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 Understanding the impact of COVID - 19: Going back to economic theory

The coronavirus pandemic has raised the fear of global recession. Movements of goods and labour across borders have been restricted dealing a body blow to exports and imports and impacting global production levels.

Restricting movements of labour and capital leads to an increase in costs of production and decrease in demand - leading to decreased levels of private investments, FDI/FPI outflows, reduction in scale of production, unemployment and slump in the growth rates. Restricting cross-border mobility of labour leads to escalation of labour costs and increased inflation. The inflation situation would worsen if governments pump in fresh money supply as stimulus to tackle the situation. This is exactly what is happening with the coronavirus (COVID- 19) crisis.

Global scenario

There is little doubt that the global economy is gazing at a downturn. The trailer which is being shown now will manifest itself into a full motion picture in the months to come. The projections for world GDP in 2021 have fallen below 2.5%. The projections from Standard & Poor's (S&P) Ratings and Moody’s are echoing the views of The United Nations Conference on Trade and Development (UNCTAD) estimates which states that global growth can fall below 2% this year. Moody's revised its global GDP projection to just 2.1% while S&P has put it even lower at 1.6%. The spread of the pandemic will lead to extension of the lockdown in various countries which could weaken business prospects considerably in terms of global GDP growth - which could fall to 1.5% for the 2020 fiscal.

Another area which warrants immediate attention is the global travel and tourism industry. The World Travel and Tourism Council (WTTC) has predicted a cut in 50 million jobs in this sector worldwide (out of which 30 million will be in Asia itself) and a cut in international travel by 25% in the May-August quarter on account of the COVID-19 pandemic. This is already evident as visitor arrivals in Hong Kong for February were 95% lower than usual. As on March 31, UNCTAD predicted global trade to decline by an estimated 1.4 % in the first half of 2020 and by 0.9% in the whole year. However, there is a silver lining when it comes to global stock markets.

Stock markets pulling up

In the US, the DOW Jones Industrial (DJI) Average has been the worst hit. However, since the announcement of the $2 trillion package on March 25, 2020 the rebound continues in the US stock markets as DJI Average gained 779.71 points or by 3.4% to close at 23,433.57 while Nasdaq Composite advanced by 2.6% as on April 8, 2020 — an average gain of 3% over a 10-day period. Similar rebounds can be seen in the case of pan-European Stoxx 600 benchmark, Britain’s FTSE 100 and Germany’s DAX which have all gained by 1%, 1.4% and 1.99% respectively as on April 9. In the Asia-Pacific region, the Chinese Shenzhen composite surged up by 3.1%. South Korea’s Kospi climbed by 1.7%, Hong Kong’s Hang Seng index rose by 1.8%, Australia’s ASX gained by 3.4% and Japan’s Nikkei 225 gained by 2.01%. The same story holds good for India. After announcement of the ₹1.7 trillion relief package, the SENSEX and NIFTY 50 is growing at an average rate of 4% since the beginning of April.  

Move in the right direction

With the global average GDP growth going down, India is no exception. Having survived the onslaughts of demonetisation and GST, this pandemic hit the Indian economy hard and growth rates have slumped to around 3.5%. As Parikshit Ghosh of Delhi School of Economics points out, “As the country goes into lockdowns and other forms of disease suppression, there will be catastrophic livelihood loss for daily earners and the self-employed.”

The ₹1.7 trillion relief package is a move in the right direction. About 800 million people will now be getting additional five kg of wheat, one kg of pulses or rice for the next three months in addition to their regular package. Apart from these in-kind transfers, the government has announced cash transfers in a bid to broaden the social safety net under the PM-KISAN, MGNREGA and the Jan Dhan accounts. The government is also going in the right direction by planning a second stimulus package for nearly 500 million workers under the MSME sector which accounts for nearly 50% of India’s GDP.

Policy recommendations

The government should bring in more fiscal stimulus and allow fiscal deficits to move up without any fear of down gradation in credit ratings (that might lead to losing of investor confidence). In this hour of crisis, a big push fiscal stimulus is required over and above the ₹1.7 trillion crore already announced. This particular strategy is a tried and tested one. During the US Subprime crisis of 2008, fiscal deficit doubled from 3% to 6% of GDP and it was required to restore growth. Over a period of time, the deficit came down with the expansion of the tax base which mostly covered the fiscal deficits. Another policy pitch can be oil imports. India being an importer of oil can take advantage of the falling oil and gas prices. Borrowing oil cheaply and building up strategic oil reserves can be a golden strategy for India. If appropriate policy measures are taken then India could significantly benefit from the shift in global supply chains which might boost India’s manufacturing sector that has fallen prey to the Chinese predatory pricing strategies. Additionally, the fall in US Treasury bond yields can serve as an attraction for capital inflow to India.

Moreover, many economists are suggesting easing the reserve requirements as a part of the monetary policy stimulus. But the question is — will easing the reserve requirements necessarily generate demand for credit from the masses with the economy in the midst of an employment crisis? This monetary easing should be coupled with lending to well managed NBFCs to ensure enough liquidity in the system and helping financial institutions to build up on their own capital reserves by giving them a moratorium – which the government has already done. Hence, we require a  fiscal-monetary mix but it has to be adjusted in line with the consequential rise in inflation so as to ensure that the inflation level does not go out of bounds.

The author is an assistant professor, Department of Economics, Faculty of Commerce and Management Studies, St. Xavier’s University, Kolkata. India.