When pandemics spread, they bring on an economic contagion, beyond the morbidity and mortality of the disease itself. Economic activity has been curtailed to enforce social distancing — an indispensable bullet in the Coronavirus disease (COVID-19) war.
The World Bank and the International Monetary Fund (IMF) warned that the virus is pushing the world economy into a recession worse than that after the 2008 financial crisis. Moody’s downgraded India’s GDP growth rate forecast for 2020 from 5.5% to 2.5%. A United Nations Conference on Trade and Development (UNCTAD) report titled The COVID-19 Shock to Developing Countries pleaded “governments to do whatever it takes” to stop economic contraction becoming a recession or worse, a prolonged depression, and to protect the poorest.
UN Secretary-General António Guterres called for a large-scale, coordinated, comprehensive and multilateral response based on solidarity and shared responsibility. His proposals for a “double-digit-percentage” of global GDP investment, massively increasing resources to developing countries by augmenting IMF capacity including through Special Drawing Rights’ issuance and of MFIs like the World Bank are critical.The G20, representing the world’s most powerful economies, expressed its resolve to defeat Covid-19, but so far, concerted global action and cooperation, and enhanced liquidity and funding has not materialised. Significant national relief and stimulus packages announced by the United States, Europe, China and India are expected to help staunch the economic haemorrhage and finance the coronavirus war. Developing countries, including India, face several economic challenges. These include volatility and precipitous fall in financial markets and commodity prices, and financing gap due to shrinking fiscal revenues and COVID-19 expenditure. Liquidity crunch, disruptions in international trade, and transport, depletion of foreign exchange reserves, devaluation of their currencies, fall in export revenues due to export controls and contraction in global markets and economic engines are also causes for concern.
They also face the prospects of a global food, pharmaceuticals and medical supplies crisis as producing countries impose export control and stockpiling. India could face a remittance crisis due to coronavirus-related redundancies in major labour export markets. The economic impact on India needs to be assessed by what some Harvard economists call the “shape of the shock” and it’s “structural legacy”. These will depend on the nature and extent of the disease burden, resources deployed/diverted for treatment/care/vaccine, the trajectory of the pandemic, the collateral damage to sectors, state of the pre-crisis economy, policy responses and special measures taken.
Resilience and rebound will depend on the duration of the lockdown, the stage at which the lockdown was imposed (in India’s case it was early enough) and social distancing compliance by citizens. Reducing uncertainties around health security driven economic decision-making, will help and slightly longer lockdowns seem better than stop-go options.
India has to ensure that in this interregnum, a banking/credit crisis does not occur, liquidity at household and corporate level is maintained, there is minimal disruption in capital formation and investments. Labour displacement is to be minimised and migrant labour encouraged to stay in place or return after the lockdown including though repurposing for the corona war.
Skill atrophy should be prevented, output and supply maintained through targeted support to strategic sectors, SMEs, SHGs. Providing social protection to poor and vulnerable farmers and workers is critical. Prime Minister Narendra Modi’s economic relief and stimulus package seek to achieve these objectives and will continue to evolve.
If the lockout lasts for months, there is risk of a prolonged freeze in the real economy and recessionary prospect. We have to keep essential sectors firewalled through protective measures/PPE gear and affordable, rapid status tests and protocol until we open all sectors.
Walden Bello, the author of Deglobalisation: Ideas for a New World Economy notes COVID-19 dealt a second big blow to globalisation and connectivity. With China, its flag bearer, becoming the epicentereof the crisis and economic contagion, there is a rethink on the global risks of over reliance on this “undisputed workshop of the world”, the largest trader and exporter. Countries everywhere are considering diversification strategies away from China and rooting for autocracy in strategic areas. Global investor reassessment about putting all their eggs in the China basket, presents an unmissable opportunity to attract them to India. Although no one should underestimate China’s enduring comparative advantage and resilience we should leverage India’s large market, human resources and diversified production base to become a manufacturing, services, research and development, and technology hub.
Pharmaceuticals, biotech, medical supplies and equipment and related infrastructure for health sector capacity, supply and value chain is a vital multisectoral cluster to create with all stakeholders, private and public. Consumer durables, construction materials, electronics, engineering goods, IT, speciality textiles and garments, AI and robotics are other promising areas. Article XX of GATT/WTO permits countries “to take any actions it considers necessary to protect it’s national security interests”. We can use trade restrictions, TRIPs, TRIMs exemptions to support domestic value and supply chains to protect our health, food and economic security. A “new India” industrial and trade policy is needed to incentivise our entrepreneurs to be makers, not just traders. They must build a Make in India hub to meet domestic and global COVID-19 related demand and subsequent rebound and revenge consumption. The adversity bought on by the virus can become a transformative economic opportunity to “Build Back Better”.￼
Lakshmi Puri is a former assistant UN secretary-general, former deputy executive director of UN Women and former acting deputy secretary general of UNCTAD.