Tackling Fiscal Challenges and Emerge from ‘Covidonomy Crisis’

 By Vishakh Krishnan Valiathan
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In 1991, the then Finance Minister, Dr Manmohan Singh, announced the opening of the Indian economy, so that it can get exposed to globalisation and hence can step towards becoming a developed country.[1] However, over the period, India has emerged as one of the fastest-growing and largest economies in the world. The country has even achieved a consistent run of six to nine per cent growth rate during 2003-2018.[2] Along with China, India was the only country to survive the global financial crisis during 2008-09 with a positive growth rate. Interestingly, the Covid-19 pandemic has hit all the major economies globally. The ‘Great Lockdown’ has already paved the way to a recession that might go in the history books; the progressive spread of the Covid-19 pandemic has copiously cut the cable to cross border connectivity and globalisation, thus creating room for protectionism.[3] Technology and digital economy might emerge as opportunities in the post-Covid era.

Fiscal packages to the rescue?

The pandemic has created a vacuum in human- to- human contact and preferable distancing from each other has been the latest culture. In the short-run, work from home and the virtual online meeting has become the trend worldwide, but in the long-run, this might lead to serious mental health issues especially affecting a major share of the workforce in the service sector which predominantly consists of the youth population. As the world awaits, the global recession would hit the emerging economies badly than the Financial Crisis of 2008-09 leading to unemployment and return migration in many of the middle-income economies. Moreover, according to International Labour Organisation (ILO), it is estimated that around 1.6 billion workforce in the informal sector, accounting 76 per cent of the informal employment globally, would be affected due to the lockdown since late February and March 2020 in various nations.[4] In this, around 42 per cent consists of women labourers.[5] The unfortunate part is that the daily wage earners across the globe would suffer the most. This might lead to higher rates of starvation, hunger and poverty, as it all depends upon government fiscal relief policies.

As the longevity of the virus is uncertain, the progressive recovery from the economic slowdown may consume more time than expected. Educational institutions, factories, public spaces, etc. have been under total shutdown in most of the countries for months and governments have eased the restrictions in phase to phase manner in due course.[6] However, given the increasing mortality rate due to the virus, opening an economy, even in a phased manner, shall be considered only if the state has succeeded in flattening the Covid -19 curve during the lockdown. With the development of the vaccine in progress, which will take time, countries are urging its citizens to start living with the virus, but this might go for a toss.[7] Why so? Suppose a country opens its economy and if it does not have at least 50 per cent of hospital beds and PPEs to cover up the surge of cases, then it would fall into the pit of high mortality in a quick pace. While observing that even technologically equipped countries with advanced Public Health Systems like the US and Italy[8] have suffered huge losses in terms of human life and economy[9], and at the same time countries like India which is densely populated, will have to be extremely cautious as community transmission can be fatal.

Figure1. Fiscal Responses to Fight Covid-19 as a share of GDP (%) (Select Countries)

Source: Authors own; Data collected from http://web.boun.edu.tr/elgin/COVID.htm.

Even though countries have announced special packages, it is mainly to tackle the Covid situation and post Covid economic scenarios. In May 2020, the Indian government announced Rs 20 lakh crore financial relief package named  ‘Atmanirbhar Bharat’ to tackle the ongoing crisis.[10] The packages announced by various nations are indicative of the spending, given the respective size of the economies, particularly it seems less for India concerning its size of population and damage caused by the virus. Moreover, it is interesting to note that China, Italy and the UK have invested much lesser than the other countries as these nations were largely affected as well. However, these packages would largely focus on immediate injection of funds, solving internal labour issues, unemployment and food security in general, apart from their other fiscal problems. Moreover, there is a greater need for government expenditure in Public Health, as health is a priority now.

The Challenged Indian Covid [Ec]onomy

The first case identified in India was on a student who came from Wuhan in Kerala on January 30, 2020.[11] At that point, the measures were taken on a low scale as cases started to rise by mid-march 2020. Interestingly, the majority of cases in the country were imported and later there seemed to be an increase in asymptomatic cases as well. When the central government announced the lockdown by the end of March, the country had sacrificed its economic activities giving more attention to social distancing and flattening the curve in the coming months. This, however, affected thy economy with huge loses along with lack of funds with businesses to pay their employees leading to an employment crisis. According to a report by the Centre for Monitoring Indian Economy (CMIE), around 27 million youths falling in the age group of 20-30 years have lost their jobs during April 2020.[12]

The early anticipation on the lockdown might have helped in breaking the Covid chain in a limited manner but at the same time, the economy plunged. Interestingly,  around 43 per cent of the country’s GDP is contributed by the southern states plus Maharashtra.[13] The states with more contribution towards the industrial and service sector having fewer containment zones should be given proper instructions for functioning which would help in the revival in the short run.  However, the trend post lifting of the restrictions seems to be inclined like this-  the more easing of restrictions in the economy, the more increase in the infected cases in the country.

Figure 2. The unemployment rate in India 2020

Source: CMIE; The Economist, https://www.economist.com/asia/2020/05/23/indias-economy-has-suffered-even-more-than-most.

While dealing with these problems, the government might have announced an economic package, but it has not covered every aspect of the economy. The Atmanirbhar Bharat, the comprehensive financial package, mostly focused on five pillars, economy, infrastructure, system, vibrant demography and demand. This mostly focuses on India becoming self-reliant. The country faces various economic challenges ahead. Firstly, the migration issue both internal displacement, return migration and repatriation, is a serious concern. Secondly, the supply of enough ration through public distribution systems with maximum reach has to be obtained. Thirdly, with the unemployment rate standing at 23.2 per cent as on June 1, 2020, the lack of employment opportunities would worry the outgoing final year graduates and youth of the nation.[14]  Fourth, the locusts’ attacks from the western frontiers created a threat to agricultural lands, given that covid had already affected the workforce in the primary sector.[15] Fifth, the whole shock of Covid-19 and its subsequent lockdown procedures may have affected the mental health of the youth population who were most inclined to social life before this situation until march.  Certain measures that most of the global governments might take would include tax reduction, loans at lower interests’ rates, injecting liquid cash to its citizens as required until normalisation, securing jobs by providing special packages to businesses to sustain etc. which are mostly welfare-oriented. Another area where the government has to invest would be on the vaccine development as they have to consolidate a separate package for the same. Hence, nations will have to sacrifice their policies by spending more into the economy by pumping maximum cash into the economy to emerge from the situation economic crisis.

To conclude, in the post-Covid world, the influence of the digital economy would be of high demand with prominence to digital payments and might witness a progressive transition from cash to cashless transactions. Technology will revolutionise the post-Covid era as work from home might become a casual culture giving opportunities for people without travelling and allowing to break borders via virtual meetings, which has its own merits and demerits. The government could also establish a society where social, industrial and technological systems are integrated and optimised- connected to share information while also creating a sustainable environment with social benefits, less cost and risk. Perhaps there will be a shift economically and probably in the world order as we emerge from this crisis.

End-Notes

[1]‘Manmohan Singh’s 1991 Budget: the day that changed India forever’, The Hindu, July 24, 2016,https://www.thehindu.com/business/Economy/Manmohan-Singhs-1991-Budget-the-day-that-changed-India-forever/article14505003.ece, accessed on June 2, 2020.

[2] ‘GDP Growth (annual %)- India’, The World Bank, June 2, 2020,https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=IN, accessed on June 2, 2020.

[3] G Gopinath,”The Great Lockdown: Worst Economic Downturn Since the Great Depression”, International Monetary Fund, April 14, 2020, https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/, accessed on June 1 , 2020.

[4]ILO, “ILO Monitor:Covid-19 and the world of work. Third Edition- Updated estimates and Analysis ”, International Labour Organisation, April 29, 2020, https://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/documents/briefingnote/wcms_743146.pdf, accessed on May 12, 2020.

[5]Ibid

[6]K Whiting, ‘These countries are making travel bubbles for post- lockdown tourism’, World Economic Forum, May 14, 2020, https://www.weforum.org/agenda/2020/05/tourism-coronavirus-travel-bubble-lockdown/, accessed on June 2, 2020.

[7] PTI, ‘Will take one-and half or two years for India to develop a vaccine for COVID-19: Health Minister’, The Economic Times, March 12, 2020, https://economictimes.indiatimes.com/news/politics-and-nation/will-take-one-and-a-half-to-two-years-for-india-to-develop-vaccine-for-covid-19-health-ministry/articleshow/74597044.cms?from=mdr, accessed on June 2, 2020.

[8] E Myers,’Italy: Ranked Second Best Health System in the World’,LehighReview,Volume 17, 2009, https://preserve.lehigh.edu/cgi/viewcontent.cgi?article=1005&context=cas-lehighreview-vol-17, accessed on June3, 2020.

[9] AFP, ‘US tops world in coronavirus cases, overtaking China and Italy’, The Economic Times, March 27, 2020, https://economictimes.indiatimes.com/news/international/world-news/us-tops-world-in-coronavirus-cases-overtaking-china-and-italy/articleshow/74838553.cms, accessed on June 2, 2020.

[10] U Misra, ‘PM Modi’s Atmanirbhar Bharat ABhiyan economic package: Here is the fine print’,The Indian Express, May 14, 2020, https://indianexpress.com/article/explained/narendra-modi-coronavirus-economic-package-india-self-reliance-6406939/, accessed on June 6, 2020.

[11] VK Valiathan,’Covid-19 and Kerala: A Model for Medical Securitization’, Centre for Land Warfare Studies, February 18, 2020,https://www.claws.in/covid-19-and-kerala-a-model-for-medical-securitization/, accessed on June 2, 2020.

[12] YS Sharma,”27 million youth in age group of 20-30 years lost jobs in April: CMIE”, The Economic Times, May 13, 2020,https://economictimes.indiatimes.com/news/economy/indicators/unemployment-rate-dips-to-23-97-data-from-cmie-shows/articleshow/75689370.cms, accessed on June 2, 2020.

[13] ‘Indian States by GDP’, Statistics Times, September 28, 2019, http://statisticstimes.com/economy/gdp-of-indian-states.php#:~:text=Newly%20created%20state%20Telangana%20is,%2DEast%20India%20share%202.8%25., asccessed on June  6, 2020.

[14]CMIE, ‘Unemployment Rate in India’, Centre for Monitoring Indian Economy, June 1, 2020, https://www.cmie.com/, accessed on June 3, 2020.

[15] ‘Worst attack in 27 years:Swarms of locusts destroy crops in several states’, India Today, May 25, 2020, https://www.indiatoday.in/india/story/worst-locust-attack-in-27-years-swarms-destroy-crops-across-north-india-1681782-2020-05-25, accessed on June 6, 2020.