SUNDAY COMMENT: INDIA NOW NEEDS A NEW AND BOLD ECONOMIC PLAN
The trajectory of the coronavirus disease (Covid-19) in India makes it clear that the first 100 days (since China admitted there was a problem) have been relatively kind on India. The second 100 days will be the real challenge. It is time to accept this.
Even if India manages to dodge the Covid-19 bullet, parts of the country will remain so-called containment zones with significant restrictions on the movement of people and goods and the operation of businesses. Mumbai, given the current situation there, 1,100 cases and rising, is sure to be a containment zone — if not the entire city, then large parts of it. And this, the bestcase scenario, could play out till the end of June, maybe even July. It is time to accept this.
The economy will likely shrink in 2020-21. It is time to accept this too.
A recent report in Mint (published, like Hindustan Times, by HT Media), quoted India’s former chief statistician and economist Pronab Sen as estimating that roughly 50 million people may have already lost their jobs in India.
With the first quarter (April-June) pretty much a write-off, the impact on production will be brutal. The United States (US) economy will produce 34% less in the first quarter, according to some reports. Corresponding numbers for India are not available, but no one will be surprised if the number is at least 34% here. In fact, given the completeness of the lockdown in many parts of the country, it could be 50%.
That’s the kind of blow some businesses may not be able to withstand — they will simply go under. Many others will cut costs and jobs. Tens (some say hundreds) of millions of people, may be plunged back into poverty. Investment will suffer, as will consumption. The damage could set India back three to five years, maybe a decade.
True to the name of this column, here’s a possible economic plan for India to deal with such a scenario. First off, some important questions and answers.
What should the plan aim to do?
It should prevent businesses from going under or making deep losses; safeguard jobs (to the extent possible); lessen the blow for those being retrenched; and provide cash (liquidity) to both businesses and individuals.
How big should it be?
There are benchmarks available. The US has announced a package that is 10% of its GDP. The United Kingdom has announced one that is almost 15%, but some of this is in the form of credit guarantees, and the actual magnitude will be far lower. Anything between 4% and 5% of GDP should be fine. That’s between ~7.6 trillion (lakh crore) and ~9.5 trillion. A Mint edit called for the round number of ~10 trillion (lakh crore. That would do.
When should this be done?
Now. It’s already late.
How should this be done?
In one swoop. Not incrementally, with a tweak here and a rebate there, but in one comprehensive package that includes tax rebates and holidays for individuals and companies, forbearance (for loans), cheap working capital loans, an Indian equivalent of the US’s Troubled Asset Relief Program that helped that country’s financial system survive the crisis of 2008, and cash in hand for those who need it most (especially migrant workers and small businesses).
And that’s in the immediate-term — as different from the short-term.
In the short-term, the government should work with industry to ensure that there are no supply side issues. And it should do enough to stoke demand. It should work on reviving both investment and consumption.
In the medium-term, it needs to focus on the two things that every country will expend its energies on after the pandemic is brought under control (the smarter ones are doing it even now): self-sufficiency and innovation. The first may give a nationalistic (and protectionist) flavour to economic and investment policies, going against the grain of multilateralism that influenced most economic policies over the past three decades, but multilateralism was dying even before Covid-19. It is now truly dead.
India now finds itself in a place where it has the opportunity to rebuild its economy the way it wants to — and that’s what it should do in the long term. The political proclivity of the Narendra Modi government will ensure that at least part of this involves a welfare State, through transfers that stop just short of a Universal Basic Income.
There’s nothing wrong with that — more people will need help after this pandemic than ever before. But India can also now focus on building its manufacturing base. The disruption of supply chains and the need for self-reliance make an excellent case for manufacturing in the country. Cost and competitiveness matter (like they have always ), but in the post-Covid world, supply chains integrated within geographical boundaries, self-sufficiency, and innovation will matter even more.
THE PLAN MUST AIM TO PRESERVE BUSINESSES, SAVE JOBS, AND MINIMISE PAIN. IT NEEDS TO BE TO THE ORDER OF 4-5% OF THE GDP — AROUND ₹10 LAKH CRORE. IT MUST BE IMPLEMENTED NOW. IT NEEDS TO PROVIDE TAX REBATES AND HOLIDAYS, CHEAP WORKING CAPITAL LOANS, CASH IN HAND; AND ADDRESS SUPPLY AND DEMAND ISSUES. IT MUST ALSO FOCUS ON ENHANCING SELF-SUFFICIENCY AND INNOVATION