Coping with coronavirus: The next steps

By: |
April 07, 2020 2:30 AM

In the face of the corona-crisis, the Centre must postpone the fiscal consolidation, and even relax states' fiscal deficits, while keeping a close eye on inflationary prices.

The unfolding of the Covid-19 pandemic has brought to the fore several issues of concern.The unfolding of the Covid-19 pandemic has brought to the fore several issues of concern.

The Covid-19 pandemic has created an unprecedented global crisis, and the policy focus of every country (except China) now is to combat the calamity and prepare for its aftermath. India has never seen a disaster of such a scale. What is more, the crisis has hit the slowing Indian economy unexpectedly. In fact, the Global Financial Crisis of 2008-09 fades into insignificance in terms of its impact on the lives and livelihoods of common people, even as the full magnitude of the present evil is yet to unfold. The first ten days of lockdown have created a serious sense of uncertainty and insecurity among people, and even as they wait with the hope that the infection’s curve will flatten, cases like Nizamuddin Markaz have continued to push numbers up.

The unfolding of the Covid-19 pandemic has brought to the fore several issues of concern. Without assigning blame, it is important to take note of these, and apply correctives to combat future emergencies. The most important issue continues to be the poor state capacity, and knee-jerk reactions in dealing with the crisis. This has manifested in many undesirable consequences. While the immediate lockdown was unavoidable, it was necessary to see the possible immediate consequences, and prepare to deal with them and sequence the actions to minimise hardship. Since the fallout is likely to be on state administrations, there should have been a better coordination mechanism between the Centre and states. Perhaps, it would have helped matters greatly if the prime minister had a videoconference with the state chief ministers at least a day before the announcement, asking them to gear up the machinery. To his credit, he did that later, but by then, there was already chaos all around. The inability to fathom the consequences has caused enormous hardships to the vulnerable and irreparable damage to the economy. A major decision like this requires coordination with the states because eventually, they are, and will be at the forefront, fighting the disaster.

The most important fact that stares us in the face is the historical neglect of the healthcare sector. The constitution has placed public health within the purview of the states, and historically, spending on public health has been abysmally low. The Government of India took up the National Health Mission as a Centrally Sponsored Scheme, but the funding is inadequate, spread across several activities, and targeting the poor ( Again, after the much-publicised Ayushman Bharat, the focus has been on insurance rather than creating the basic healthcare facilities, and only lip service has been paid to wellness centres. The aggregate annual spending on medical and public health, including water supply and sanitation, is just about 1.3% of GDP. In FY18, in per capita terms, the public expenditure on medical and public health varied from Rs 690 in Bihar and Rs 814 in Uttar Pradesh to Rs 2,092 in Kerala. A major capacity issue is the poor intelligence network and implementation mechanism. How else can one fathom that a major religious congregation was going on in full swing in the national capital just 100 metres away from the Nizamuddin police station, with thousands of attendees from all over the country as well as from abroad? Who is accountable for the lapse?

The government machinery has been trying to gear up to save the situation, and this would require both the central and state governments to increase public spending. The lack of ventilators and adequate health infrastructure is a major constraint, and this needs to be overcome without much loss of time. The frontline soldiers in this war need protective gear and equipment, testing facilities, and, above all, they will have to be protected from hostile, quarantine-fearing elements. We are unable to produce even the masks and protective gear in good time, and need to import them. Hopefully, with concerted efforts at both the central and state levels, we will be able to flatten the curve in not too distant a future.

Simultaneously, saving livelihoods is equally important. In all such fights, be it demonetisation or coronavirus, it is informal sector workers, particularly the poor, who suffer the most, and with economic progress having brought in a lot of mobility in search of livelihoods, the migrant workers have suffered loss of income, hardship, and severe economic and emotional insecurity—as was seen after the lockdown was announced. Although establishments have been ordered not to retrench workers and to continue to pay their wages, it is virtually impossible to implement this. Furthermore, many establishments themselves are fighting to survive, with all businesses coming to a compete standstill. Thus, besides the informal sector employees and migrant workers, the government will have to handhold small businesses, and it is not clear how this can be done.

The most important part of government intervention to revive the crippled economy is to increase public spending. The problem is formidable, as the additional spending required is considerable. The pandemic has struck an economy that has already been slowing since 2016. The twin balance sheet problem has resulted in the lenders not lending, borrowers not borrowing, and businesses not expanding. RBI’s move to reduce the policy rate by 75 bps, and CRR by 100 bps is unlikely to initiate any revival. The liquidity support may help, and regulatory forbearance is inevitable, but it will have to be fiscal policy that helps in the revival.

The speed of economic revival will depend upon the longevity of the lockdown, and the volume of public spending by the government. It now appears that the lockdown will be lifted in stages, and the complete lifting will take a considerable amount of time. Therefore, a V-shaped recovery is unlikely. The Centre has not been able to realise the budgeted revised estimate of tax revenues and disinvestment proceeds for FY20, and realisation for the next year will pose serious downward risk. The country is literally in a situation akin to financing a war, and the government will have to postpone the fiscal consolidation process for the present, loosen its purse strings, and finance its deficits substantially through monetisation. More importantly, much of the immediate expenditure for saving lives and livelihoods will have to be incurred by the states which are severely hamstrung by significantly lower tax devolution, and virtual stagnancy of own revenues. This is the time for the government to announce relaxation in states’ fiscal deficits, perhaps by one percentage point, to make them effective participants in the struggle. It is also important for the states to realise the importance of health, and prioritise spending on healthcare services.

Monetisation of deficit, and sharp increase in liquidity in the absence of economic revival and output increase has the potential to create an inflationary environment in the future. As macroeconomic stabilisation is predominantly a central function, even as the central government loosens the purse strings, it has to keep a close watch on the prices front.

The author is Member, Fourteenth Finance Commission & former Director, NIPFP. Views are personal

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