Economies after Covid-19

The disruption caused by Covid-19 could potentially deglobalise the world at a faster pace than before

The gigantic economic consequences of Covid-19 will last longer than the massive impact on public health. The global financial crisis of 2008 was very disruptive because it struck at the heart of the economic engine, the financial sector. Covid19 is leading to a shutdown of the entire body economic as strict lockdowns are imposed in most major economies as the only means of tackling the health emergency. Rebooting economies, which are basically reduced to functioning on life support of essential goods and services, will be a greater challenge than restarting the heart à la 2008. There are still too many unknowns in the current crisis and understandably the focus of leaders is on health first and economics second. The US and the UK have taken out pages from the policy book from 2008 and announced massive stimulus packages but those assume that the challenge is the same as it was a decade ago. It may not be.

For a start, the global order today is very different because of the actions taken to rescue the global economy in 2008. Policymakers assumed that if they could return the world to a state that it was in prior to the collapse of Lehman Brothers, things would continue as usual. In the end, most economies did find pathways to recovery in reasonable time, but the political backlash against perceptions of generous bailouts of wealthy elites, particularly bankers (whose actions led to the crisis in the first place) led to a rise in populism worldwide and a rejection of economic globalisation. That churn was still underway as Covid-19 hit the world. If the spread of the virus is perceived as one more negative consequence of globalisation, the world will become more insular and economic models may undergo structural change. Measures to return to status quo may not be fit for purpose.

The fact is that apart from a retreat from free trade and free movement of labour, there may be other non-political forces that may be nudging the world to a more local, rather than global, economy. The technologies of the fourth industrial revolution may favour a localised economy, whether these are manufacturing processes like 3D printing or the underlying foundation of big data that may make countries reluctant to share information freely across borders.

More immediately, there is the China factor. Over the last 30 years, China has been the poster child of globalisation enriching itself and providing cheaper manufactured goods for consumers the world over. The fallout of Covid-19 may be two-fold. One, there will inevitably be a backlash against China for being the place of origin of the virus and for its failed cover-up in the initial stages. Second, countries may no longer want production of essential goods and their supply chains to be so China-centric or indeed centered on any foreign country. Of course, the world is unlikely to return to autarky but the disruption caused by Covid-19 could potentially deglobalise the world at a faster pace than before.

For India, there is only opportunity whichever way the global order pans out. But some orthodoxies may need to be abandoned in order to survive the current crisis in reasonable shape and to be in pole position in the aftermath. First, India needs to rethink the conventional wisdom on fiscal and monetary policy. This is a controversial idea because successive governments have worked hard at instilling fiscal and monetary restraint. But this crisis is not business as usual and its aftermath may be very different as well. Now is a good time to junk the fiscal deficit target of 3 per cent of GDP and relook at the inflation-targeting monetary policy framework. Neither is appropriate to deal with a crisis of this magnitude. In fact, if the crisis prolongs, the government may have to do something it has not done in a long time: print money to finance its spending.

Second, the government will need to adopt industrial policy, not in the traditional sense of picking winners, but in terms of providing big funding to high technology sectors. That is the only way India can be at the frontier of the commercialisation of the fourth industrial revolution technologies. Third, the political economy narrative must move on from whether policies should favour industry or people. This is a false dichotomy. In the current crisis, everyone needs support. Vulnerable people need cash transfers. Large companies need support on liquidity. Small companies may require protection from bankruptcy. The body economic can only survive and thrive if every stakeholder survives and thrives. There is no economy with industry and without people, just as there is no economy with people and without industry, even when times are good.

The world is unlikely to come together anytime soon. India must move forward with purpose.