These are extraordinarily difficult times for our nation and the world. People are gripped with the fear of disease and death from COVID-19. This fear is ubiquitous and transcends geography, religion and class. The inability of nations to control the spread of the novel coronavirus and the lack of a confirmed cure for the disease have exacerbated people’s concerns. Such a heightened sense of anxiety among people can cause tremendous upheavals in the functioning of societies. Consequently, disruption of the normal social order will inevitably impact livelihoods and the larger economy.
The Indian Short Story
The economic impact of COVID-19 has been much discussed. There is unanimity among economists that the global economy will experience one of its worst years in history. India is no exception and cannot buck the trend. While estimates vary, it is clear that, for the first time in many decades, India’s economy will contract significantly.
An event with deep impact
Economic contraction is not merely a GDP number for economists to analyse and debate. It means a reversal of many years of progress. A significant number among the weaker sections of our society may slip back into poverty, a rare occurrence for a developing nation. Many enterprises may shut down. An entire generation may be lost due to severe unemployment. A contracting economy can adversely impact our ability to feed and educate our children owing to a shortage of financial resources. The deleterious impact of an economic contraction is long and deep, especially on the poor.
On NREGA and cash support
There is extreme duress among India’s poor. At a time when agriculture activity has been robust, data show that just in the month of June, 62 million people demanded work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) programme at minimum wages. This is thrice the usual number and 10 times more than the total number employed by the entire listed corporate sector. It is evident that most of them are displaced non-agricultural workers, struggling to make ends meet. Such is the scale and enormity of despair in our labour force. Fortuitously, the MGNREGA programme has proved to be a bedrock of support in such times but it is not enough.
Look at the financial system
There is also a dire need to restore confidence in the financial system which acts as the vital lubricant for the economy. COVID-19 assistance measures undertaken by the Reserve Bank of India (RBI) and the government such as interest rate reductions, credit guarantee and liquidity enhancement schemes are welcome steps, but they have largely failed since banks are not confident of lending. Reviving the health of the banking sector is not merely about capital infusion or disinvestment of public sector banks. Allowing institutions such as the RBI, public sector banks, bankruptcy boards, securities and insurance regulators to function freely and professionally is the foundational step to restoring confidence in the financial system.
Government needs to borrow
India must make full use of loan programmes of international institutions such as the International Monetary Fund and the World Bank. Our long track record as an impeccable borrower with no default, timely repayments and full transparency make us an ideal borrower for these institutions. However, these will not suffice, and the government needs to borrow more.
Setting things right
It is important to enlarge one’s diagnosis of India’s economic woes from mere GDP numbers to the underlying sentiments of fear, uncertainty and insecurity prevalent in people, firms and institutions. Restoring confidence in people through direct cash assistance and other welfare programmes can help them live their lives and spend. Restoring confidence among bankers through autonomy of institutions and processes will help them lend. Restoring confidence among businesses with greater access to capital will help them invest and create jobs. Restoring confidence among international organisations by re-establishing the credibility of our institutions will help get funding assistance and objective sovereign ratings.
Without being lured into complacency over illusionary recovery of headline numbers, the path to India’s sustained economic revival is through the philosophical pursuits of improving confidence and sentiments of all in our society, using the economic tools of fiscal and monetary policies.