Policymakers’ hurried response may not lift growth.


The last fortnight has witnessed mayhem and panic, across the world. The coronavirus pandemic—which has taken over 11,000 lives in 140 countries—is showing no signs of abating soon. This has caused havoc in global equity markets, shuttered businesses worldwide and is likely to shave off anywhere between $5 trillion-$7 trillion in global GDP. All this requires policymakers to step in and announce confidence building measures and stimulus that will revive growth and provide some cushion during an economic crisis. Except that it may have a limited impact on soothing frayed nerves and lifting overall business sentiment and providing wider course correction for the economy. At least that seems to be the case so far.

The Narendra Modi government has not yet announced any specific economic measures, instead has promised that these will be done after due consideration by a task force set up under Finance Minister Nirmala Sitharaman. The big question that many including this author have been asking is, are we wasting precious time in responding to an economic crisis and should we expedite our response as some of the other governments have already done so? Consider this. The United States has announced a $1.2 trillion package even as some variations of the deal are still being debated by the Senate (the form in which the relief should be given is still unclear); the UK has announced a $39 billion relief; France has announced a $45 billion stimulus. The Justin Trudeau government has announced $56 billion for the Canadian economy and the South Korean government has announced a $10 billion relief measure. If all these steps are aimed at building confidence and boosting business then why are global markets still tanking? It is because most investors feel that policymakers have limited options in the present economic situation. Investors and businesses fear despite pumping massive amounts, government efforts may not be able to lift the economy significantly, given the unknowns that are involved.

And no, it is nothing like the 2008 financial crisis where central banks boosted demand by announcing easy money policies that led to a huge bull run lasting almost a decade. This time the problem has been compounded by a crisis on both demand and supply side. So it is not just that people don’t have money leading to no demand, there are also shuttered factories as well. So this is nothing like the previous economic crisis that the world has witnessed in recent decades and government responses may end up being varying degrees of hit and trial results.

None of this is to undermine the crucial role that stimulus packages play in acting as a booster dose for the economy. Instead, the point is at this stage no government or central bank knows how it has to be done or how long this present state would last. This is the exact reason why there is no consensus on whether the stimulus in US should be in the form of a payroll tax cut or a one-time cheque to every American up to a certain income or should there be more funds being pumped into the healthcare system since the coronavirus epidemic has further stretched an expensive and imperfect healthcare system.

Around the world, consumption has dropped drastically as people are staying indoors and purchasing less of everything. Likewise, due to unprecedented disruption in supply chains and less workforce coming out to work, companies are either producing less or not able to produce at all.

To address this global recession, there are multiple approaches—all equally compelling. Should it be by putting a lumpsum money in the hands of people below an income threshold to spur spending, or should it be in the form of relief to companies so they don’t fire employees amidst a slowdown that has been exacerbated by the coronavirus? Should there be bailouts for specific sectors like airlines and tourism which have a cascading impact and bigger impact on overall unemployment? Or should there be focus on relief for banks that are bound to see a substantial rise in NPAs as companies and employees find it hard to repay loans? Or should it be driven by big ticket infra spending since it spurs demand in allied sectors, all of which has a cascading economic impact and has the ability to create massive new jobs? Or lastly, should the focus be completely on insulating those at the bottom of the pyramid-daily wagers, street vendors, unemployed youth?

As this author said, all are equally compelling economic policies but the fluidity of the present global economic scenario suggests that the headwinds are so pronounced that to decide specific economic policy would need some time.

To make an informed choice with limited empirical data (most Heads of State concur corona-induced economic disaster is as bad as the Second World War and therefore there is no templated response that is available for any economy), requires both foresight and restraint. The urge to announce a bailout package too early in the storm needs to be controlled as that could lead to policymakers running out of ammunition before the worst case scenario plays out. At the same time, lessons from other countries that have already committed trillions of dollars could be equally important in finalizing a bailout package for the Indian economy. Of course, Finance Minister Sitharaman doesn’t have the luxury of time, so a stimulus is extremely important and this author feels the announcement of the intent is equally significant. Matters for India have been further compounded since Covid-19 is threatening to paralyse economic activity at a time when there is a slowdown and the GDP was expected to grow at 5.6% for FY 21, marginally higher than 5% for FY20. Now, a minimum 1 % decline due to coronavirus is being factored in by most experts.

But until the time a fiscal package is announced, Mint Street will have to do some heavy lifting. Reserve Bank of India should (and must!) cut rates, as has been done by other central banks. UK has cut rates to a record low of 0.1% to boost lending and RBI should follow suit. In fact, RBI needs to work overtime for an action plan in the event of a meltdown in smaller banks due to rising non-performing assets (NPAs).

In fact it needs to explore the possibility of a slight revision in both the recognition and time from when a loan is treated as an NPA given the scale at which bad loans may mount (in both retail and corporate segments).

The new few weeks would be the most challenging for the world. Not just due to the devastating impact coronavirus would have left on the public health systems and mounting death toll, but due to the long-term economic mess which may take a year or more to clear up. What is needed is not a single booster shot, but a series of measures with real time continuous monitoring and policy interventions that adapt to a very dynamic and fast deteriorating economic condition. The FM should take feedback from all relevant stakeholders and finalise a plan that should be implemented in phases and not in a single shot.

Shooting in the dark is not an option for any government right now. After all if this is the Third World War then it is a long battle and we cannot afford to run out of ammunition too early.

Gaurie Dwivedi is a senior journalist covering economy, policy and politics.