MARCH 18, 2020

By Naresh Minocha, Consulting Editor

WHAT is the difference between 2008 recession and unfolding 2020 recession? What is the difference in the magnitude of economic cost for India due to these two slowdowns? Would Modi Government's fiscal smugness add to the miseries suffered by daily wage earners & temporary workers?

Such issues have to be addressed to understand all elements of unfolding economic crisis & why it is gravest for India.

The September 2008 recession was triggered by Lehman Brothers' collapse-led global banking failure. It was quickly followed by Swine Flu, which originated in Mexico in April, and became a pandemic in two months. It led to 5-day lockdown of Mexico and moderately affected travel & tourism across the world.

Unlike 2008 recession, the present one was brewing since 2019 as pointed by several entities and economists. The recession has been accelerated by Covid-19 pandemic.

It is far more severe than swine flu or 2003 bird flu. Covid-19 might ultimately turn to be most severe one after the 1918 Spanish flu, which killed 40 million persons & wreaked havoc on global economy.

Both, health experts and economists had predicted severe influenza pandemic even before arrival of Swine flu. It is important to recall their studies to get an idea of direct and indirect cost of Covid-19 menace.

It is equally important to recall the cost of fiscal and monetary stimulus unleashed by UPA regime to fight 2008 recession. Such an exercise should help Modi Government shift gears from wait-and-watch to rapid action to arrest & reverse economic meltdown.

The World Bank's Working Paper (WP) on Bird Flu published in June 2006 can serve as a torchlight for managing the Covid-accelerated recession.

Captioned 'Evaluating the Economic Consequences of Avian Influenza', WP stated: "an eventual human pandemic at some unknown point in the future is virtually inevitable (WHO, 2004). Because such a pandemic would spread very quickly, substantial efforts need to be put into place to develop effective strategies and contingency plans that could be enacted at short notice. Much more research and coordination at the global level are required".

World Bank researchers did three simulation studies based on Hong Kong flu of 1968-89 (mild), 1957 Asian Flu (moderate) and 1918 Spanish Flu (severe) for WP.

It concluded: "For the world as a whole, a mild pandemic would reduce output by less than 1 percent of GDP, a moderate outbreak by more than 2 percent, and a severe pandemic by almost 5 percent, constituting a major global recession. Generally speaking, developing countries would be hardest hit, because higher population densities and poverty accentuate the economic impacts in some countries".

It is premature to conclude the severity of Covid-19 amidst the flux. What is, however, certain is the high economic cost of lockdown in China, Italy and Spain and partial shutdowns in other countries. Ubiquitous are preventive measures, whose cost especially, borne by daily wage earners & retrenched workers, is daunting. It is, however, not acknowledged by regimes in developing countries. The Union Government, for instance, did not compensate residents of Kashmir for prolonged lockdown, drying sources of income for majority of them.

WP estimated the global cost of preventive measures for potential human-to-human pandemic at 1.9% of GDP. This is the highest impact followed by cost of illness & absenteeism at 0.9% of GDP and mortality at 0.4% of GDP. It thus estimated the total economic impact of these three variables in 2006 at USD 1.5 trillion, equivalent to 3.1% of world GDP.

Another study that merits mention here is WP titled 'Economic Effects of the 1918 Influenza Pandemic -Implications for a Modern-day Pandemic' Published by Federal Reserve Bank of St. Louis (FRBSL), USA, in November 2007. It focuses on the United States with 1918 Flu as foundational model.

According to WP, "Researchers at the U.S. Center for Disease Control and Prevention calculate that deaths in the United States could reach 207,000 and the initial cost to the economy could approach USD 166 billion, or roughly 1.5 percent of the GDP".

It added: "Long-run costs are expected to be much greater. The U.S. Department of Health and Human Services paints a more dire picture-up to 1.9 million dead in the United States and initial economic costs near USD 200 billion"

Some businesses could suffer revenue losses in excess of 50 percent. Others, such as those providing health services and products, may experience an increase in business (unless a full quarantine exists).

FRBSL economist, Thomas A. Garret, who did the study, stated: "Local quarantines would likely hurt businesses in the short run. Employees would likely be laid off. Families with no contact to the influenza may too experience financial hardships. To prevent spread, quarantines would have to be complete (i.e., no activity allowed outside of the home). Partial quarantines, such as closing schools and churches but not public transportation or restaurants (as done in Philadelphia, St. Louis and Washington, D.C.) would do little to stop the spread of influenza".

This observation has direct relevance to States in India that ordered shutdown of schools, cinema halls, malls and events but left untouched public transport that is always over-crowded during peak hours.

Consider now reasons why India is more unfavourably placed than other countries in coping with Covid-accelerated recession. Unlike other countries, Indian Government invested colossal sums of money to bail-out banks from non-performing assets (NPAs) crisis during last five years. Notwithstanding this, financial institutions continue to fail and thus require specific bail-outs.

Factor in lingering adverse effect of demonetisation on the economy. Reckon persistent uncertainty due to failure to stabilize Goods and Services tax (GST) framework. Add to this social strife & riots relating to citizenship fears whipped up by the Opposition. Don't overlook the cost of enhanced security after abrogation of Article 370 and restructuring of Jammu & Kashmir into two union territories.

Above all, we should not overlook Government's failure to remove trust deficit and economic uncertainty, leave aside unresolved issues that can be clubbed as policy paralysis.

The Government failed to arrest economic slowdown due to all such factors before Novel Corona Virus arrived as last straw on the back of ailing camel/economy. The Government must distinguish visible cost in terms of mortality & illness from hidden cost due to preventive measures and change in behaviour of consumers.

Both imply huge contraction in demand for goods and services. Covid-19-led business closures or curtailed operations would throw up new crop of NPAs, leave side drop in tax receipts and rise in unemployment. The Government should thus revisit NPA rules and adjust them to changed situation.

Reserve Bank of India should factor in risk of spike in NPAs due to Covid-19 and address it by monetary stimulus that is likely to be announced in first week of April.

With this perspective, the Government should see how UPA bailed out economy from 2008 recession. It unveiled big-bang fiscal stimulus in December 2008, coupled with generous monetary stimulus. This was followed by 2 nd fiscal stimulus in January 2009.

The total cost of wide-ranging fiscal stimulus was whopping Rs. 1,86,000 crore This was equivalent to 3.5% of GDP. This helped attain GDP growth of 6.7% in 2008-09. The bail-out package, however, increased fiscal deficit from 2.7 per cent in 2007-08 to 6.2 per cent of GDP in 2008-09.

Instead of taking any measures that would help cushion impact of recession, the Government hiked excise duty on petrol and diesel. It also enhanced road and infrastructure cess levied as additional excise on these two transportation fuels.

These initiatives affirmed Modi Government's 2014-15 strategy of mopping up windfall from significant fall in price of imported crude.

The Government did not create any contingency buffer from lakhs of crores of rupees collected through savage taxation of crude-derived fuels kept out of GST.

It should at least now commit additional revenue collected from petroleum to providing relief to daily wage earners hit hard by Covid-19 prevention strategy and ongoing economic slowdown.

The Government should give one-time, suitable cash relief to all poor on the lines of regular payments to farmers under Pradhan Mantri Kisan Samman Nidhi (PM-Kisan). This would help reverse demand contraction, apart from checking extreme poverty.

Apart from this, the Government should convince GST Council to opt for reduction in GST rates for services provided by airlines, hotels and other businesses hit hard by Covid-19. The Government should bail-out airlines by whittling excise duty on aviation turbine fuel.

The focus should be increasing consumption through reduction in excise, customs and GST rates and any other indirect imposts and not through income tax sops.

Once Covid-19 pandemic peaks and later starts subsiding, the Government should fire all cylinders to increase efficiency in spending budgetary allocations.

The Government should defer disinvestments as sale of family silver till battered stock market returns to vibrancy and robustness. The Government should instead seek special loans offered by International Monetary Fund, World Bank (WB) and other multilateral institutions to bridge shortfall in budgetary receipts on call-off of disinvestment process.

Simultaneously, the Government must give up its habit of relinquishing part of contracted project loans to WB and Asian Development Bank. It should efficiently utilize all project loans to realize fully benefits of developmental projects.

Last but least, it should strive to end social strife and improve governance. This is key to reviving animal spirits among entrepreneurs and prodding foreign investors to chip in money on greenfield & expansion projects.