How the pandemic is shaping economic policies
India’s tryst with growth has been contested often fiercely and sometimes as a lamentable dirge by traditional economists, policymakers, academicians, and politicians alike. A picture representing relatively better figures is always available for the public to see because it disseminates negative feelings about the economy’s well-being. However, it skews the perception of policymakers themselves, and severely troubling long-standing issues stay that way with an added mismanagement of state administrations, which was exacerbated during the COVID-19 pandemic. The spillover effects of the lockdown on the economy have posed an important question: what percentage of GDP decline is due to the domestic impact of the virus on economic activity, and how much reflects spillovers and spillbacks from weaker economic conditions?
The pandemic’s economic consequences have proven to be acutely visible and have left every nation without an exact blueprint for a successful recovery. A severe breakdown in global supply was compounded by an abrupt fall in aggregate demand, followed by a plunge in both consumption and investment due to the lockdown and the increasing uncertainty of the pandemic itself. Governments have had to pick precariously between risking billions of human lives to keep the economy running and shutting down the economy that would, in turn, save lives increasing overall human welfare and productivity. Thus, every quarter of the past year shows drastic differences in trends across all sectors and communities.
Reliance on mainstream theories to back up policies has tumultuous consequences even under normal circumstances. None of the strictly monetary or strictly fiscal policy interventions have desirable results without a whole series of cascading debts to account for. The time gap for the policies to see effect globally is another layer added to recovery. Furthermore, this crisis has affected economies and social, psychological, and political norms that had gained comfortable supremacy for years. Throughout history, there have been numerous speculative economic bubbles and manias. Some were relatively isolated events that held limited or no broad economic ramifications, while others resulted in a full-blown financial crisis or marked the end of essential eras. The consequences of the most recent Financial Crisis of 2007–08 questioned economists, teachers, and policymakers’ credibility because of its most unpredictable nature. Until now, there is no single reason that all economists have agreed on for the crisis. Crises like these always pose questions about the credibility of Keynesian or neoclassical political-economic theories. Instead, these should sync with reality and act as pillars for governments to think and act prudently upon. Everyone is still learning as is so happening with the current pandemic as well.
For the USA, a deep contraction in Q2 reflected the impact of the containment measures that varied by state and geographical areas.A strong rebound followed with an annualised rate of growth of 33.1 percent. Fiscal interventions involved releasing particular funding bills for unemployment benefits, K-12 education, resources for vaccines, relaxing loan payments and clearing a CARES Act which was roughly 11 percent of the GDP. Monetary interventions included lowering the Federal funds Rate and creating facilities to support the flow of credit.
Spain is another country that was heavily affected by the COVID-19 outbreak. It has focused, instead, on areas impacting grassroots levels and catered to saving lives and improving overall welfare, rather than revamping economic conditions as a priority. Some of its fiscal measures to mitigate negative and deleterious effects were that of providing budgetary funds to the Ministry of Health and to regional health centers, additional spending for research related to COVID-19, the entitlement of unemployment benefits for workers temporarily laid off, temporary subsidies, tax incentives, moratoria of social security contributions for the self-employed and companies in selected industries and other such social contributions.
China, on the other hand, proceeded headfast into effective management of both saving lives and its economy. It extended the national Lunar New Year holiday, and imposed large-scale mobility restrictions at the national level, social distancing, and a 14-day quarantine period for returning migrant workers. These containment measures resulted in a contraction of 6.8 percent in Q1. Approximate 4.7 percent of the GDP was allotted to all sectors, and support outside the public sector budget was another 1 percent. Key monetary measures included a liquidity injection into the banking system via open market operations (reverse repos and medium-term lending facilities). The reserve requirement on FX forwards was reduced to zero and the country’s exchange rate was allowed to adjust flexibly. Thus there were measures to create substitutability across and within sectors, which is the need of the hour and enables the independent citizenry to survive.
Several models have since come up in economic literature for both developing and developed countries to outdo the pandemic’s impacts. The most common one being the DSGE Model, derived from New Keynesian theories developed by Celso J Costa Junior et al., attempts to answer some questions about the persistence of the supply side driven problem while also confronting the issue of aggregate demand, a possible shape of recovery, the limiting macroeconomic effects of a ZLB (Zero Lower Bound) and, finally, the possibilities of an unconventional monetary policy. They have also shown how the basic aggregate demand-supply model has led to a classic severe fallout in the absence of any policy intervention. A global Bayesian Vector Autoregression (BVAR) model with five major economic blocs: the United States, China, the euro area, “other advanced economies” (OAE), and “other EMEs” (OEM) developed by Emanuel Kohlscheen et al. sheds light on the multiplier effect of the lockdown, and the extent of developments in one economic region that will spillover to other regions. Other literature presents models taking in data from the Spanish flu epidemic and measuring countries’ recovery extent as the most hard-hit regions implemented intensive virus mitigation measures.
The Indian economy itself presents a myriad of opinions regarding its recovery process. While there are reports of a positive impact of fiscal policies, there is still considerable confusion about the nature of recovery itself. Two exact options are a V-shaped recovery quoted by the RBI and a K-shaped recovery as quoted by various think tanks and academicians. India’s fiscal support measures were divided into two broad categories:
(i) above-the-line measures, which included government spending (about 3.2 percent of GDP, of which about 2.2 percent of GDP is expected to fall in the current fiscal year), foregone or deferred revenues, and expedited spending; and
(ii) below-the-line measures designed to support businesses and shore up credit provision to several sectors (about 5.2 percent of GDP).
In the early stages of the pandemic response, above-the-line expenditure measures focused primarily on social protection and healthcare. These included in-kind (food; cooking gas) and cash transfers to lower-income households (1 percent of GDP); wage support and employment provision to low-wage workers (0.5 percent of GDP); insurance coverage for workers in the healthcare sector; and healthcare infrastructure (0.1 percent of GDP). The more recently announced measures in October and November included additional public investment (higher capital expenditure by the central government and interest-free loans to states of about 0.2 percent of GDP) and support schemes targeting specific sectors.
Since March 2020, the Reserve Bank of India (RBI) has reduced the repo and reverse repo rates by 115 and 155 basis points to 4.0 and 3.35 percent, respectively, and announced liquidity measures comprising Long Term Repo Operations, a cash reserve ratio cut of 100 bps, an increase in the marginal standing facility to 3 percent of the Statutory Liquidity Ratio, now extended till March 2021 and open market operations (including simultaneous purchases and sales of government securities), resulting in cumulative liquidity injections of 5.9 percent of GDP through to September. Earlier, the RBI introduced regulatory measures to promote credit flows to the retail sector and micro, small, and medium enterprises and provided regulatory forbearance on asset classification of loans to MSMEs and real estate developers (later extended to loans from NBFCs). On March 16, RBI announced a second FX swap (2 billion dollars, six months, auction-based) in addition to the previous one with equal volume and tenor. It announced OMOs of state government securities again on October 16. Foreign direct investment policy was adjusted, requiring that an entity of a country that shares a land border with India can invest only after receiving the government approval.
All this was made questionable due to the migrant crisis that escalated in the early days of the pandemic and herd-panic developing in Maharashtra and Kerala’s states. Some unruly political decisions leading to upheavals and protests also curbed the intended benefits of one of the lockdowns the country had implemented. But the country was facing an economic meltdown with burgeoning risks even before the lockdown was imposed. The RBI called it ‘a historical technical recession’. The World Bank and rating agencies had initially revised India’s growth for FY21 to the lowest figures India had seen in three decades since the economic liberalization in the 1990s. However, after the economic package announcement in mid-May, India’s GDP estimates were downgraded even more to negative figures, signaling a deep recession. Even though sector-wise trends show a gradual increase in Gross Value Added from Q1 to Q4 of 2019, the total GVA at Base Price has dropped due to lower contributions from all sectors from 2015 onwards. Inflation was at an all-time high of 7.89 percent in 2019. The RBI implemented inflation targeting in 2016 to manage the rate and approved the Output-gap model or the NAIRU Model as present in New Classical Macroeconomics. However, research shows that only the structuralist model can explain the awkward trend of inflation (especially the post-covid trends) over the past years.
Think tanks have since devised specific and targeted reports for taking the process forward with reduced side effects: redesigning the fiscal transfer system among states; special social protection-related programs; revamping the national health mission scheme and the public distribution system; providing interest-free loans; expanding employment guarantees; and a unique COVID-19 grant window. These policies must shape growth prospects while continuously accounting for local businesses and downtrodden workers. It is clear that the economy is deeply intertwined with political decisions at most levels, but that does leave a freeway of sorts for the public to take prudent decisions regarding their consumption and investment. Instead of opting to purchase from big-time retailers, small and local vendors can and must be supported. With a large part of productive work happening from homes digitally, the inaccessibility of the same services to impoverished and marginalized regions are bound to affect learning and employment opportunities profoundly. Thus the pandemic has shifted the scope of a government’s active role in managing a country during perilous times while also underlining the importance of the pillars of democracy: its wage-workers, educators, and household makers.
This calls for not just a revamp of state infrastructure but, firstly, acknowledging the inabilities and incapacities of mainstream economic understanding that focuses on production to be the only saving grace of an economy and which, time and time again, has let people down at large and made Greater Fools of entire nations. Real value, deep connection, and appreciation came about when the world witnessed healthcare workers and doctors risking their own lives and tending to patients with a disease nobody could see coming. This makes one appreciate Marx’s contribution to labour theories and feminist economists’ role in criticising the paradigm of equality across all levels of work. Even the company or the firm, which once stood for cooperation, structure, and discipline and which is still crucial to bringing about innovation, must be revitalised to serve its initial purpose.
It boils down to the customers being the job creators. The institution of media must foremostly tell the truth about its country, even if it means removing spray tans of orange hues to white because the first step of solving any problem always involves recognising there is one. As Mackensie McHale from the Newsroom said about reclaiming journalism, “civility, respect, and a return to what is important; the death of bitchiness; the death of gossip and voyeurism; speaking truth to stupid. No demographic sweet spot; a place where we all come together”. It is crucial that going ahead, we, all the pillars of a democracy, can collectively volunteer to devise policies surrounding communities’ welfare without having to trade off figurative growth. Instead of discrediting the logical pillars that classical economics have lent us, we can modify them to our times and needs, where imperfect market information persists, and economies take several years to return to equilibrium.
(Amrita is a graduate student of Economics at the University of Hyderabad and a member of REIN)
