pandemic were to spread at the community level in a densely populated country like ours, the economic and welfare costs would be unprecedented. India, compared to China and the US, is so far less affected by the plunge in global trade. In fact, crude oil prices plummeting to $25 per barrel is good for India’s current account balance and external sector stability. However, there are signs of capital flight, like during GFC. India’s financial sector, particularly the capital market, has been on the edge. The BSE Sensex lost more than 35% over the last few weeks, before recovering partially, eroding the wealth of millions of investors.

India’s informal sector accounts for more than 50% of its GDP and employs more than 80% of the workforce. People are avoiding restaurants, movie theatres, and other public places. Many business and economic activities, which provide employment opportunities in the informal sector on daily basis, are badly affected. Thus, expansionary fiscal policy measures such as cash transfers to the informal sector, subsidies in food and healthcare items, reduction in taxes will help mitigate hardship and generate effective demand.

Though the banking sector is gradually recovering from the NPA crisis, banks need to go easy on firms for mortgage and interest payments until the pandemic is under control. Otherwise, a large number of micro and small firms could cease to operate. The RBI has already taken initiatives to increase liquidity and inject confidence in financial markets as well as lowered interest rates by a whopping 0.75% in one go and announced a three-month moratorium on EMI payments.

Though the present crisis in the world economy is not the same as the GFC, the world economy is heading for a serious slowdown. We are experiencing unprecedented times that demand a coordinated monetary-fiscal policy effort by major economies, especially the countries in the G-20. Immediately after the 2008 GFC, the G-20 -- an informal collective of 20 advanced and emerging economies -- was able to jointly implement stimulus measures that helped revive demand, restore financial and credit markets and bring back global growth into positive territory in the first half of 2009. It’s a similar crisis situation that the world economy is facing, with severe implications for the welfare of people across the globe. Therefore, there is a need for global leaders to adopt a collective and coordinated approach for a quick turnaround of the world economy and bring it back on the path of stability. This is a second opportunity for the G-20 countries to come together, after the GFC, to initiate coordinated policy action to deal with this pandemic.

(The writers are Professor and Faculty at the Institute of Economic Growth, Delhi, and Indian Institute of Technology, Ropar, respectively)