America’s opioid crisis took off in 1995 after doctors and medical students were convinced about thinking of pain as the fifth vital sign (traditional signs were temperature, pulse, breathing rate, and blood pressure). Medical science now recognises the ignorance, danger, and short-termism of overprescribing pain killers. COVID creates massive economic pain but history suggests that today’s circumstances are when we should take the longue duree and heed historian Fernand Braudel’s warning against “fireflies and froth”. Policy presentism — a belief that today’s circumstances are unique, permanent, and unprecedented — is unhelpful and calmness is power. COVID will end, the last quarter was unique, and COVID has created a policy window for overdue reform.
The pain of COVID is real, unprecedented, and expected — GST shortfall of Rs 3 lakh crore, expected new bad loans of Rs 3 lakh crore, and a 25 per cent first quarter contraction of GDP. But is this surprising if the planet is taking a gap quarter or year? Modern economies are rivers, not lakes, customers pay salaries, not shareholders, and banks have powers to lend not spend. A lockdown that forces customers on strike will have pain but extrapolating this data will lead to noisy estimates like the unemployment number whiplash — 8 per cent to 28 per cent to 8 per cent within four months — that are microscopically precise but macroscopically incomplete.
The last quarter was unique and the short-term is unmodellable till we have answered three questions. Are we at the start, middle, or end of the virus? This matters because life will be tentative until companies and individuals know where we are. Will companies and individuals be frugal or hedonistic after the virus — that is, will they save for a rainy day or live for today? This matters because lower demand is fantastic for the environment but fatal for the economy (the paradox of thrift). Finally, do we have an effective solution for professions that can’t be done without social distancing until the vaccine arrives? This matters because the fastest-growing segments of India’s labour markets — sales, customer service, logistics, hospitality, and construction — are these professions. All policy can do in the short run is ensure that disease doesn’t lead to death, unemployment doesn’t lead to hunger, and working capital problems don’t lead to bankruptcy.
The long term is different: Our post-COVID, post-Trump, post-China, post-GST, and post US Federal Reserve economic strategy must recognise factors in our favour. The unassailable status and benefits of being a reserve currency embedded in the belief that “the dollar is our currency but your problem” are challenged by the US Federal Reserve exploding balance sheet, shifting of the goal post on monetary policy, and a US$ 3 trillion fiscal deficit. China has many strengths but its territorial arrogance may be premature; its credit to GDP is an unsustainable 300 per cent, many of its big companies are animals bred in captivity who will not survive in the jungle, and its domestic consumption is not sufficient to substitute for global trade. More importantly, China’s military overreach is unifying the region and creating coalitions and alliances that they will regret but India will enjoy.
Muted global growth means oil prices will remain low; this is a huge macroeconomic gift for a country like India with a birth defect — 1.3 billion people but almost no energy of our own. The global digitisation supercycle creates insatiable demand for software talent. Over the next few decades, most rich countries with their ageing populations, creaking health systems, and huge public debt will struggle to grow. But the global glut of capital — fixed income has become no income with 25 per cent of the world’s bonds trading at negative or zero interest rates — means investors. This forces investors to overprice growth. And because of our past sins, India is the only big country with decades of growth left.
This luck is something to be built on. The recent courage and ambition demonstrated in politics — Article 370, black money, Swachh Bharat, Ujjwala, etc — should now be replicated in economics. Our problem is not jobs but productivity. This needs compliance reform (taking an axe through our 67,000 compliances and 6,700 filings), labour law reform (China’s factory refugees will not come if our employment contract is marriage without divorce), banking reform (raising our credit to GDP ratio from 50 per cent to 100 per cent by licensing more banks and fixing existing ones), education reform (bring forward the Poorna Swaraj for universities and schools proposed by the wonderful new National Education Policy from 15 years to 5 years), ease-of-doing-business reforms (reduce the number of ministries from 52 to 15) and civil service reform (cut the number of people in Delhi with the rank of Secretary from 250+ to 50). COVID creates a policy window for change and Japan offers an important reminder of why a risk-averse bureaucracy must be sidestepped or overruled. Prime Minister Shinzo Abe’s great strategy — three arrows of fiscal, monetary, and structural action — is a tarnished legacy because he didn’t deal with the sabotage of the structural reform arrow by vested interests whose weapon was the civil service.
COVID’s economic pain is a passing shower, not climate change. The weather of the moment — the first quarter 25 per cent GDP contraction — has passed. The second-quarter contraction will be a fraction of 25 per cent because our labour market shock absorbers like agriculture and self-employment that keep us poor — but not hungry — are working. The third quarter will be different because factories are producing, migrant labour is returning, offices are opening, investors are investing, and entrepreneurs are reinventing. Let’s ignore the breathless demands for the government to borrow 10 lakh crore by stealing from our grandchildren. Let’s, instead, create climate change for our entrepreneurs, firms, and citizens with reforms that will give them economic Poorna Swaraj. And take our per capita income of $2,500 to $10,000 in five years. If not now, then when?
This article first appeared in the print edition on September 3, 2020 under the title ‘Wall with a window’. The writer is Chairman, Teamlease Services