Plotting a recovery: How India can handle a major crisis on its hands – Analysis

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July 28, 2020 7:00 AM

Digital infrastructure will be vital for future growth in India’s software exports, especially as international labour mobility is stunted

India needs to deal urgently with its deficiencies in domestic transport systems.

The Covid-19 pandemic could not have come at a worse time for India. The economy was already in poor shape, especially in terms of the balance sheets of the private sector. The fiscal position of the government was also deteriorating. In tandem, economic growth was slowing to the extent that it was making both problems worse, hampering the ability of the private sector to climb out of its hole, along with reducing government tax revenues and squeezing needed public investment. India now has a potentially major crisis on its hands. The situation can be handled with denial and repression, or with acknowledgement, analysis and focused actions. Here are a few ideas for the second of these routes.

First, the pandemic is far from under control and still threatens to explode disastrously. Furthermore, we may be entering an era in which such pandemics happen more frequently, as humans continue to impinge on the rest of the animal kingdom as well as crowding each other more. New investments in public health are vital, including training of personnel at all levels (not just doctors), as well as facilities and equipment. Private health care systems are not designed to deal with public health problems where contagion is a fundamental issue. This is entirely separate from all the inequality and basic rights issues associated with the lack of affordability of health care. The direct investments required here are not very large relative to GDP, and their rate of return in terms of insuring against massive disruptions of economic activity has to be very large.

Investments in public health also extend to sanitation. The recent national emphasis on building public toilets was welcome but overly narrow. There has to be a massive increase in investment in supplying clean water for drinking and washing, and in treating wastewater. India is remarkably backward in this respect. Achieving this objective will require getting money to states and cities because that is where the design and implementation of water supply and waste systems have to occur. These are quintessential public goods, and there does not seem to be much room for private investment, but multilateral agencies can provide project funds. Allowing states and cities to issue bonds more easily, and to raise repayment funds through taxes and user charges more freely, will allow some access to private capital. All of this has been done in small localised cases, but it needs to be stepped up on a massive scale to give people the first line of defence against contagious diseases, of which Covid-19 is only one.

Second, India needs to deal urgently with its deficiencies in domestic transport systems. Airports and airlines will be able to adjust relatively quickly to the new requirements of a world in the shadow of pandemics— the investments required can easily be passed on to relatively well-off customers. In cities, the rich will be safe in their air-conditioned automobiles. But the railways and urban and inter-city bus systems will require massive investments to upgrade their equipment and facilities, including railway and bus stations, and trains and buses, along with processes for better hygiene and sanitation. Again, the economics will have to tackled somehow. Perhaps the most urgent and important need is in the railways, where corporatisation can be a major step toward modernisation, as Rakesh Mohan has argued cogently on many occasions. Indeed, investment in the railways will be vital for economic recovery in the case of moving freight, even more so than passengers. As India will face a much more challenging environment for international trade, doing everything it can to promote the safe and efficient movement of goods within its borders will provide an alternative avenue for growth.

Third, India’s digital infrastructure is far from adequate for a post-pandemic world. Some of the shifts to using virtual interactions will become permanent, and, as noted, there can be future disruptions of this nature. India’s schools, colleges and businesses all need access to much better digital infrastructure. To some extent, the smartphone revolution created a false sense of accomplishment—that channel and its underlying infrastructure could support significant new levels of communication, but nothing like what is required for a 21st-century economy. Here, there are challenges of making sure that there is adequate competition: dominance by a single private player, however efficient, will not be ideal, even if better than earlier dominance by inefficient public monopolies. Digital infrastructure will also be vital for future growth in India’s software exports, especially as international labour mobility is stunted.

Finally, one has to tackle the pre-existing condition of underlying financial problems. RBI and the government must do more to keep small and medium enterprises afloat, in whatever way is needed. These firms are hurting the most, and they will have a harder time recovering, especially if they collapse completely. Negative impacts on employment will especially manifest here. Short term support has to be combined with rapid regulatory innovation to improve financing mechanisms for these firms. Corporations also need attention. They are receiving forbearance in cases where they are candidates for bankruptcy, but, rather than simply ignoring their problems, it is better to step up restructuring so that recovery can be more rapid. An overhang of bad debt that is unrecognised and unresolved will kill any recovery for a long time.

The author is a Professor of Economics, University of California, Santa Cruz

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