A holistic and all-out coordinated response to Covid-19 in India is a must

Sachchidanand Shukla

The world continues to grapple with the coronavirus pandemic as it wreaks havoc on societies and economies. The OECD Economic Outlook Interim report projects annual global GDP growth for 2020 to drop by half a percentage point to 2.4% due to the pandemic. It says a longer lasting and more intense outbreak could slow global growth significantly to 1.5%.

UNCTAD avers that the impact of the coronavirus in China has cost global value chains USD 50 billion in exports and also estimates that FDI could shrink by 5-15%. The IMF & the ADB too peg the impact at around 0.4-0.5% for Global GDP growth. The question therefore is what can the policymakers do to contain the impact in India?

Nature of the problem: Given the nature of the pandemic, the outbreak may spread across geographies sporadically and hence the best and most ideal policy response is prevention or containment. But that, by definition, will hurt economic activity and will result in a deeper freeze in economic activity. While demand for durables etc can be postponed, the demand for services such as travel and leisure etc will be extinguished and will be a permanent loss in terms of income & consumption. The spread of the virus might cause a demand slump, precipitate a supply-demand doom loop and push the global economy in a recession. So what should the policy response be?

Monetary Response: Can a rate cut by RBI cure a virus infection or contain its spread? Twenty-one central banks have already cut rates while the ECB announced measures to support bank lending and expand asset purchases earlier this month. The US Federal Reserve cut policy rates again in an out-of-turn meeting three days ahead of its scheduled meet. It slashed rates by 100bps to 0-0.25% and launched a US$700bn Quantitative Easing (QE) Program. These moves came after a 50bps cut last week and announcements of injections of over US$1tn into short-term funding markets. As many as 17 central bank meetings are scheduled during the current week and there could be more rate cuts.

• Interest rate & liquidity: The fact is that monetary easing by central banks will not push up economic activity in the short term. The idea is to help ease credit conditions and tightening of liquidity that may happen due to rising risk aversion and try to contain the damage pre-emptively. Thus, monetary response will have to be the first line of defence and a 50 bps Repo rate cut from the RBI along with its commitment to provide INR as well as USD liquidity to the needy will soothe frayed nerves and boost the financial immunity of businesses and sectors even if transmission has thus far been poor. Also, synchronized actions across countries increase the power of monetary policy.
• Supervisory: The RBI and other regulators should also step up supervision and monitor developments at banks, sectors and companies very closely. Banks should be allowed to consider a temporary restructuring of loan terms for the most-affected borrowers.

Fiscal Response: An outbreak such as this isn’t caused by just the lack of spending money, but also more due to lack of ‘’willingness to spend money’’ on things that increase the risk to economic activity.  Consumption will suffer as people stay home or production will get hit due to supply of workers or inputs. But note that the Indian economy is highly informal and there are huge income disparities and income and consumption will get hurt more for the informal sector. It is here that fiscal policy has a greater role to play despite having limited fiscal firepower.

• More money into pockets: Thus, leaving some money behind in pockets can provide succour. For example, slashing of fuel prices can help put some money in middle class pockets.
• Wage/ healthcare subsidies: Offer free diagnostic and curative services for those who are sick or are on leave due to compulsory or self-quarantine.
• Enhance transfers— The government could enhance and expedite transfers and cover, especially for vulnerable groups and households.
• Sectoral: There can also be a targeted sectoral incentives/ tax breaks/ deferrals for directly affected sectors especially the services sectors such as aviation, retail or leisure sectors. The government can allow a temporary deferral of social security (pension/ health) contributions for firms.

State government: Given that health is a state subject, the role of state governments will be important. A coordinated policy effort by way of communication, quarantine and treatment is a must to contain the adverse impact of this pandemic. A central body comprising central and state officials to coordinate and disseminate best practices will also go a long way in minimising the economic damage.

The government and businesses must brace for a longer and steeper pandemic-triggered hit than the single-quarter event as expected earlier. Hence the policy response must be holistic, swift and forceful to overcome the coronavirus and mitigate its economic impact.

(The author is Chief Economist, Mahindra Group. Views are personal)