When the Prime Minister of India, Shri Narendra Modi, called for a nationwide ‘Janta Curfew’ on 22nd March 2020, there were clear writings on the wall that this would be the beginning of a series of such lockdowns the country will undergo in the days to come. Starting from the Janta Curfew, successive State Governments imposed their own versions of lockdowns-Maharashtra Government imposed a lockdown (only) in Mumbai, Nagpur, Pune and Pimpri-Chhinchwad on 20th March 2020, while Rajasthan announced a complete lockdown of state on 21st March. Delhi announced Section 144, which prevents assembly of more than 5 people from 23rd to 31st March 2020. Other States followed suit. Hence, when the Prime Minister announced a lockdown from 25th March, it was most likely that the majority of the country was already under some form of lockdown. However, what probably took everyone by surprise was the duration of lockdown (21 days) and the time given to prepare for it (barely 4 hours). It can be argued that the unique nature of the problem did not give much space for the Government and we probably are already a week too late in implementing this. However, at this critical juncture it was probably the only option at hand.
Covid 19 and the Liquidity Trajectory
It is undeniable that the Covid-19 will have a huge economic cost. Recovery could take as much as 18-24 months and during that time the world may become a very different place.
After the 2008 Recession, Central Banks advocated an expansionary monetary policy (through quantitative easing) to cut down costs of borrowing (i.e. interest rates). The effect-over the last decade, a plush of liquidity propelling the global economy. This liquidity resulted in increasing the price of different asset class (like equity, land, etc.) and often creating a ridge between the real and financial economy. This was seen in India as well. Over the last decade, we have seen the stock markets boom (Sensex gave a return of 9.37% per year since 2014), even at a time when the unemployment has been at its peak (it was 6.1% for FY 2017-18, the highest in 45 years) and manufacturing activity is low (PMI fell to 51.4 in August from 52.5 in July, its lowest since May 2018 and below its long-run average of 53.9). At the same time, India has liberalized its capital account in recent years to attract foreign money in the absence of a large domestic savings pool. That’s expected to encourage companies from Apple Inc to SoftBank and Sequoia Capital to invest in India. With interest rates low, this capital found a perfect avenue in the booming Start-Up scenario of the country. Evidently, most of these funds were chasing growth/valuation rather than checking the fundamentals of the company. Hence, we can say, that we were living under a ‘growth for the sake of growth’ bubble. There is likely to be a reconfiguration within the company strategies and we may now enter a phase where company fundamentals and business sustainability become important again.
Possible Government Steps:
The Covid-19 is having the deepest impact on this liquidity aspect. It has shown the fragility of the current phase of capitalism-we are seeing a rapid erosion of value even when there is no visible damage to physical infrastructure. What are the choices for the Government?
Clearly, the RBI would go for a steep reduction in interest rates to pump liquidity. It may also relax payment obligations and rules. However, a monetary policy can only do as much. As regards the fiscal policy, the Government will have to definitely forget achieving the fiscal deficit. According to estimates, Rs. 2.2 Lakh Crore can be raised from one percentage point reduction in fiscal deficit. There is also a possibility of raising funds from the declining crude oil prices-approximately Rs. 13,000 Crore can be raised from a Re.1 increase in excise on petrol and diesel. The latter is of course, a tricky choice since increase oil prices can push inflation. Moreover, the Rupee has been on a free-fall against US Dollars which negates the fall in oil prices. The Government may also give a tax moratorium for impacted sectors, like aviation, hospitality & tourism, retail, e-commerce, etc.
Once the tide settles, Employment losses will be severe and unevenly distributed. We can expect a series of bail-outs by Government, however, it must be ensured that this is not accumulated by cronies.
There is currently no safety net for India’s informal-unorganized sector, which hires about 90% of India’s workforce. This gives an unprecedented opportunity to implement a Universal Unemployment Insurance. This will be far better than asking Indian’s to borrow and giving a tax break to the rich. If jobs are difficult to find, this will provide critical assistance to households and boost demand in the macroeconomic sense.
Having said all that, at this juncture it is of utmost importance to practice social distancing and emphasize on Human Sustainability. It is also important to find our mental peace and not plunge into a panic mode. History is replete with examples of triumph over pandemics, and it is time to stand up to it.
Jatin Bavishi is Incubation Manager at Dhriiti
The views expressed in this article are solely those of the author’s and do not necessarily reflect Qrius’ editorial policy
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