Economic Policy: India’s biggest challenge in time of Coronavirus

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Published: April 4, 2020 4:15:58 AM

Despite the health impacts of the corona-crisis, the biggest challenge for India will be in terms of economic policy.

A deserted look of a flyover in Kolkata, West Bengal

Since the nationwide lockdown on March 24, various branches of the Indian government have issued dozens of notifications to clarify the scope of the lockdown, develop the health system’s response, and support the real economy and the financial system. These are illustrations of the strength of the Indian ruling elite. It remains to be seen how well these pieces of paper and digital documents translate into effective action. In the United States, projections of the death toll from the pandemic are drawing comparisons with that country’s past wars. The nature of the societal response that is needed has also used war as an analogy for the effort to overcome the virus. Independent India has not faced a crisis like this in its seven plus decades, with large-scale war and famine being legacies of the colonial period. Independent India faces its biggest challenge ever.

Everyone recognises that the healthcare system will be the first line of defence against the pandemic, and that India’s resources are lacking. Even advanced countries like the US and Italy have been seeing their healthcare systems come under enormous strains. India will need a range of equipment for those on the frontlines, and will have to go beyond domestic production to get what it needs. It remains to be seen whether the bureaucracy can be flexible enough to search globally for what is needed. This will apply to healthcare professionals as well as supplies and equipment, and may require domestic reallocations as well as looking abroad. Eleven “Empowered Groups” have been constituted, covering different dimensions of the needed responses. How well they work will have to be seen. Again, the US provides an example of weakness and failure at the federal level, in sharing equipment and supplies across states from national stockpiles, and in failing to coordinate and prioritise support for the worst hit states. Will the different Empowered Groups coordinate well, and how will they implement what needs to be done?

Beyond the frontline of care for the stricken, testing, contact tracing, and more complex aspects of societal management require on-ground engagement that will be a challenge for lower levels of government. One has already seen better responses from police forces in southern states, which have higher literacy and stronger civil society in general, versus northern ones, including well-off areas such as the National Capital Territory. The challenges will be even greater in rural areas, and one cannot help but wonder whether the manner in which the lockdown was implemented, leading to a hasty and painful dispersion of migrant workers to their home villages, will still end up making it more difficult to track, isolate, and treat disease cases.

Despite the critical nature and human consequences of frontline healthcare and public health interventions, perhaps the biggest challenge for India will be in terms of economic policy. In a situation unprecedented since the Great Depression, it is difficult to estimate exactly what ought to be done. But, observing what is being done in the US, it seems that India needs to do more than it has so far, even though much has been announced in terms of new measures since the lockdown was announced. My own opinion is that RBI should provide even more support for financial markets, and for the finances of financial and non-financial firms. It should consider another interest rate cut as well. Even more importantly, the central government should be pumping more money into the economy, both in the form of transfers, and by supporting aggregate production and investment. In the current situation, it seems to me that all fiscal deficit targets are irrelevant in the short run. The government should borrow what it needs, and RBI should make this possible. Control of the health crisis at the expense of a prolonged downturn in the economy, well beyond what was already being experienced, will substitute one form of suffering for another.

Of course, there will be concerns about inflation, but the collapse in the price of oil will help enormously. Another major source of inflation is food prices, and the government should be focusing very heavily on maintaining, and even improving, food supply chains, and enlisting the help of state governments to ensure that agricultural commodities move freely across the country. This will also mean rolling back some of the lockdown on transport systems—that complete shutdown was one of the worst aspects of the lockdown as initially announced. The government should also release food grains from its stocks, and import food if necessary, to make sure that food supplies are sufficient. Another concern about government spending is that it may crowd out private spending, especially investment, but that is unlikely to be an issue for the next year.

It is unfortunate that the crisis will put on hold important economic reforms such as disinvestment, and cleaning up balance sheets of the financial sector and nonfinancial corporations. Certainly, a massive stimulus will allow some scoundrels to benefit, or to escape the consequences of past misdeeds or incompetence. But, that is an unavoidable side effect of avoiding a major economic collapse. Side effects should not distract from what is immediately necessary for preserving the livelihoods of the masses.

(The author is Professor of Economics, University of California, Santa Cruz. Views are personal)

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