The current government has not developed a coherent approach to implementing structural economic reforms
Two months after India’s pandemic-triggered lockdown began, one can take stock of the country’s situation and the overall government response. The initial actions of the government were a mix of overreaction and timidity. While it was necessary to move quickly to prevent the spread of the virus, the manner of implementation showed a remarkable lack of awareness of the vulnerability of millions of the country’s migrant workers, who were made to suffer needlessly because of the panicky approach of completely shutting down all domestic transport. This was in late March, when there was enough data from China and Europe to plan an intelligent lockdown. That did not happen. Much has been written about the human suffering that was caused, but it is worth trying to go back and understand why such poor decisions were made.
The lockdown was swiftly followed by a timid economic response, with both RBI and the central government offering relatively small measures to deal with the sudden stop in almost all economic activity. RBI provided liquidity support to keep businesses from becoming insolvent, and, given the central government’s economic reach, it also provided similar measures, as well as direct transfers. These were obvious and necessary moves, but well short of what was needed immediately to shore up the economy and reduce suffering.
Meanwhile, the health response has probably gone as well as can be expected, given the generally poor state of India’s infrastructure for delivering health care. Different states have responded with varying levels of effectiveness, reflecting not just their resource levels but also their institutional capacities. The crisis has highlighted the importance of state and city governments in the delivery of public services, something that the national government consistently fails to acknowledge in its design of policies in this sphere. But, areas, where the national government could and should have done more, included the rapid development of testing capabilities and access to protective equipment. This certainly does have challenges, but is also something as basic as getting the message out that healthcare providers should be protected rather than being ostracised. The substitution of slogans for practical messages continues to be a weakness of the current regime.
The outcome of a draconian lockdown and a reasonably competent healthcare response has been a slow rise in cases, to some extent in well-defined hotspots. Unfortunately, the situation still does not seem to be under as much control as it might have been, and it is not clear why. Reopening the economy will be a slow and fraught process in these circumstances, and it does seem that Indians might have been better off both in terms of health and economic circumstances with a better-crafted set of responses from the national government.
Meanwhile, after a long seven weeks and multiple extensions of the lockdown, the national government finally announced a new set of policy measures to combat the adverse economic consequences. In the interim, RBI had been ramping up its liquidity support, in a welcome departure from its earlier timidity. The headline number that was announced, in a dramatic multiday rollout, was reported at 10% of the GDP, several times the initial response in late March.
But, there is less to government’s new policy proposals than meets the eye. The new numbers appear to include previously announced measures. Liquidity support measures have been combined with direct income support, making it less obvious what the true immediate impact will be. Analysts who have unpacked the announcement suggest that the national government’s actual increase in spending through these new proposals will be much less than 1% of GDP. In a nutshell, there is still not enough in the package to tide the economy over the lockdown and a gradual reopening.
Interestingly, the crisis has also been used as an opportunity to announce some needed reforms, particularly with respect to the management of food supplies and the conduct of domestic trade in agricultural commodities. It will be interesting to see how effectively these changes are implemented. Other reform measures are a mixed bag—opening up coal mining to private operators does not seem particularly relevant to the current situation; other privatisations at this time run the risk of being distress sales; liberalisation of FDI in defence production also seems orthogonal to the crisis and downturn, and so on. Most importantly, these are medium and long-term measures that are not germane to India’s immediate economic challenges.
None of the above should be surprising. The current government has not developed a coherent approach to implementing structural economic reforms. Of course, these are always difficult to accomplish, and previous governments have also struggled. But, the more recent tendency in the national government has favoured rhetoric over analytical rigour, and politics over economics. The exhortation for self-reliance tacked on to the newest policy proposals also fits into this mould.
Certainly, the pandemic will cause structural shifts in the global economy, but these will require carefully crafted and strategic policy responses, not slogans. India’s economic future, judging from the past two months, maybe bumpy, and more so than it needs to be.
The author is Professor of Economics, University of California, Santa Cruz. Views are personal