A time for extraordinary action
An unprecedented scale of state investment is required to lift up the Indian economy
- The Indian economy was in dire straits even before COVID-19 reached our shores.
- Specifically, the lockdown and other movement restrictions, backed by scientific and political consensus on their inevitability, have directly led to a dramatic slowdown in economic activity across the board.
- An initial, quantitative response, using a methodology that is based on the technique of input-output (IO) models.
- Such models provide detailed sector-wise information of output and consumption in different sectors of the economy and their inter-linkages, along with the sum total of wages, profits, savings, and expenditures in each sector and by each section of final consumers (households, government, etc.).
- Crucially, it pays attention to intermediate consumption, namely consumption by some sectors of the output of other sectors (as well as consumption within their own sector).
- The key advantage of such a model is that it allows the calculation of the impact of any change in any sector in both direct and indirect terms, which has made this model somewhat ubiquitous in the computation of the economic impact of disasters.
- The direct and indirect impacts of the lockdown are estimated using IO multipliers which are assumed to be constant. We then calculate the percentage decline in the national gross domestic product (GDP) of 2019-2020 that this impact amounts to.
Impact on various sectors
- The loss of GDP ranges from ₹17 lakh crore (7% of GDP) in the most conservative scenario, where the average number of output days lost is only 13, to ₹73 lakh crore (33% of GDP) in the most impactful scenario, where the number of days of lost output averages 67.
- In intermediate scenarios of 27 and 47 days of lost output, the GDP decline is ₹29 lakh crore (13% of GDP) and ₹51 lakh crore (23% of GDP), respectively.
- If we take the scenario where a prolonged lockdown happens, averaging about 47 days across sectors, we find that the mining sector faces the largest drop of 42% in value added despite that sector itself being shut down for, say, 35 days as we have assumed, which is less than the economy-wide average.
- The electricity sector sees a 29% fall in value added, even though it faces no shut down per se. Losses are expected across all sectors in terms of both wage compensation and availability of working capital.
- In some sectors such as agriculture, the impact may manifest in delayed fashion, if the anti-COVID-19 measures, or the pandemic itself, affects agricultural operations in the next kharif season, even if, as reports suggest, much of this year’s rabi has been successfully harvested.
The way forward
- India needs a similar strategy. As Kerala Chief Minister Pinarayi Vijayan pointed out, extraordinary times need extraordinary action.
- We need to compensate and pump cash into the hands of not only wage workers in the formal and informal sectors, and also into the livelihood activities of the informal sector, but businesses too need to be primed with handouts in the case of small and medium enterprises, and with a variety of concessions even in the case of larger businesses.
- One must note that the current crisis is not a transformatory moment for the Indian economy, even if the scale of the impact and recovery process will undoubtedly push the economy in new directions. But “greening” the economy or more radical transformative measures are not particularly relevant in its current state.
- What is needed is ensuring the key role of the state to lift up an economy that is in danger of being brought to its knees, and to restore some semblance of its normal rhythm, by an unprecedented scale of state investment.
A double whammy for India-Gulf economic ties
It is going to be a challenge to manage the impact of the COVID-19 pandemic as well as the oil shock
The Gulf region is at the epicentre of a perfect storm: apart from the COVID-19 pandemic, it also has an oil price meltdown. Although this double jeopardy still has some distance to go before stabilising, given India’s vital relations with the eight Gulf countries, the situation’s impact on bilateral economic ties needs to be anticipated and managed.
Oil prices in a tailspin
- The Organization of the Petroleum Exporting Countries and other crude producers (OPEC+), failed to reach a production-curtailing strategy as Saudi Arabia and Russia, the cartel’s two biggest producers, held different views.
- As a result, OPEC+ unravelled with each producer chasing a higher share in a collapsing market. Consequently, the oil prices went for a tailspin having fallen by 55% during March to an 18-year low on March 30.
- In a rare joint statement on March 16, the heads of OPEC and the International Energy Agency (IEA) warned that developing countries’ oil and gas revenues will decline by 50% to 85% in 2020 with potentially far-reaching economic and social consequences.
- The economic outlook for the Gulf has indeed deteriorated, with Saudi Arabia’s fiscal deficit expected to cross 8% in 2020. The global economy is expected to have a recession induced by COVID-19 this year.
- The global economy is expected to have a recession induced by COVID-19 this year. Even if it limps back to growth in 2021, the process may be slow and less energy-intensive: national self-reliance on strategic goods such as pharmaceuticals may deter their trade, and the tourism and hospitality sectors, the core of Dubai’s economy, may take much longer to resuscitate.
- Bilateral economic ties are strong: the India-Gulf trade stood around $162 billion in 2018-19, being nearly a fifth of India’s global trade. It was dominated by import of crude oil and natural gas worth nearly $75 billion, meeting nearly 65% of India’s total requirements.
- The number of Indian expatriates in the Gulf states is about nine million, and they remitted nearly $40 billion back home. Both these intertwined pillars of India-Gulf ties have been affected by the recent maelstrom roiling the shared region.
- India being the world’s third largest importer of crude, a sharp and prolonged decline in oil prices helps its current account.
- The Gulf’s lower oil revenues also presage decreased bilateral trade and investments as well as expatriates’ remittances — all of them adding to India’s current financial stress.
Impact on expatriates
- This time there is an added complication of the pandemic, to which the Asian expatriates living in densely populated camps are particularly vulnerable. In case the pandemic worsens in the lower Gulf, panic-stricken, wage-deprived Indians may prefer to come back.
- Apart from creating a logistical nightmare of transporting millions of expatriates back, they would need to be resettled and re-employed. In the longer run, it is quite clear that we need to find new drivers for the India-Gulf synergy.
- This search could begin with cooperation in healthcare and gradually extend outward towards pharmaceutical research and production, petrochemical complexes, building infrastructure in India and in third countries, agriculture, education and skilling as well as the economic activities in bilateral free zones created along our Arabian Sea coast eventually leading to an India-Gulf Cooperation Council Free Trade Area.
- Only then would we have sufficiently diversified the India-Gulf economic ties to protect them from such shocks.
Will COVID-19 affect the course of globalisation?
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Import substitution, which had once become a bad word, may be back in currency
With several countries and regions locked down, will there be a redrawing of geographical boundaries?
- The World Trade Organization (WTO) has now estimated that in a worst-case scenario, global trade could dip as much as 32%, indicating the kind of dislocation they expect in large economies. It’s going to be a very different ball game — the first thing that will happen is countries will try to build themselves up.
- In India, for instance, we can see the disruption that is taking place — almost 50% of our trade is directly linked with the micro, small and medium enterprises (MSMEs) sector as even large players have sub-contracted to the smaller producers.
- Going forward, most economies, with the exception of China, are going to see a very different kind of dynamic as they will try to build up from where they would be in a few months’ time and then think in terms of how to integrate themselves again with other countries.
How could this impact Asia Pacific as a region and India in particular?
- The COVID-19 crisis is a challenge never seen before and it is going to be a bigger shock for the world economy than the global financial crisis which was only driven by a demand shock. This entails a demand and supply shock and it is still unfolding.
- It is now clear that many economies are going to shrink — developed countries as well as many in the Asia Pacific region that are highly dependent on tourism and commodities trading will also shrink. Commodity prices are at their lowest in the last 10 years.
- For India, however, there is a slight silver lining because of low oil and commodity prices as we are net importers and, also, since the government is not allowing a full pass-through of the lower global prices, it means that there is some fiscal space through commodity price reduction.
We have seen over the last couple of months a significant slowdown in trade flows in advanced economies and a sharper fall in developing countries. Do you consider this a passing phase or is COVID-19 set to reverse the trend of globalisation as we know it?
- The process of globalisation was already in retreat and last year, the term ‘slowbalisation’ was being used. World trade had never really recovered since the global financial crisis — from a 10% growth, it had been hovering around 1%-2%. Add to that the trade wars and the WTO talks process coming to a grinding halt.
- Countries will reconfigure their economies to look at import substitution with a greater clarity now, as the perils and pitfalls of overdependence on foreign supplies become clear. Import substitution, that had become a bad word, may be back in currency.
Could this dampen movement of labour across countries?
- The movement of personnel will follow the formula of economic needs, so the U.S. may keep importing skilled personnel from India. But, the kind of unemployment that you will see will require a huge effort on the part of every country to get their workforce to where they were before the crisis.
- The first priority of every government would be to create jobs for its own people. In a high unemployment scenario, hiring expats won’t be in favour. In any case, there had been rising protectionism on this front already.
Does the social fabric in places that are now open to immigrants could come under stress?
- Our experience from the financial crisis is that economies that paid greater attention to social protection were able to recover very quickly.
- This crisis has exposed the gaps in the health sector and social protection and the stimulus packages should focus on closing these gaps which will also help in achieving sustainable development goals. The first priority will be to create jobs for those rendered jobless.
How do you see the role of WTO evolving in such a situation?
- It’s only going to get worse, because if countries need to bring their domestic industries back, they would need space for policy flexibility. And WTO will be redundant there — for instance, on the issue of subsidies for small industries, no country will like the WTO to be telling them what to do or what not to do.
- The agricultural subsidies issue is going to be junked — on 31st March, India notified the WTO that it has crossed the 10% limit in rice subsidies as a good citizen. Unfortunately, the impact on global governance systems hasn’t been understood yet.
Shall there be a rethink on existing multilateral and bilateral pacts?
- In the last quarter of the twentieth century, we saw one driver of governance — market forces-oriented. But now, in major economies, governments have taken centre stage and depending on how long the pandemic drags on, the government will remain in the driver’s seat and markets will take a backseat.
- India, of course, has already become a reluctant player and had, in a way, started disengaging. Other countries were more tightly knit together through pacts like the ASEAN.
- The European Union is already in tatters and it will be important to see the role of the European Commission and the European Central Bank in getting a decent stimulus in addition to what individual governments have done.
- NAFTA is already being rewritten. So going forward, much of the churning is going to get bigger in regional formations.