The world has never seen anything like this in recent times. The SARS-Cov-2 virus, which has brought the world to its knees, is perhaps the biggest global crisis since World War 2.
On March 24, at 8 pm, Prime Minister Modi announced a three-week lockdown, with just four hours notice. The media is full of stories of the untold misery this has heaped upon migrant workers across the nation, who had to scramble to get back to their native villages by any means possible, often walking hundreds of kilometres, in the absence of any form of transport. The Centre had to act fast based on the medical advice it was getting. It probably felt that any delay in lockdown would have proved fatal to the nation. In all fairness it is perhaps impossible to plan for a lockdown for a densely populated nation like India where “social distancing” is simply not an option for the vast majority of people.
The economic costs of the Covid-19 crisis are already visible, both at the global and national levels. Most rating and multilateral agencies have predicted a massive dip in GDP growth for India. SBI EcoWrap and UBS have forecast GDP growth for India for FY 21 to plummet to 2.6 per cent and 2.5 per cent respectively.
SBI EcoWrap has forecast the income loss due to the current lockdown at ₹1.77-lakh crore and loss in capital income at ₹1.69-lakh crore.
There is a vast difference between the present situation and the global financial crisis that hit the world in 2008. When the Lehman Bros induced crash happened in 2008, the Indian economy was on far stronger footing. In fact, the year 2008 was preceded by many years of 8 per cent plus robust GDP growth. So a massive stimulus could see us through then. Of course India had to live with some of the consequences of the stimulus — runaway inflation, widening current account deficit.
But now the situation is vastly different. The Indian economy was spluttering even before the Covid19 crisis hit us. Aggregate demand was weak, manufacturing was tepid and so were private investments. Coupled with this were the massive problems in the financial sector — bank NPAs and the NBFC crisis. The GDP growth, even by CSO estimates, had touched a 17-year low.
To combat the current crisis, Finance Minister Nirmala Sitharaman unveiled a ₹1.7-lakh crore package for the economy. The RBI too did its bit by cutting policy rates by 75 basis points and injecting more liquidity into the system.
But many commentators feel the Finance Minister’s ₹1.7-lakh crore package is too “niggardly”. This is merely 1 per cent of India’s GDP. In contrast, the US has unveiled a package which is close to 10 per cent of its GDP.
Most economists and commentators, ranging from across the political spectrum, were critical of the Finance Minister’s plan and called for a much bigger economic package. Most agree that this is not the time to worry about the fiscal deficit.
Many economists and civil society activists have called for a direct cash transfer of ₹7,000 for the next three months for the bottom most 80 per cent of the population. On the food front the silver lining is that the stocks lying with the FCI (at close to 60 million tonnes) are at least two-and-a-half times higher than the 21-million tonnes prescribed limits for buffer stocks. But the challenge now is to transport this to the needy in this hour of crisis.
The costs of casting aside fiscal rectitude for now are many — runaway inflation, falling rupee, flight of capital, a balance of payment problems, higher borrowing costs and a ratings downgrade. But the crisis on hand is so severe that loosening the purse strings, at least for this fiscal year, may be necessary.
The sectors hardest hit by the Covid-19 crisis are aviation, hospitality, tourism and commodities. The small and MSME manufacturing sectors, already under pressure, are going to be impacted more severely.
The sheer unpredictability of the virus’ spread is also confounding matters. There is little doubt that the world economy is hurtling towards a recession. The challenge is to prevent this recession from becoming a full-blown depression. That will crucially hinge on how soon nations across the world can “flatten” the curve of the virus.
There is already good news on this front from China, South Korea and Japan. The markets, both at the global level and in India, posted smart gains on Tuesday’s news that the situation in the US may not be as bad as feared.
Hope is a good thing to hold on to in these desperate times.