COVID-19 has put an adverse impact on the global economy. While we can hope the pandemic will be controlled in some time, the resultant economic slowdown may take longer to recover. Countries have been rushing to contain the negative economic fallout by announcing stimulus packages. The UK announced one aggregating to 20% of its FY19 GDP, while the US announced a $2-trillion package (10% of its GDP). This seems to suggest most countries are prepared to disregard conventional public finance principles of limiting fiscal deficit to manageable levels, at least for the time being. While the quantum of financial support varies across countries, the interventions proposed are largely similar.
Most countries have prioritised medical response to the pandemic through (1) funding to set up dedicated COVID-19 treatment facilities; (2) co-opting existing private healthcare providers for testing, treatment; (3) scaling up domestic production of sanitisers, ventilators often going beyond available capacities by leveraging capacity of companies in adjoining sectors (alcoholic beverage firms producing sanitisers, ventilators manufactured by auto companies). Countries have reduced duty on imported components for testing kits, ventilators, etc, to enable quick ramp-up of production. Support has been extended to R&D, innovation initiatives to identify alternate cost-effective technologies to produce such items by extending grants to academic institutions, start-ups, etc, and streamlining the regulatory approval process to reduce the time from laboratory to market. The results have been visible, with a number of academic/medical institutions and start-ups coming up with cost-effective sanitisers, testing kits, disinfectants for reuse of N-95 face masks, 3D-printed ventilators, etc, across countries.
On the economic front, countries have been focusing on increasing liquidity in the banking and financial system by reducing repo rates and allowing reduction in cash as well as statutory liquidity reserves to be maintained by banks. The US, the UK, India and China announced cuts in repo rates ranging from 0.5%-1.25% per annum. Banks are using additional liquidity to postpone interest, principal repayments from existing borrowers. The US, the UK, Australia and the EU set up lines of credit for banks to scale up lending to corporates, particularly MSMEs, to enable them tide over cash deficits. Countries including India have deferred dates for statutory payments like direct and indirect taxes to minimise immediate cash requirements for businesses.
Most countries, in addition to issuing advisories to businesses not to retrench their workforce during the lockdown and the subsequent downturn, have introduced measures for incentivising businesses to retain their employees by supporting them in making social security payments or even salaries. India, for example, announced that the government would pay both the employers’ and employees’ PF contributions for enterprises below a threshold size for three months. Canada announced 10% wage subsidy to be paid to small businesses for three months. Most governments have tweaked existing social protection schemes to compensate the workforce for periods of absence during the lockdown or on account of sick leave and extend medical insurance coverage to patients for treatment of COVID-19.
To make more money available in the hands of economically-vulnerable sections of society, many countries have announced cash transfers. India has announced direct cash transfers to farmers and agriculture workers, widows, pensioners and other economically-vulnerable sections, as well as increase in daily wage rates for rural asset-creation programmes. The US and Canada have announced basic income support to economically-vulnerable citizens through higher tax credits, increase in child care support, etc.
What we are seeing are initial measures by governments to combat the immediate economic downturn. As countries manage to control the outbreak and disease incidence dips, one can definitely expect a further set of measures targeted at economic recovery, followed by inclusive and sustainable growth. The depth and incisiveness of these measures are expected to go a long way in deciding where the country would feature in the post-COVID-19 economic pecking order.
The author is Partner & leader, Government & Public Services, Deloitte India