Imagine in the midst of the Cuban missile crisis (that almost pushed the US and Soviet Union into a nuclear confrontation) there was an outbreak of the Spanish flu and the US was still on the gold standard. The current crisis needs to be appreciated by India similarly. It requires a medical cure to kill the fear, effective economic actions and sophisticated geopolitical navigation. We all recognise that until an anti-viral is found, there will be fear, and life will return to normal only after a vaccine is available at scale.
The virus currently has many more unknowns than knowns. We don’t know for sure how it spreads, whether people can get re-infected, whether it is mutating, whether the hot weather kills it, and what the real fatality rate is. We don’t know for sure how far we are from an anti-viral. We know, however, that we are at least 18 months away from having a vaccine that works and is available at scale. Till an anti-viral is found, economic activity will be constrained, and this will affect people, industries and countries in disparate ways.
The global economy is set to lose close to ten trillion dollars because of the “self-induced coma” it has been put into — to use Paul Krugman’s evocative phrase. The preceding global financial crisis (GFC) has exhausted the efficacy of monetary tools. In addition, corporates globally are leveraged to the tune of $12 trillion. The accompanying oil price collapse (beginning due to a spat between producers Saudi Arabia and Russia) has been compounded by a precipitous slump in demand. The Chinese economy can’t help as it did during the GFC, as it is hemmed in itself. Even if it could, there is too much global suspicion of China to allow it to do so. So, countries will largely be on their own.
The tensions between the US and China have escalated into a full-scale superpower crisis after the virus spread. Since 2010, there has been great concern in the US about China’s rise. China’s muscular foreign policy together with its aggressive stance on multiple issues, most importantly on technology and technology standards, has created conflict. The rhetoric, now, is likely to be a polarising one with the coronavirus spreading in the US in an election year, smashing its economy, infecting over three-quarter of a million people in the country and killing more than 40,000 — China could be seen as enemy number one in the US.
No wonder then that at a time when the world yearns for global coordination, there is almost none — in healthcare responses (lockdown to guided restrictions) and economic coordination (from 1 to 18 per cent of GDP responses). Multilateral agencies, especially the WHO and UN, suffer a complete loss of credibility. India needs to chart its own course in these turbulent times. My belief is that if India takes the requisite actions it may come out well, belying the predictions of the Cassandras.
We need to act at three levels — health, economic and geopolitical. The Union Ministry of Health and Family Welfare has done well to stem the spread of the infection. It has used Indian jugaad in deploying the country’s modest healthcare resources efficiently to deal with the pandemic. It has sensitised the public, introduced the concept of social distancing and isolation in the most challenging situations. Now it must test at scale and isolate. But Indians cannot afford to stay locked much longer. We are too poor and too many of us live on a day-to-day basis — not even on a paycheck to paycheck basis. We are hardy, young and understand self-preservation, and will learn to cope. Economic activity will be subdued in the near-term, but it must be “unlocked”.
The current IMF projections suggest that India will have the highest growth rate in the world this year. I believe they are right if we act. Oil prices have collapsed, really helping our balance of payments. Our food stocks are plentiful, the rabi crop has been good, and the prognosis for the monsoon is positive. This, together with the fact that aggregate demand is down, will dampen inflationary impulses. The “new RBI” has acted boldly and strongly. It has taken prompt actions to reduce rates, increase liquidity, adjust prudential norms, allow moratoriums, and protect financial entities. The weakened rupee will help our exports and with a debt to GDP ratio of about 73 per cent, along with better growth prospects, India is relatively better placed than several other countries. We should, therefore, not unduly worry about our credit rating. This both allows and actually requires the government to act on the fiscal front.
The government needs to implement the following four steps to spur the economy. It should do so by “printing money” given the moderated inflation impulses. It needs to provide additional direct benefit transfers of Rs 2,000 every month for three months to Jan Dhan accounts, together with foodgrains release from the FCI, to the tune of around Rs 65,000 crore, to alleviate people’s miseries. It needs to protect MSMEs directly by providing them working capital (with an RBI backstop) and, like in the UK, provide 80 per cent of the salary to employees of the “GST-paying MSMEs” for six months (if the employees were on their rolls in February). It needs to launch a massive public works programme (in the nature of the New Deal of FDR) outside the Budget as suggested by the chairman of CII’s National Committee of Infrastructure and PPP, Vinayak Chatterjee. This fund should be earmarked for infrastructure and a quarter of its budget should be set aside for strengthening and upgrading primary health centres. The allocation should not be less than Rs 200,000 crore.
The government should take advantage of the crisis to push through much needed pending reforms in agriculture (especially those pertaining to APMC), power (pricing and discoms), banks (government ownership at 30 per cent and bad banks). Given the paucity of tax revenues, the government should be willing to print money but it could also consider having the PM making an appeal for private gold from people and temples (no questions asked) — it could target 1,000 tonnes of gold worth $30 billion and offer a five per cent tax-free return repayable ($1.5 billion a year) after 10 years, in rupees or gold.
We can come out ahead if we act now. Super-power rivalries will create opportunities to replace China as a major supplier to the US and Japan. But first, we must survive. We can then re-imagine and thrive.
This article first appeared in the print edition on April 22 under the title “India can come out ahead”. The writer is chairman, BCG India.