ExplainSpeaking: Options to unflatten the economic growth curve

Now, flattening the curve of Covid-19 infections comes with the flattening of the curve of economic activity. As many of you would have noticed, the lockdown has resulted in India’s GDP predictions plummeting from 6.5% to as low as zero in the current financial year; some even expect a contraction this year.

Last week, two events — one international and one national — provided a glimpse of the trade-off between physical and financial health that we all face.

The first was the historic decline of crude oil prices in the US as the May contracts of West Texas Intermediate touched the “minus $40 per barrel” level on April 20. The remarkable weakness in oil prices points to a demand destruction like none other in human history. Worse, it suggests that this weakness is likely to continue for a while.

The second event was closer home. One of the most well-known mutual funds, Franklin Templeton, shut down six of its funds blaming the Covid-19 disruption. Some believe this is a one-off event while others believe this portends poorly for investors. Indeed, who can be sure about the economy at this juncture?

Read | The big decision on the unlockdown, its scope and reach

But what of the response in India’s economic policymaking?

The most important development to look out for is the unveiling of another fiscal relief package by the central government.

Considering that the coronavirus crisis is likely to drag the economy down for at least several months now, it makes sense at one level for Finance Minister Nirmala Sitharaman to keep some of the powder dry for the future, and not try to simply spend her way out of the crisis.

Yet, on the other hand, the more the government allows the economic crisis to deepen, the more complicated and, indeed, costly will it get to unflatten the curve of economic growth.

So, from the economy’s standpoint, some of the key questions to watch out for this week are: Will there be a fiscal stimulus? If so, how big, and who will be the targeted beneficiaries? Will the super-rich be taxed more? Will there be an extended moratorium on dragging companies to the insolvency tribunals? And last but not the least: Will the government ask the RBI to monetise its deficit?

We’ll see.

Wishing you the best, and stay safe.

Udit