Covid-19 and its economic impact

India must get ready for a new age of constrained globalisation

Economies can also get ill from viruses. While the priority remains health security, New Delhi must give thought to the economic fallout of the coronavirus (Covid-19) pandemic. The immediate impact is visible: a sharp contraction in sectors such as transport, entertainment, tourism and, most damagingly, goods and services export.

Uncertainty has led to an exodus of foreign capital from the stock market. In the medium term, especially if the virus continues to spread both within and outside India, the existing slowdown in investment and consumption will be exacerbated. More importantly, a drawn-out pandemic will savage India’s service sector, the single-engine that has kept the economy going. The United Nations Conference on Trade and Development has estimated India will lose nearly $350 million in trade. The Asian Development Bank’s worst-case scenario is an economy nearly $30 billion poorer. But these are largely educated guesses. The coronavirus’s future spread, capacity for creating panic, and its impact are still unknown.

However, there are some potential pluses amid the gloom. One, the economy is less integrated with China, and the world. Its early isolation from China was notable for its minimal economic damage. Two, in a post-pandemic world many companies and governments will seek security from diversity and will put India back in the investment spotlight. New Delhi has other priorities now, but it should complete the policy package with which it intends to woo firms fleeing China. Three, New Delhi should benefit from the global oil price war. The expected windfall in revenue should be used judiciously, with an eye to fill in gaps the virus will leave in the economy. If this windfall proves elusive, New Delhi should be prepared to loosen its fiscal belt a bit. The pandemic will be accepted by the markets as an acceptable reason to be financially expansive.

On a somewhat longer time horizon, India must contemplate a new age of constrained globalisation. The international political economy has been geared to ever-closer integration and the lowering of barriers since World War II. The impact of technological change, the United States’ moves to decouple its economy from China, nativist politics in the developed world, and, now, the barriers that will follow the present pandemic point to a new paradigm. India, long a reluctant globaliser, will find this new environment less disconcerting than others, and should plan means to leverage this advantage.