COVID-19 pandemic | What can macro policymakers do?

Renu Kohli

Key features of the coronavirus shock are by now clear: it is global and domestic; a public health war fought chiefly through lockdowns and travel curbs everywhere; the magnitude, duration and severity of it is indeterminate and unforeseeable for now, casting high uncertainty about its economic fallout that is nonetheless devastating; and that it strikes in a weak, vulnerable economic context within India and overseas. Sufficient to sharpen policy knives, if not already, and keep ready for deployment. What can macro policymakers do?

Lockdowns mean downturns. These are unparalleled and simultaneous in this instance, ranging from plant shutdowns, production halts, stoppage of supply chains, airlines, travel, tourism combined with a demand side jolt to services and consumer spending. The lockdowns are compelled, enforced and self-imposed. There is no other choice.

The lockdown pandemic response has brutal economic costs: it has raised the spectre of defaults, bankruptcies, closures, retrenchments and layoffs, driving in the reality of a severe recession, the depth of which is unimaginable and difficult to assess at this point. That this is devastating, however, is visible in large-scale liquidation of assets by investors, chaotic markets and lack of sufficient faith in policy interventions. Simultaneous monetary, liquidity and dollar swap lines from the US Fed, ECB, and other central banks were unable to stabilise or assuredly address the recession fears.

These policy efforts underlined the greater relevance and role for fiscal interventions. The Covid-19 stimuli have come in fast the last few days: The US announced a $1 trillion plan to help consumers and businesses, extending from state loan guarantees to cash handouts. France announced €45 billion of crisis spending, setting aside fiscal rules after Italy; the UK unveiled a £330bn bailout; more countries will follow. The planned crisis spending could be scaled up once the full extent of output losses is known. Besides, the US Federal Reserve will also lend against stocks and bonds; the ECB has launched a €750bn bond-buying programme.

India is currently in immediate response mode to manage the pandemic through pre-emptive lockdowns, closures, quarantines and social distancing advice. In the last few weeks, the government cancelled many flights and visas, imposed travel bans, steadily extending coverage to full stops in some cases. As it lags the global infection chain, these measures will intensify and will be retained until there’s certainty the pandemic has peaked, is ebbing; this time horizon is not known.

The RBI has responded with forex swaps, long-term repo and open market operations to maintain liquidity and smooth functioning of financial and credit markets, stabilise these and to impart confidence. For now, it has withheld rate cut, most likely to avoid exacerbating the sudden, unabated reversal of capital but will no doubt respond with monetary easing at suitable time, for which there’s space.

Beyond these, the RBI should activate assessments of expected repayment delays and/or defaults, engage with banks to plan deferment/extension of repayment schedules, rework loan contracts where required. These measures must be specific, targeted, with clear rules to exclude moral hazard risks. More such initiatives, e.g. temporary relaxation of loan margins, regulatory relief, etc. can be anticipated, readied for rollout.

Fiscal intervention is needed. There is a strong case for corona stimulus, or rather relieve the economic pain inflicted by pandemic lockdowns. The government has a moral and practical duty to help firms, businesses, and workers affected by these measures.

In a national address on March 19, the Prime Minister announced that a COVID-19 economic task force is to be set up to study the virus shock impact; this will engage with stakeholders for feedback to take decisions, ensure implementation of the steps to be taken. This is welcome.

However it falls short on two counts. One, a pandemic crisis response led by enforcing lockdowns and imposing self-distancing has to be equally and simultaneously led on the economic side by assuring help and intervention, i.e. a general pledge the government would do its utmost to alleviate the brutal economic pain inflicted by the crisis — a war-like situation, to which the Covid-19 crisis was compared — was necessary.

Two, the task force’s establishment and impact assessment appears lagging and delayed in the light that lockdowns in airline, travel and tourism sectors were imposed at least more than one fortnight ago; coverage was, and is being rapidly extended throughout. Such a standstill in economic activities, at this scale, did not happen in 2008, when India’s economy was much stronger, less vulnerable; the coronavirus shock exceeds that manifolds. The PM or the government has acknowledged hardships imposed upon the middle, lower-middle and poorer classes. Business and high income groups have been urged to safeguard interests of their service providers. However, a commitment on overall relief was missing.

In this, announcing the quantum or precise amount of crisis spending wouldn’t matter. An exceptional assurance of help in an exceptional situation would have made a lot of difference.

It is true the fiscal situation is bad. This will further worsen. Questions about resources, fiscal space and difficult choices will no doubt surface. These will have to be addressed, but later.

Renu Kohli is a New Delhi-based macroeconomist. Views are personal.