Economy

COVID-19 + Slow Down = ‘Great Recession’: The Need for Aggressive Spending

Authors – Dr. Martin Patrick and Dr. Joshy K J

Indian economy has been passing through a slow down presumably due to the effects of demonetisation in 2016 and the introduction of Goods and Services Tax (GST) in 2017. The impact of the so called ‘twin blows’ on the real GDP growth trends of India is evident from the fact that GDP growth rate were 8.17, 7.17 and 6.81 percent respectively during 2016-17, 2017-18 and 2018-19. The expected growth rate for the year 2019-20 is below 5 percent. In this context, the economy has been facing another phase of crisis due to the outbreak of COVID-19. It could not have happened at a worse time than this, as the economy’s GDP growth rate fell to 4.7 percent in the previous quarter.

Based on pre-COVID-19 projections of India’s GDP, the average daily GDP value for 2020-21 is estimated to be at about $8 billion. It implies that the initial 21- day lockdown (up to April 14) would mean a maximum possible loss of $168 billion (Approximately 14 lakh crore rupees) and its extension for 40 days (up to May 3) would cost $320 billion. More than worrying about the figures, the plus point is the crisis due to this steep decline in GDP values can well be managed if the country is able to contain the spread of the pandemic in the shortest possible time. The fall in annual GDP growth rate due to COVID-19 impact for 2019-20 is estimated to be between one to two percentage points for India, depending upon how we deal with the situation. In fact, the revised GDP growth rate forecasts for FY2020-21 by international credit rating agencies {(Fitch ratings– 2 percent, ADB– 4 percent, S&P Global Ratings– 3.5 percent, ICRA—2 percent, Moody’s Investors Service (for calendar year– 2.5 percent)} and the World Bank (1.5 — 2.8 percent) cast shadows on the future of Indian economy.

The outbreak of the pandemic, unparallel to many earlier economic episodes, characterised by both demand and supply shocks resembles a war-like phenomenon. Indian economy largely relies on consumption driven growth and service sector jobs for sustaining the growth trajectory is a naked truth. The crisis has its own adverse impact on the labour market, goods market and financial market. It reduces the income levels of people leading to a decline in the household consumption expenditure, which in turn will have a huge negative consequence with reverse multiplier effect, both in short and long periods. On the supply side, this would necessarily mean cut in production, which would obviously result in job loss and further increase in unemployment levels. As per the latest ILO report, the magnitude of job loss during COVID-19 in the informal sector in India is alarming (around 400 million) as India, the second largest supplier of labour force in the world with 520 million workers, has 85-90 percent of the workforce in the informal sector. When the economy turns towards a recession due to both severe demand and supply shocks, it may eventually lead to a stagflation phase.

No doubt, the economy has to pay a high cost for the pandemic as the Modi government is determined to contain it on a priority basis, unlike Western countries that follow the ‘mitigation method’ to lessen the impact of COVID-19. There is every possibility that this ‘containment strategy’ (which is inevitable for India) coupled with the existing slowdown may lead to a ‘great recession’ unless suitable and adequate measures are taken. Realising this or not, the Government announced some packages to check adverse effects of pandemic.

Is the Package Adequate?

The routine ‘Bail Out’ packages are helpless to contain the ill effects of a pandemic like this. The measures to deal with an extraordinary crisis should also be extraordinary. What is needed now is a two-pronged strategy: one, size of the package should be to the extent of 10-15 per cent of GDP and second, aggressive direct spending until the containment of disease followed by bailout packages for the most affected sectors such as tourism, trade, etc.

Most of the countries, especially the ones being hit heavily, have come up with large economic packages to tide over the possible adversities (Table 1). India has also come up with a spending package, however, the size of the same is much smaller than the packages of other major countries. For instance, countries like USA, UK, Australia and Spain have announced packages of the volume that ranges between 10 to 20 percent of their respective GDP where as in India it is only 0.9 percent of GDP.

The packages announced by UK, USA, Spain etc. have been prepared with an objective to enhance the aggregate spending. Most of them have a direct effect through the transfer of income to different sections. The Indian Government has announced a stimulus plan of $22.6 billion (1.7 lakh crores) that provides direct cash transfers and food security measures, offering relief to millions of poor people.

Connected to this, the move of the Government for medical insurance worth 5 million rupees ($66,000) for every front-line health worker is highly commendable. The package includes the distribution of 5 kilograms of wheat or rice per person along with a kilogram of pulses at free of cost for every low-income family ( helping to feed about 800 million poor people over the next three month), free cooking-gas cylinders to 83 million poor families, a one-time cash transfer of $13.31 (Rs 1000) to 30 million poor senior citizens and $6.65 (Rs 500) a month to about 200 million poor women for next three months. In addition to these, the credit policy changes intend to infuse 3.74 lakh crore rupees into the economy. The decision of the Union Cabinet to cut the salary of all the members of the parliament (MPs) for the financial year 2020-21 by 30 percent sends great message more than the amount. The move to suspend the MP Local Area Development (MPLAD) fund for the next two years raises lot of apprehensions as the key aspect would be whether this amount would be sidetracked for direct spending and come back to the right channel without any delay, so that the spending cycle goes uninterruptedly.

The point is that although there are measures taken in the right direction, they are inadequate considering the grave problems that persist in the economy due to unpredictable and unprecedented situation like this. There are no serious attempts to compensate the job loss of informal workers, especially migrant labourers. In short, the size of the direct spending should go up on the one hand and encompass all sections of vulnerable groups due to the lockdown on the other in order to bounce back as quickly as possible.

Aggressive Direct Spending – The Right Remedial Measure

Based on global trends, India is likely to experience a spike in terms of the number of cases, over the next few days/ weeks. Moreover, social distancing is likely to be more difficult in India due to the higher proportion of communal living arrangements and population density. From the economies sustenance point of view, temporary measures are very important in containing the adverse economic impact of pandemic and social distancing. The words of the Finance Minister (FM) that there would be more stimulus packages are also much comforting.

The second package and the following ones should contain schemes for aggressive direct spending, not only to save the economy from the negatives of COVID-19 but also to safeguard it from a severe or ‘great’ recession. Immediately, the Government has to necessarily spend at least 5 percent of the current GDP, that is 10 lakh crore rupees (GDP being 204.42 lakh crore in 2019-20). Considering the special economic condition the country, the Government should follow through up with another package of at least 5 lakh crore rupees for direct spending, embracing the poor and the marginalised. Compensatory and relief measures for informal workers, small entrepreneurs and traders should also be a prime component in the package. As is known, the total expenditure of central and state governments put together may come to around 70 to 75 lakh crore rupees in 2020-21 out of which we can easily garner 5 to 6 lakh crore rupees for the rural and urban poor to address the issue concretely. Since the consumption propensity of lower income groups is much higher, such measures will keep the spending levels satisfactory. The Government can use the successful income transfer programmes like MGNREGA and PM KISAN with an aim to double wages and raise consumption levels.

The announcement of the Government regarding the release of Rs 12,287 crore is a good measure, which would help states to enhance their financial resources now. Further, it is not the time to talk about fiscal prudence and hence it is necessary to increase the ‘Debt Ceiling’ of States. RBI’s announcement to increase the ways and means limit—limit for short-term credit that states can borrow from the central bank—by 30 percent from existing threshold for all states and union territories is an encouraging step.

Addressing the demand and supply side factors simultaneously is of crucial importance in the medium and long-term. The announcements relating to deferring taxes for some industries like aviation, hospitality and small companies, which have been hurt the most by the lockdown, could be a medium term measure. It is equally critical to evolve the most suitable and sustainable strategies for resource mobilization in the long-term which will prevent the economy from plunging into a depression. The most important lesson is that over-reliance of cross border supply-chain does always have a dangerous face along with all its advantages on the other side.

To conclude, the total direct cash transfers has to be to the tune of 10- 15 percent of GDP in different and successive packages in the short period and then followed by bailout packages after the lock down. The adverse effects of 2008 global financial crisis the Indian economy faced were tackled with the stimulus measures (both fiscal and monetary) carried out in order to boost growth by generating more aggregate demand. The policymakers will have to carefully analyse the tough trade-off between continued lockdown at the cost of long-term economic devastation and a rational ‘unlocking’, allowing the country to ‘return to work and normalcy’. If proper dosage of direct spending is initiated, the country can minimise the number of death cases on the one hand and reduce the adverse effects of severe slow down so that a ‘great’ recession can be avoided.

-Authors:

Dr. Martin Patrick – Economist and Honorary Fellow at Centre for Budgetary Studies, Cochin University, and Former Professor at Maharaja’s College, Kochi. Email: [email protected]

Dr. Joshy K J – Associate Professor and Head, Department of Economics, CHRIST (Deemed to be University), Bangalore. Email: [email protected]

-Picture Credits: fairobserver.com / [email protected] / Shutterstock



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