COVID-19 pandemic has created an unprecedented crisis in the world. It is said to be worse than the Great Depression. The pandemic has emerged as a key risk to human health and is causing significant and rising human costs and economic turmoil through supply disruption, drop in domestic and external demand, reduction in trade, lower tourism and business travel and loss of consumer and investor confidence. As per IMF’s World Economic Outlook, April 2020, the global economy is projected to contract sharply by –3% in 2020-21 the pandemic. This is much worse that the financial crisis of 2008.
Most of the economies have ground to a halt as lockdown is the only option available to contain the spread of this Wuhan Virus. Many small and low income countries could not afford lockdown and decided to continue with economic activities, despite fear of spread of the virus. Many other countries in middle income group opted for a moderate lockdown. India is probably the only country which opted for a severe lockdown. On 1 to 10 mobility score India is the only country which scores 10. However the good effect of this decision is clearly visible so far as preventing spread of the virus and relatively smaller number of deaths are concerned.
Now with onset of COVID-19 pandemic economic growth of India and many other middle income countries will be decided by following factors:-
- Intensity, spread and duration of the corona pandemic.
- Time taken for economic activities to normalize.
- Growth rate of global economy.
- Managing tax and non tax revenue deficit as percent of GDP will be important.
- Monetary, Fiscal and Other Policy support by various governments to manage adverse macroeconomic impact.
- Time taken to restore domestic & external demand, bringing back on track trade volumes in crucial sectors like manufacturing, tourism, business travel textile, gems & jewellery etc.
- Restoration of supply chain disruption.
- Restoration of consumer and investor confidence.
- Management of migrant workforce of MSMEs.
- Focus on agriculture and related industry to create local employment.
- Higher budgetary allocation to public health management and research.
Unlike rich nations India does not have a robust social safety net. So there was a risk that full lockdown for a prolonged period will lead to irreversible job losses, hunger, starvation and death. There will be severe economic and financial fallout world over and India can’t escape the consequences. India does not have capacity to spend huge sums on stimulus measures. Indian economy was already slowing down even before this pandemic. So we are more vulnerable to shocks. The financial fallout is still unfolding and hence extent of economic damage can’t be assessed as yet, but it will be substantial and crippling for many countries. Many countries will have to be bailed out by International Monetary Fund (IMF). In fact IMF is readying its fund of USD 1 Trillion to help countries whose economies are not so robust and resilient.
Indian Context
As per IMF’s World Economic Outlook (April 2020), global growth is expected to contract sharply by -3 per cent in 2020-21, much worse than during the global financial crisis of 2008-09. COVID-19 pandemic has emerged as a key risk to human health and is causing significant and rising human costs and economic turmoil.
As per Ministry of Finance “The growth of India’s real GDP in 2019-20 is estimated at 5.0 per cent (Second Advance Estimates) as compared to 6.1 per cent (First Revised Estimates) in 2018-19. However, with the onset of COVID-19 pandemic, its intensity, spread and duration will now majorly determine whether India is able to realize its estimated and projected GDP growth.”
Borrow to Spend?
India can’t afford to provide a stimulus package like US and European countries. We just do not have the resources. It will not be prudent for RBI to print more money. Dilemma is that if Central and State Governments borrow more to spend on stimulus, the investors will lose confidence and rating will go down. Fiscal Deficit & CAD will balloon and rupee will depreciate even more. Therefore foreign investment will not come to India and there will also be flight of funds out of India. This will further aggravate the financial crisis and we will enter into a Chakravyuh out of which we can’t come out. RBI has attempted to inject some liquidity in the banking system by reducing reverse repo rate. This is better option than printing currency. Banks now have more cash and hence can lend more to industry especially MSMEs. But whether banks will actually take risk and lend money is a different matter altogether. Central and State Governments will have to come forward and provide collateral to banks on behalf of viable businesses. This will be a new and novel approach so that banks can lend without fear of these loans becoming NPAs in future.
Global Trade in Indian Context
Virus has devastating effect on export by Indian business entities. Consider following data to understand the enormity of situation:-
- There has been 35% decline in exports in March 2020. The pandemic has taken such a big toll on global trade and commerce. Export of all categories has fallen except iron ore. The situation is not expected to improve very soon. Export of engineering goods have fallen down significantly. Textile, gems & jewellery and petroleum products have also fallen down sharply.
- Approximate value of export in March has been only USD 21.4 Billion showing a decline of around 35%.
- Imports also fell by around 29% to USD 31.2 Billion. There has been demand contraction in India. Except transport equipment all other import categories have declined.
- Oil import has also fallen by 15% showing lower economic activity. Though the fall in oil import value is also due to lower crude prices in world market.
- One positive outcome is that trade deficit has also reduced from USD 184 Billion to USD153 Billion.
- India’s Foreign exchange reserves stood at US$ 474.7 billion as on 3rd April 2020, as compared to US$ 412.9 billion at end-March 2019. This is a positive.
- As per the 2ndAdvance Estimates for 2019-20, the total production of food grains is estimated at 292.0 million tonnes as compared to 285.2 million tonnes in 2018-19. This also is a positive news.
Plan to Increase Investment in India
One important lesson learnt is that we will have to be less reliant on imports for crucial requirements. The global supply chain disruption has taught us this lesson. Government has to quickly workout a viable strategy for global investors and even domestic investors. There is no time for long winded departmental meeting of various meetings. There is no time to form complex looking rules with complicated compliances.
We already know about crucial areas in which we are weak in local production due to which these items have to be imported. For example we are very weak in local production of basic chemicals, active pharmaceutical ingredients, power equipments, electronics like TV Panels & Solar Panel Cells, mobile & computer components, white goods like air conditioners & washing machine components, auto parts, precision machineries, leather, specialized steel & aluminum products etc. We are weak in sectors like food processing, wooden furniture segment etc.
Central Government and State Governments have to reach out to global investor and industry captains and encourage them to invest here. Global companies have realized that for business safety they need to look for alternate bases for their production units. This will help them avoid disruption in supply chain.
Why will Global Investors Come to India?
Central government has to quickly find answer to this question. The business environment that we offer is not considered business friendly by many investors, including Indian investors. Income tax case against Nokia is an example. They had to shut shop. Tax demand on Vodafone and other telecom companies is a very recent example. Commerce and Industry Ministry has to seriously look into making business friendly rules, otherwise industries will move to countries like Taiwan, Vietnam, Ireland etc. A Make in India Strategy has to be put in place very quickly. There is a huge disruption in global manufacturing and supply chain. This presents India with an unprecedented economic opportunity. We must not lose this moment in history.
It will be pertinent to mention here that merger and acquisition has fallen down by 36% in India. In 2019 the value of M&A was USD 128 Billion. This has fallen down to USD 82 Billion. Out of this USD 82 Billion, deals by foreign companies were only USD 34 Billion. Due to financial crisis created by COVID-19 many companies will start restructuring their portfolios by selling off assets which are not profitable. Many enterprises will follow this route to deleverage their balance sheet. The recent rule which bars China’s direct investment will also result in lesser amount of foreign fund flowing into India for M&A activities.
Social Security Needs of Migrant Workers and Contract Workers?
There are around 5 crore migrant workers working in various organized and informal sectors in India. Their average income is around Rs 10000 to Rs 15000. But they play a very important role in lubricating the economic wheels of industry. These people are at the bottom of the ladder and are worst affected during economic crisis. Large numbers of them do not have social security and are daily wagers. Due to COVID crisis there is huge exodus of these workers who want to go back to their home states. This has resulted in lack of manpower for many SMEs. Even agricultural activities in many states have been adversely affected as they depend on these migrant workers. Now industry is realizing the importance of this segment of workforce. Governments should now frame rules to protect these workers and to provide them social security cover. Following actions will go a long way in retaining these workers:-
- Pradhan Mantri Awas Yojna fund should be used to make houses for these workers who earn below Rs 20000 per month. The houses should be managed by local administration and a small rent can be taken for renting the houses to workers.
- ESI cover should be given to workers whose monthly income is up-to Rs 25000 per month.
- This pandemic has laid bare the importance of having a much better health care system than what we have today. More government hospitals should be opened for economically weaker sections working in cities and metros. India’s health spent is only 1% of GDP and is one of the lowest in the world. Central and State Governments have to start moving towards an effective National Healthcare Scheme.
- Central and State Governments should increase allocation for public health infrastructure. Use Labor Cess for this purpose. Provide Group Medical Cover to migrant workers and contract workers using this fund.
- Employers should be instructed to provide medical insurance cover to such workers.
- Special attention should be paid to workers engaged in construction sites. They are brought to work by various contractors and are exploited.
- Migrant workers working anywhere in India in whatever sector of economic activity should be covered for medical facility.
- Special monitoring will be required for those employed as truck drivers. Around 1.5 crore people are engaged as truck driver. They do not have any type of safety net. This is not a small number.
- Special attention should be paid to contract workers employed in sectors like textile, construction, chemical, fertilizer and mining industries. Contract workers are also employed in wholesale mandis like grain market, vegetable markets, loaders, vendors etc. Time has come to pay attention to their social security needs.
Revive Agriculture and Rural India Economy
This aspect will be of utmost importance. Currently agricultural sector is a drag on Indian economy, largely due to governmental apathy and policies. Agriculture and rural economy has never been our focus. Due to this neglect almost 5 Crore migrant workers are compelled to move out to various states in search for job. The current lockdown had a very negative effect on agricultural economy. There has been inconsistent implementation of agricultural policies. We need to give agriculture industry status, even if it results into price rise of agricultural products. Agriculture is a labour intensive activity and has potential to employ large number of people. Government’s intention to double farmer’s income by 2022 will remain a pipe dream unless rural economy is revived in a big way. More money has to be put in the hand of farmers so that rural demand for products and services increase. Logistic chain of agricultural products needs to be improved significantly. Local governments should find ways to facilitate direct access between farmers and urban consumers so that farmers get better price of their produce.
Conclusion
COVID-19 is a pandemic. The virus is an invisible enemy which stalks all people, high or low, rich or poor. As of now there is no treatment. It has put the world economy at great peril. The government has done well by extending the lockdown till 3rd May 2020. But any further extension will be devastating and non reversible damage to economy. There will be huge job losses, migrant labor exodus, interrupted cash flow for business enterprises, interrupted movement of goods and perishable. All this will cause mounting economic distress and huge unrest. There will be large number of deaths due to hunger than due to COVID. Hence time has come to lift the lockdown in a planned and phased manner.
The government will have to restart the economy from 3rd May 2020. Otherwise this medical crisis will turn into a serious economic crisis. So economic activities have to start in a planned manner with proper surveillance and safeguards in place at work stations. The jobs and livelihoods need to be protected. Any further decline in exports and even domestic consumption may herald recession.
The fight against Corona virus is our moment of reckoning. We must be willing to get rid of life we had planned and should be ready to embrace the life which is waiting for us.
