Use the Covid crisis to spur systemic changes

Liquidity measures, spike in health care funding, better governance, and multilateralism can help India tide over

Former British Prime Minister Winston Churchill was known to say that no great crisis must be allowed to go to waste. The coronavirus disease (Covid-19), which until last month seemed limited to China, is now at everybody’s doorstep. While many expect that countries will imitate the broad protocols used by China and contain the virus, the coronavirus might continue as a recurring problem.

Predicting its economic impact would be foolhardy, given that there is no parallel that has been so dramatically disruptive a global event. One can, however, look to establish some broad trends. The pandemic should inform our understanding of supply chains, changes in market position, fiscal deficits and multilateralism.

Adam Smith, in the The Wealth of Nations, highlights the economic value of the division of labour. But this pandemic has shown that such a division of labour, when taken too far, has costs. China generates nearly 29% of world manufacturing. By way of comparison, India is at 3%. Covid-19 has caused a supply shock, with inadequate production taking place.

If there is one certain impact of this pandemic, it will be the increased diversification of supply chains. Countries will need to adjust to some form of an economic reset. To take one extreme example, studies have identified that more than 95% of all antibiotics sold in the United States (US) come, indirectly or directly, from China. A large part of the active ingredients for medicines made in India is sourced from China. This cannot be an acceptable level of dependency on one country, however well-meaning it may be. This will likely change, not just in medicines but in other industries as well.

Disruptions in demand and supply are opportunities for entrepreneurship. Previous situations of demand-supply breakdowns, such as war or the Great Depression, have been followed by substantial surges in pent-up demand, enabling either the emergence of new players or new technologies. Without a doubt, some Indian manufacturers should be able to benefit from these shifts in supply chains.

The Reserve Bank of India has promised to step in to create some liquidity in the markets. However, since it is unlikely that any general purpose monetary stimuli will work, we will need to see strong liquidity measures targeted towards vulnerable industries and borrowers such as small and medium enterprises, travel companies and mortgage borrowers. One should also see some regulatory forbearance for the recognition of small ticket non-performing assets. This can mitigate the cash flow challenges that these entities will face due to the drop in economic activity.

This crisis provides the call to arms to reset our under-invested health care system. Indian health care sustains itself due to private practitioners, starting from small rural doctors all the way to tertiary care. Government spending at 1.4 % of GDP is among the lowest in the world.

The present government appears to have been proactive in its response to the virus, but one wonders why it didn’t, at the outset include leading private institutions in undertaking the widespread testing required. Its decision to put in mechanisms to involve 51 private laboratories are welcome, but this has not been operationalised yet. One hopes that it is not a case of too little, too late. Covid-19 is an opportunity to obtain political consensus for the expansion of the health care system on a national scale.

Economic recoveries rely heavily on sentiment. Sentiment, during a crisis, depends on the perception of good governance and communication. There has been criticism of the secrecy around the Chinese response, although, once Beijing got its act together, it has been able to demonstrate remarkable progress amid tales of heroism from the country’s medical fraternity. In India, better communication and improved management can go some way in building confidence among the citizenry. If there is a belief that the information provided by the government accurate, the treatment is prompt and the health care system is competent, there is likely to be a greater willingness to invest in the future. One would hope that this pandemic will drive greater investment towards research in lesserknown, neglected tropical diseases.

Most critically, the pandemic demonstrates that an interlinked world needs closer coordination, a part of which includes stronger multilateral institutions. Containing this pandemic is a global activity and every country has a responsibility to solve this problem. This crisis provides an opportunity for the nations of Europe to come up with some kind of coordinated fiscal policy, which has eluded them for years. The US, with one of the most powerful medical health systems in the world and an unparalleled capacity for research, can again demonstrate the leadership we saw in the 20th century. It could perhaps start by funding the World Health Organization and a kind of Manhattan Project-type of team to fast track a vaccine. We will see thousands of international contracts cancelled and the force majeure claims will need an aligned legal approach. It may be necessary to create the kinds of institutions (Fannie Mae/world Bank), which can accelerate the provision of financing. All of this can only happen when nations act together.

In 2008, in response to the economic crisis, the leaders of the G20 nations had promptly met in Washington to come up with a forceful response. Surprisingly, we are still searching for that type of leadership. Only Prime Minister Narendra Modi has reached out to the South Asian countries for some form of coordinated action. One hopes that this pandemic can create a template for progressive multilateral action in an increasingly isolationist world.

Govind Sankaranarayanan, former COO and CFO at Tata Capital , is currently vice chairman at ESG Fund Ecube Investment Advisors The views expressed are personal