Economy and Policies

COVID-19: Indian monetary and fiscal policy to tackle the economic crisis

The COVID-19 crisis brings a double whammy to the global economy. The shock can be parsed into two major components: a halt in production in affected countries, disrupting supply chains across the globe, and a steep fall in demand coupled with a collapse in consumer confidence. Stringent measures being put into action across the world to contain the virus, are shoving the economy into unprecedented doldrums, from which emergence will not be simple or automatic.

According to Worldometer data, the pandemic has affected 198 countries across 6 continents to date 26th March 2020, leading to a total of 471,820 health cases and 21,297 deaths. Before the pandemic broke out the entire global economy was in a recovery mode, leaving the worst of the US-China trade war behind. In early and mid-January of 2020, all the major indices of the stock-market were hitting an all-time high. Once the Coronavirus emerged and spread like a wildfire across the world, it has set the global economy in motion towards a deep-frozen state, and the world stock market seems to be “priced for perfection” with each of the major indices (SPX, DJI, FTSE, N225, etc.) slumped by more than 25% within a period of one month. Now it looks infeasible to contain the virus and recover the economy simultaneously because the mandatory measures to be taken in order to curtail the spread of the virus, can direct the economy only towards stagnation and long-lasting recession.

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The very first priority for the administration of any country should be to minimize the loss of life and health, but it should not overshadow the economic crisis of that country. Only co-ordination of the right monetary and fiscal measures rather than piecemeal actions will be able to meet the challenge.

The ways to combat the COVID-19 crisis won’t differ much for India from the rest of the world. The order for a 21-day nationwide lockdown came from the government of India at the very right time. Otherwise in the country with the highest population density in the world, the pandemic would have proliferated far more expeditiously than it did in the other countries.

The Indian economy has already been struggling through a state of serious hardship, where its GDP growth rate is 11-year low, private consumption expenditure is 7-year low, investment value is a 17-year low, manufacturing output value is 15-year low and agricultural output value is 4-year low. It has plummeted from 99th to 103rd position in the Global Hunger Index ranking, standing at 76th out of 82 in Social Mobility Index ranking and also dropped by 10 positions in the Democracy Index ranking.  Its financial markets have declined sharply as foreign portfolio investors pull their money out of India’s equity markets, weakening the rupee, despite $2 billion of forex-swaps by the RBI. We are not even in a situation to predict the post-COVID-19 catastrophe scenario. Now what India needs is coordinated action by RBI and the finance ministry, as well as by key agencies dealing with health, education, transportation and commerce, and state governments in a ‘whole of government’ framework. Moreover, India may need foreign collaboration at the initial stage to avail necessary medical supplies for the cure and quarantine facilities of the Coronavirus victims.

The traditional monetary policies with just reduction in the repo rate are not going to be fruitful in such a crisis. Even if we keep the COVID-19 factor apart, liquidity is not the only drawback in the market. The actual problem is very weak credit growth. It’s the ramification of India’s years old impaired financial system. Back to back bad loan cases (e.g. IL & FS, DHFL and now the one with YES Bank) are even diminishing the lenders’ confidence to lend money to the companies. The economy requires an attempt from the government for a holistic overhaul or clean-up of the financial system. The clean-up measures must include the cleanest possible balance sheet for every company and improvement in corporate governance. Unless the financial system is fixed all the rate cut attempts will be like pushing water through a broken pipeline. Along with this, the government should start with a 25 basis point cut in the repo rate in the upcoming MPC meeting to be held in April 2020; as a rise in the rate of inflation can be expected after such a long halt in production.

Both the RBI and the government should bring-out the big artillery while framing the policies. If needed it should go for unconventional policies such as “helicopter money”.

Due to the disruption in the global supply chain and the slump in consumer demand the certain sectors — pharma, auto, construction, tourism, etc. — are affected the most. RBI should also target those sectors for further regulatory forbearance to reduce the cost of doing business. These could be time-bound actions for 3-6 months. Next, come the small and medium-size industries. They are seeing a severe cash flow disruption during this crisis. More funding for MSMEs could also be considered by increasing the assets of Mudra Bank and other MSME-focused banks.

The sharp fall in global oil and gas prices is a silver lining in the overcast sky of the Indian economy. The government must utilize this golden opportunity to build strategic oil reserves, even if it needs external leverage for that. It will also help improve the Current Account Balance of India. It also shuts the window for the disinvestment of Oil companies such as BPCL, HPCL, etc.

On the fiscal side, the government should ensure that people (esp. the farmers, wage earners, and gig workers) have money to spend to meet their indispensable amenities during this lockdown period when they are not working. Public investment and healthcare spending must be increased for the unrestricted supply of masks, sanitizers, gloves and medical kits for health workers and sufficient availability of quarantine and ventilation facilities for the Coronavirus victims. The finance minister’s decision of allocating a package Rs. 1.7 Trillion to help of the poor and migrants in tackling the financial difficulties arising from the COVID-19 outbreak and the 21-day lockdown.

The government should reduce the accumulation of economic scar tissue in the following manner:

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Further tax simplification, especially of GST for MSMEs and exporters, could be accelerated. The tourism sector will need special attention. Lockdowns in China, and rapid testing and quarantine in South Korea, show that the spread of the disease can be controlled. As India has taken the necessary actions in a quite earlier stage, it is expected to contain the pandemic with comparatively less social and economic loss.

About the author

Nilanjan Poddar

Nilanjan Poddar

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