‘Unprecedented crisis; do whatever it takes’: Jayati Ghosh on Covid-19
In the wake of the national lockdown, the Indian economy been severely affected. The maximum impact is expected to be on daily wage workers and those below the poverty line. To understand the various economic dimensions of the pandemic and lockdown, Jayati Ghosh, professor of economics at the Jawaharlal Nehru University and a prominent development economist, spoke to Hindustan Times:
How is the present crisis different from other disruptions the Indian economy has faced?
This crisis is unprecedented certainly in my lifetime, and probably in the past century. It is a pandemic that is spreading fast, whose full spread and impact are still unclear, and which has both demand and supply effects that are immediate as well as lasting. In demand terms, the lockdown and associated collapses in incomes obviously cause demand to fall drastically across the board, not just in so-called “affected sectors”. In terms of supply effects, the disruption of economic activity is already affecting supply chains, both production and distribution are affected, so specific shortages will certainly emerge. It is impossible to predict the full impact at this point, without a clear idea of how long the lockdowns will continue, what the spread of the disease and the fatalities will be like, and what proactive counter measures will be taken by the government. What is already clear is that currently we are in a period of declining economic activity.
Among the worst hit will be daily wage earners. What will it take to prevent a crisis and ensure two square meals to these people and their dependents?
The impact on informal workers generally— daily wagers, those with insecure contracts; regular workers with micro and small enterprises that are having to shut shop; self-employed people — is already devastating as the lockdown has already meant loss of income that they cannot afford, and such workers typically have very little savings to draw upon. Farmers are already facing massive problems because of closure of mandis and breaking of transport links, and other farm income sources like poultry have been badly hit by virus fears. An immediate safety net of massive proportions is essential if hunger and related problems do not result in even more tragic outcomes than the virus itself. This should include: public provision of free food rations for the next few months and adding to basic foodgrains, other necessities like pulses, cooking oil and soap; immediate cash transfers of Rs 7,000 to Rs 10,000 per month for the coming months to those known to be more vulnerable (the list could include Jan Dhan account holders, those registered with MNREGS, those receiving public pensions, beneficiaries of Awas Yojna and Ujjwala schemes, etc.). Pending payments for MNREGS wages and other dues should be immediately transferred. There should be a moratorium on tax and interest payments until the lockdown is over, and then the situation could be reviewed. (Editorial Note: Finance minister Nirmala Sitharaman announced a package with some of these measures after the interview was conducted)
These measures may sound expensive, but this is no time to be worried about fiscal deficits since we are dealing with a major calamity and lack of public spending will cause the GDP to plummet further. Instead, the Indian government should do “whatever it takes” just as other governments like the UK and Germany have already promised.
Crash in crude oil prices has given the government a windfall source of revenues at this hour of crisis. However, given the sharp fall in economic activity levels, the additional revenue earnings from sale in petrol-diesel would be much less than what normal times. How much of a cushion can this be in financing an economic package?
There is no doubt that the government is a beneficiary of the global oil price crash, and the finance minister has already given herself the option of further raising excise duties on petroleum products. However, the lockdown and the collapse in economic activity will mean significantly reduced demand for oil products, so the aggregate benefit will be much smaller than in normal times. However, as I mentioned, this is no time to be worried about how any deficit will be financed—the point is to spend money quickly (which the government can always do by borrowing from the RBI, ie, a monetised deficit) in the short run. This will also help to increase economic activity or prevent it from falling further, which would affect tax revenues over time. Inflationary impulses are likely to come from lockdown-induced shortages, so the government must be aware of those and do whatever is required to ensure supply of those items.
India’s financial sector had already been dealing with the problem of bad debt even before the current pandemic. Is there a chance that even the relatively better off lenders will be besieged with bad loans as businesses suffer from now on?
This is the kind of economic shock that will necessarily generate massive bad loans, and it would have tested the strongest of credit systems. In India, both banks and non-bank lenders are already vulnerable because of the existing burden of non-performing assets; these may now balloon to the point of making it hard for these institutions to function. Some recapitalisation of lenders is inevitable in this context.
Given the sharp drop in stock market indices and potential loss in earnings even in the formal sector, are we going to be seeing significant wealth effects among even the rich households? What implications will it have for saving and consumption behaviour?
I am not terribly concerned about the stock market declines, as the indices were already at unrealistically high levels and some correction was inevitable. There will be negative wealth effects of the current share movements, but these will be completely dwarfed by the massive decline in aggregate demand due to the collapse of most working incomes. Household savings and consumption were already declining in the recent past; now we are likely to see a precipitous drop. We are talking about a near breakdown of economic activity because of the simultaneous decline in both demand and supply.
As and when the crisis eases off, what should an economic reconstruction strategy focus on? Unlike a war-ravaged economy, there is going to be very little loss of physical capital and infrastructure due to this shutdown. Will this pose a limit on using methods such as aggressive public work programmes to stimulate mass demand?
Once the virus has been contained and this immediate crisis has been addressed, we will need to completely rethink how we organise our economy and the priorities for public spending. It is to be hoped that this crisis makes the government realise the importance of investing much more in public health and in ensuring proper wages and conditions for frontline health workers. We will need to revive demand as soon as possible by expanding the rural employment programme and bringing in an urban employment programme — a useful template for this has already been developed. There are many activities in both urban and rural areas that are massively underprovided, which could be aided by such a programme. By the end of the crisis, we will have realised the importance of food security, and therefore of policies to ensure that by making farming viable and distributing food more equitable and inclusively. A package for MSMEs to ensure their revival and future viability will be absolutely essential. Farmers also will need a package. Supply chains will have to be rebuilt. The financial sector will need to be regulated to enable banks, non-banks and insurance companies to meet the actual needs of the real economy and to provide more equitable access. Women workers (paid and unpaid) as well as those from disadvantaged social groups are among the worst affected in the crisis, not only because they are disproportionately among relatively unprotected frontline workers, but because in periods of scarcity they tend to be rationed out of jobs, food, other incomes. It will be necessary to identify the specific ways in which they have been affected and direct policies towards dealing with these issues. Exclusionary criteria for public service delivery (such as use of biometric identifiers) should be eliminated.