PROACTIVE AND RESPONSIBLE STATE INTERVENTION IS THE NEED OF HOUR FOR TAMING THIS CRISIS

By Dr. Kulwinder Singh 

Since 1900, economic history evidenced several depressions world over. The Great Depression is the most widespread depression of the 20th century that started in1929 and lasted until the late 1930s. The 21st century too has an uncomfortable journey during its first twenty years experiencing a hall of shame in the USA at its dawn in 2001 followed by the global subprime crisis which was the second long lasting from 2007 to 2009. Reasons of economic depressions during pre and post 1950s are entirely different and largely heterogeneous from each other. During 1900 to 1950, the economic depressions were the outcome of the post-war repercussions. Economic crisis during the 1970s was primarily attributed to price manipulations by OPEC.

Whereas Hall of shame in the USA became incidental due to fraudulent behaviour of giant corporations, it was the subprime mortgage crisis of American banks at the time of Global Crisis 2007-08. In fact, it is newest to global economy that Pandemic “Covid-19” caused lockdowns world over and the devastation done by this pandemic, both human and economic, is gigantic in size.

It has claimed 1.68 lakh human deaths out of 24.49 lakh reported cases globally on 20 April, 2020. The USA reported the maximum number of 41356 deaths followed by Italy (24114), Spain (20852), France (19718), UK (16509), Iran (5209), Germany (4683) and China (4632). After its outbreak in China on 12 December 2019, it has spread almost all over the globe; however USA, Italy, Spain, UK, Germany Iran, Saudi Arabia and South Korea are top affected nations. However, China being its epicenter has controlled it effectively. On the other side, it has shut the economic systems of affected countries down for months. Consequently, economic activities of production, distribution and consumption have recorded drastically low levels globally.

Currently, the World Economic Outlook (WEO) published by IMF has forecasted a deep global recession in 2020 resulting in a huge drop in GDP growth rates. It is being expected that lock-downs could reduce GDP across the EU and US by 7 per cent to 8 per cent, or 28 per cent to 30 per cent in 2020. Lock-down period in India reducing GDP by 20 per cent a day would translate to a 7 per cent to 8 per cent decline in quarterly GDP.

 

Based on the reassessment of the prospect for growth for 2020 and 2021, Kristalina Georgieva, Managing Director, IMF in her speech on 27 March, 2020 has accepted that we have entered a recession that can be as bad as or worse than in 2009. Very recently, WEO again projected that global GDP would contract rapidly by -3 percent in 2020. However, it is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support. Recovery from this recession in next year will depend upon a sizeable rebound, but only if nations succeed with containing the virus everywhere as well as prevent liquidity problems from becoming a solvency issue. A key concern about a long-lasting impact of the sudden stop of the world economy is the risk of a wave of bankruptcies and layoffs that not only can undermine the recovery but can erode the fabric of our societies.

In India, Covid-19 claimed 559 deaths out of 17615 reported cases. However, devastation done to human in India is less damaging, but its economic impact is far reaching and can be long lasting too. For managing Covid-19 spread, India has announced Janta Curfew on 22 March, 2020 and further announced 21-day nationwide lock-down for combating Covid-19 by maintaining social distancing. For India, Covid-19 has multiplied the problems of the government by occurring in a time when its economy was already struggling and the government was unable to provide employment, raising income of farmers and to facilitate the industrial sector.

Its banking sector was also in serious trouble due to financial mis-governance. Indian government has announced a Rs.1.7 lakh crore stimulus package along with several preceding measures to strengthen pharmaceutical, medical equipment industry and medical healthcare infrastructure. Moving forward, a package of Rs. 15 thousand crore has also been declared by the Prime Minister to deal with the Corona emergency along with one more relief package worth Rs. 1 lakh crore of Ministry of Finance.

Moving forward in this line, one of India’s state governments, Kerala, has also announced Rs. 20,000 crore package to deal with Covid-19. RBI declared liquidity stimulus (3.2 % of GDP) by reducing the repo and reverse repo rates to lowest (4.4.per cent and 4 per cent respectively) to counter economic impact of corona outbreak. Asian Development Bank has promised support of US $ 2.2 billion to India for tackling the corona epidemic. International institutions, national and state governments have allocated large chunks of funds to safeguard human resources and economy by announcing their deal to win the battle against corona virus. G20 has also announced US $ 5 trillion which was further suggested to increase to US $ 8 trillion for combating the serious economic implications emerging out of the corona virus outbreak. The US has declared $ 2 trillion deal under which corporate, small scale businesses and unemployed people will be the key beneficiaries.

Japan's Prime Minister Shinzo Abe promised a massive $ 991 billion economic stimulus package which is equal to 20 percent of GDP. The IMF has also promised financial support to its member nations in this bad time. But looking at the severity of the crisis, all these measures could only provide survival for some months and are not sufficient for revival of the global economy.

Despite declaration of relief deals, the Corona-virus crisis has halted economic growth of nations and their international economic relations. India’s GDP growth will down to 1.9 percent in fiscal year ending March 31, 2021. Its adverse consequences on these lowest growth dynamics of key sectors of Indian economy are inevitable. Bilateral and multilateral trade and financial flows were hit hard after the outbreak of the Corona-virus crisis and this pandemic has also emerged as the new and biggest de-globaliser. UN economists announced a likely US $ 50 billion drop in the worldwide manufacturing exports in February alone caused by the Covid-19.

The World Trade Organisation (WTO) has forecasted that the recession caused by the COVID-19 pandemic, will have a more devastating effect on trade than the financial crisis of 2007 did and also warned that global trade could fall up to a third. Fear of such pandemics being incidental in future may slow down the process of globalisation in the world economy and make the process of recovery a challenging task. Indian Exporters have been hit hard by the impact of corona virus on global trade and seek urgent relief from the government. The US, UAE, Germany, UK, Singapore, Italy and China, among others, are the largest contributors to the country's basket of merchandise exports and are under serious corona crisis. As a result, trade is crippled in most of these destinations due to a near collapse of the global supply chain even as the cargo movement has stopped.

Indian Agriculture, though, not facing supply side problems, but demand constraints can magnify its problems. Broken supply chain of fruit and vegetable due to lockdown has hit the economy of farmers and other persons employed in its supply badly. The Food and Agriculture Organisation (FAO) of the United Nations has already highlighted its concern about implications of Covid-19 crisis for food supply chains globally due to lower freight rates and lower capacity use; and India is not an exception in this regard. India’s manufacturing sector is also facing challenges provided by decline in supply of intermediate goods and sharp decline in consumer demand. Automobiles, banking services, hotel, restaurant and tourism sector, civil aviation, marine transport, all are under serious strain due to decline in consumer demand and burden of employees’ salaries payments during the ongoing lockdown period which is further extended up to 3rd May, 2020. Severely low domestic consumer demand has also raised existential questions for millions of small businesses that are struggling due to the collapse of economic activities under the impact of the corona virus outbreak.

These businesses are now demanding relief measures from the government. In its response, Confederation of Indian Industries (CII) has set up CII COVIF-19 Code and CII Covid-19 rehabilitation and relief fund for helping Micro, Small, and Medium Enterprises (MSMEs) from the impact of disruptions caused by corona virus. Stock markets underwent biggest crash after 1939 and Sensex lost 3,934.72 points (13.15%) and Nifty plunges 1,135 points (12.98%) at 7610 on 23 March 2020; however these markets recovered after 7 April and onwards, but are not in position to bear market volatilities caused by fears of a recession in coming times. There are expectations of decline in prices as demand in developing countries depends upon income which is declining. Besides, suspension of MPLADS worth Rs. Rs. 8000 crore and 30 per cent cut in salaries of MPs will implicate demand for a variety of goods and services by government departments. Some state governments have also declared 20 percent cut in salaries of their employees.

At ground level, labourers working in informal employment also bear congestion caused by Covid-19 as lock-downs have made them both jobless and homeless. Currently, International Labour Organisation’s (ILO) report ‘ILO Monitor 2nd edition: COVID-19 and the world of work’ stated that 200 crore people working in the informal sector worldwide are particularly at risk. The ILO in its report described the pandemic as “the worst global crisis since World War II''. Workers and businesses are facing catastrophe, in both developed and developing economies. The ILO has also warned about expected wipe out of 19.5 crore full-time jobs or 6.7 percent of working hours globally in the second quarter of this year due to these “catastrophic consequences” of Covid-19 which will surely cause sharp decline in consumers.

In India, about 40 crore workers (almost 90 per cent of total workforce) are employed in the informal sector and are at risk of falling deeper into poverty during the corona crisis. As per Centre for Monitoring Indian Economy (CMIE) data, unemployment rate in India has reached to 23 per cent on 29 March 2020 from 6.7 percent of two weeks earlier. Current lockdown measures have a serious adverse impact on workers’ livelihood. As a result, migrant workers have to go back to rural areas.

It will cause a steep rise in government expenditure for providing minimum livelihood amenities to unemployed people. The dangers of Food supply chains from both supply and demand side constraints of all the productive activities in all sectors indicate a serious economic slump waiting for us eagerly. High levels of stagflation emerging out of government expenditure can also aggravate obstacles of government in the recovery phase. Besides, Oxfam International has pointed out that the corona virus pandemic may push around half a billion into poverty. Furthermore, by accepting this crisis as deeper than the 2008 global financial crash in their annual meeting, the International Monetary Fund and World Bank have multiplied concerns of policymakers involved in planning for a recovery path.

Immediate consequences of Covid-19 crisis on economic growth and employment world over are gigantic in size. It will also constrain nations, particularly developing ones, in obtaining Anticipating spread and depth of coronavirus crisis world over, it can be costliest economic crisis that mankind has faced ever. Very recently, RBI has also indicated towards this becoming more serious than the Great Depression of 1930s. Collective well-planned efforts of International Economic Organizations along with resource rich nations would be needed for early recovery of the world economy from this deepest economic crisis. ILO Director-General Guy Ryder emphasised that all nations have to move fast, decisively, and together for taming the adverse consequences of Covid-19 crisis.

In lieu of adverse economic effects of Covid-19 crisis, proactive and responsible state intervention is the need of hour for taming this crisis. For management of its bad present and projected economic effects, rational economic policy mix needs to design with help of experienced economists, intellectual and experts for conquering economic depression as conventional Keynesian fiscal injections could not be sufficient to deal with this giant economic phantom.

Ensuring active, adequate and selfless participation of established corporate houses in providing inputs and resources may make the recovery journey bit easier. Emphasis on building strong health infrastructure and spread of general health knowledge among common population will enable the nations to be prepared for such challenges in future comfortably.

The state must play the role of ‘Responsible Father’ by standing on toes day and night to pull the Indian economy out of economic crisis by managing this health crisis efficiently and effectively. As economic crisis world over is deepening fast, there is not even a small waiting time. For getting India out of this crisis and making it able to grow at 7 percent in the fiscal year 2021-22, government, at the earliest, should come out with massive economy revival plans, along with strengthening the its survival measures. (Dr. Kulwinder Singh  is a Faculty, University Business School, Panjab University, Chandigarh.)