After imposing a unilateral lockdown without practising cooperative federalism and that too with just four hours notice, Prime Minister Narendra Modi faces a tough Hobson’s choice as the lockdown versus lives binary crossed a flashpoint from May 18t — the end of Lockdown 3.0. He announced Lockdown 4.0 but with a promise of a substantial reduction in restrictions and a whopping Rs 20 lakh crore fiscal package to be announced in a phased manner. So far, the latter has flattered to deceive, with the real cash transfers amounting to roasted peanuts. The government has belatedly woken up to the naked truth: India is failing both the medical emergency test and self-destructing by creating an economic washout.
Since March 25, when the national curfew commenced, the number of infected cases has risen from 560 to 100,000 (crossing China in the process) with over 3,000 dead. This government has so far proved disastrous. Given the pernicious. This government has so far proved disastrous. Given the pernicious nature of COVID-19 (a second wave seems to be occurring in South Korea and Germany), it is futile to engage in the puerile debate about whether India has triumphed or is losing the fight against the diabolical pathogen. It is early days, the final scorecard will be only known when a vaccine arrives and we look back at hard data. However, two facts are irrefutable: Human suffering has reached disconcerting levels and the Indian economy is in a free fall.
This may be a good time for the government to recalibrate its COVID-19 strategy. Instead of investing its entire state capital behind a slippery unknown, it should prioritise the known devils in its backyard. In imposing back-to-back rigorous lockdowns, the government was placing all its eggs in the lockdown basket. This has clearly boomeranged. What then should be the way out during Lockdown 4.0?
First, one should recognise that the RAG model ( Red, Amber and Green ) has inherent limitations because the economy is interconnected. If Mumbai, Delhi, Pune, Ahmedabad, Bengaluru and Chennai are in the red zone with negligible economic activity, even if the rest of the country were in the green zone, it will be preposterous to assume India’s GDP will rebound. Production is a complex process and intermediate goods may have several supply vendors scattered all over the country. For instance, 32 per cent of overall tax collections come from Mumbai alone. There is thus only one option: Radically decontrol by removing all proscriptions and let business recommence. Of course, the usual safeguards on masks, sanitisers, social distancing and Section 144 will need to be strictly adhered to. Micro-targeting of hotspots in a red zone with quarantine is recommended as opposed to a blanket ban which has proved counterproductive. An aggressive public awareness campaign must be sustained. We should be prepared for a sudden spike in cases, but that could be temporary, as people realise the concomitant risk of being in the public space all over again. Over a 14-day cycle, a discernible trend will establish the cost-benefit of the lives versus livelihood argument. In economics, a fundamental assumption of microeconomic theory is that human beings are rational. The government must trust the fact that no one wishes to be on the ventilator and that self-preservation will be the primordial obsession for every individual. Policies can always be revised later. But we should not be alarmists.
Second, the government’s financial rescue package must prioritise expenditure expectations on medical infrastructure, direct cash transfers to the poor, agricultural labour and cash-in-hand to the luckless migrants, middle-class relief on unemployment allowance, EMI moratoriums, substantial credit and liabilities relief to the bleeding MSME sector, among others. Extraordinary situations demand extraordinary solutions. It can take a leaf from the UPA’s playbook during the global financial crisis of 2008. As the mortgage crisis plundered the world economy, India’s GDP fell from a staggering high of 9.3 per cent in 2007-08 to 6.7 per cent in 2008-09, even as inflation sky-rocketed from 4.7 per cent to 8.1 per cent. It was a double whammy. But the government did not panic. Instead, its fiscal and monetary stimulus which was countercyclical resulted in the GDP bouncing back to 8.6 per cent in 2009-10 and inflation was lower at 3.8 per cent as well. The key to the dramatic turnaround was the fiscal risk. The Centre’s fiscal deficit which was at an all-time low of 2.5 per cent in 2007-08 rose to 6 per cent in 2008-09. Economics is about trade-offs. Incidentally, the GDP bounce-back was not a one-off. In 2010-11, India’s GDP climbed even higher to 8.9 per cent. Several critics will point out that subsequently, the economy slowed. But the UPA faced terrible headwinds of a global slowdown, parliamentary gridlock, high oil prices and a coalition government. The current dispensation has greater headroom for tougher decisions.
Third, at some point, the government will have to bite the bullet on tax revenues to fund the fiscal deficit, along with government borrowing and monetizing debt. A fine balance is needed here. GST is a regressive tax. The government must not choose this lazy, inelastic source of revenue as it will pauperise the middle-class and the poor further, other than on luxury goods. Clearly, the tax write-offs to the corporate sector of Rs 1,45,000 crore in the last fiscal year was thoughtless in an aggregate demand-starved economy. But direct tax is the government’s only alternative, including wealth tax, inheritance tax, progressive taxation of the super-elites, and cutting back on wasteful non-plan expenditure. In a bear stock-market, public divestments may not give commensurate returns and monetising of government real estate assets will also be under-valued. There is little elbow room.
Lastly, the NDA needs to formulate a National Exit Plan. Its strategy of letting the lockdown unravel district by district, through official commandments called guidelines, appears thoughtless. The granular opening flexibility that the chief ministers are demanding will lead to more confusion than resolution. For example, for the economy to kickstart, inter-state movement of goods and services has to be on a National E-Pass that has to be honoured by all states. Without interstate movement, the economy will remain sub-optimal with low productivity as incremental steps would create bottlenecks. India also needs to learn from the Sikkim model on handling COVID-19 — both its caseload and deaths are at zero.
Ultimately, humility is better than hubris for governments, during crises in particular. The cardinal error in the central government’s strategy was that it had convinced itself that it could slay the virus in 21 days. Had it understood that with a diameter of 60 nanometers — or 60 billionths of a meter — the virus is different from the usual suspects this government picks on, India would have been in a better place.
It is said that in calm waters every ship has a great captain. The acid test for our political leadership begins now.
This article first appeared in the print edition on May 20, 2020 under the title ‘Humility over hubris’.
( Manish Tewari is MP, lawyer and former I & B Minister. Sanjay Jha is National Spokesperson of Congress).
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