Recovering from the Covid epidemic
The fiscal conservatism of the finance ministry means growth revival will take longer and may not be seen till late in the next fiscal year or even later
Discussion about the Covid epidemic and the government’s policy announcements is shifting from how best to manage the epidemic to the most appropriate strategy for recovery from the social and economic havoc created by it. The stated goal is to stimulate the economy so that the growth process restarts by the second quarter of this fiscal year and accelerates in the first half of 2021-22.
The government has announced a ~20-trillion package for stimulating economic recovery and providing relief and rehabilitation to those most badly affected. Judging by the content of the package, it would appear that the government is counting largely on stimulating investment through easier credit availability. At the sectoral level, the principal initiative is a reform package for agriculture, which will have its impact only over the medium and long terms. It also includes initiatives like liberalising foreign direct investment in defence production and easier private participation in the space programme, which are frankly irrelevant to the present context. The direct fiscal stimulus, in the form of additional disposable income in the hands of households, is barely 10 per cent of the package, amounting to about 1 per cent of gross domestic product (GDP). This is seriously short of the 3-5 per cent stimulus that most economic commentators have suggested.
Demand has fallen drastically in the first quarter of this fiscal year and we may see a huge drop in GDP when the National Statistical Office’s estimates come out at the end of August. The bulk of this fall will have been felt in household disposable incomes, particularly in households that are dependent on migrant and casual labour. A GDP stimulus of 1 per cent will do little to correct this. Without the demand stimulus, easing credit availability will not by itself revive investment and growth. The fiscal conservatism of the finance ministry means growth revival is going to take longer and may not be seen till late in the next fiscal year or even later.
The second point one has to note is that there is no sharp distinction between the policy phase where the focus is on managing the epidemic and where the focus shifts to economic revival. The epidemic will not go all that quickly, as the continuing rise in daily cases indicates, and we need a public health strategy to cope with the crisis, maybe for another year or more. What is needed is aggressive testing as was done in Dharavi, which is doing well in controlling the epidemic, and where a person involved stated correctly: “The only option then was to chase the virus rather than wait for the cases to come. To work proactively, rather than reactively.” In fact, one could argue that the two concerns should be connected and we should look for synergies between epidemic management and economic and social recovery. The primary focus of the first phase of recovery should be on strengthening health care and measures to provide relief and rehabilitation to migrant workers and others badly affected by the lockdown.
Consider the situation where the crisis had arisen because of catastrophic countrywide drought that had decimated agricultural production. Clearly, recovery would begin through measures to restore agriculture and farm and labour incomes. The same logic holds now and the focus of public spending in the first recovery phase should be on strengthening public health care facilities. According to the National Health Profile 2019, budgeted public spending on health was just 1.17 per cent of GDP in 2016-17. But this is the budgeted figure. Focusing on the available data on actual spending, India’s public health expenditure is under 1 per cent of GDP. In comparison, nations classified “LowerIncome Countries” by the World Bank spent 1.57 per cent of GDP on health that year. India’s public expenditure on health is way lower than the average expenditure by countries clubbed among the “poorest”. We are committed to raising this proportion to 2.5 per cent of GDP by 2025. Surely, it makes more sense to do this now rather than after the epidemic.
Inadequate public spending is not the only barrier to better delivery of public health services, particularly at the last mile, which reaches out to households. The limited availability of medical personnel and inadequate accountability for delivery of results are a major reason for the poor state of public health services. Mobile medical facilities, telemedicine, and better training for local health workers can help to address the personnel shortage. As for accountability, give priority to health workers, who have performed well on defined-delivery indicators when it comes to choice of posting. Of course, this will require ministers in state capitals and local politicians to surrender their power of patronage and that may be difficult!
The other area that requires urgent attention in the first recovery phase is the policy framework for migrant labour. A recent policy brief by the National Institute for Advanced Studies has suggested several initiatives. These include hostels for circular migrants, providing them assured access to public health and public distribution despite their lack of domicile proof, low-cost train transport, flexible training and talent scouting, and better rural-urban employment-information networks.
It is true that this focus on health care and migrant workers in the primary recovery phase may not be sufficient to generate the stimulus required broadly in the economy as a whole. There will be some spinoffs. Improved health care will be beneficial for productivity as was seen in the clear positive productivity impact of malaria eradication. But this benefit will manifest itself only over the medium term. Improvements in policy arrangements for migrant workers, which may be effected only in the medium term, will relieve labour shortages in the West and the South and help to revive growth. Hence the primary recovery phase has to include more direct measures to relieve agricultural distress and help micro, small, and medium enterprises, particularly those that face the threat of closure or bankruptcy.
Ideally the government should present a revised Budget for this fiscal year, focusing on these three or four areas, and provide resources and policy guidelines for relief and rehabilitation. If they do this sensibly, avoiding public relation-oriented flourishes, the rest of the economy will revive and the growth momentum will pick up in about a year.