7 PM | Dressing a wounded economy | 26th March 2020

Context: Impact of COVID-19 on the Indian economy and possible measures.

Nations across the world have sprung into action to contain the impact of this epidemic. India too lockdown the whole country for 21 days. At the same time, the Indian government has come up with many monetary and fiscal measures to tackle the impact.

This raises various questions regarding working of monetary and fiscal policy in India. In this article, we will explain them below:

# What is COVID-19?

# What is the impact of COVID-19 globally?

# What is the impact of COVID-19 on Indian economy?

# How can the government deal with this sudden decline in economic activity?

# Conclusion

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What is COVID-19?

  • Coronavirus disease (COVID-19) is an infectious disease caused by a newly discovered coronavirus.
  • Most people infected with the COVID-19 virus will experience mild to moderate respiratory illness and recover without requiring special treatment.  Older people and those with underlying medical problems like cardiovascular disease, diabetes, chronic respiratory disease, and cancer are more likely to develop serious illness.
  • The best way to prevent and slow down transmission is to be well informed about the COVID-19 virus, the disease it causes and how it spreads. Protect yourself and others from infection by washing your hands or using an alcohol-based rub frequently and not touching your face.
  • The COVID-19 virus spreads primarily through droplets of saliva or discharge from the nose when an infected person coughs or sneezes, so it’s important that you also practice respiratory etiquette (for example, by coughing into a flexed elbow).
  • At this time, there are no specific vaccines or treatments for COVID-19. However, there are many ongoing clinical trials evaluating potential treatments.

What is the impact of COVID-19 globally?

  • Spread: As of March 25th, 196 countries, areas or territories have reported cases with a total of over 4 lakh cases and more than 18000 confirmed deaths.
  • Economically: Globally, the coronavirus shock is severe even compared to the Great Financial Crisis in 2007–08.
    • The International Monetary Fund said it expects a global recession this year that will be at least as bad as the downturn during the financial crisis more than a decade ago, followed by a recovery in 2021.
    • It has been suggested that about one-third of the economic losses from the disease will be direct costs: from loss of life, workplace closures, and quarantines. The remaining two-thirds will be indirect, reflecting a retrenchment in consumer confidence and business behavior and a tightening in financial markets.
  • It affects significantly both the elements: Supply and Demand
    • Supply will be disrupted due to morbidity and mortality, but also the containment efforts that restrict mobility and higher costs of doing business due to restricted supply chains and a tightening of credit.
    • Demand will also fall due to higher uncertainty, increased precautionary behaviour, containment efforts, and rising financial costs that reduce the ability to spend.
    • These effects will spill over across borders.

What is the impact of COVID-19 on Indian economy?

The economic impact on India can be traced through four channels: external demand; domestic demand; supply disruptions, and financial market disturbances.

  • External Demand:
    • India’s merchandise exports increased 2.9% to US$ 27.65 billion in February 2020 over a year ago, while snapping consistent decline for last six straight months.
    • Since the economies of the developed countries are slowing down, their demand for imports of goods will go down and this will affect our exports which are even now not doing well.
    • The demand for services exports will also suffer, which includes, IT industry, travel, transport, tourism and hotel industries.
    • The only redeeming feature in the external sector is the fall in oil prices. Though it will bring down India’s oil imports bill but at the same time reduces remittances from oil-exporting countries which absorb Indian labour.
  • Domestic Demand:
    • Since the country declared a 21 days lockdown on March 24th after a 14 hour Janta Curfew on 22nd March, the transportation industry, road, rail and air, is cutting down schedules and in turn affecting several closely related sectors.
    • Since people generally buy less, retail shops stock less, which in turn affects production. However, with people now purchasing in bulk, will impact the retail units at first and passing on the impacts on production units later.
  • Supply Disruptions:
      • Such disruptions can occur because of the inability to import or procure inputs.
      • It is estimated that nearly 60% of our imports is in the category of ‘intermediate goods’.
      • The domestic supply chain can also be affected as the inter-State movement of goods has also slowed down.
  • Financial Market Disturbances:
        • Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others.
        • The stock market in India has collapsed. The indices are at a three-year low.
        • In this process, the value of the rupee in terms of the dollar has also fallen.
        • The stock market decline has a wealth effect and will have an impact on the behaviour of particularly high wealth holders.

How can the government deal with this sudden decline in economic activity?

The two major tools that are available are monetary policy and fiscal actions.

Monetary Policy:

  • Though the policy rates have already been brought down by 135 basis points over the last several months, there is the scope of further reduction.
  • Interest is a double-edged sword and beyond a point, reduction in interest rates won’t work. As it is said, you can lead a horse to water but you cannot make it drink.
  • Though RBI has cut down the rates, it needs to have regulatory self-control to make the banks lend.
  • There is a need to change the definition of Non-performing Assets across the entire business sector.

Fiscal Policy:

  • The fiscal position of the government of India is already difficult. Because of the already prevailing economic slowdown in India, the fiscal deficit of the Central government will turn out to be higher than that indicated in the budgets for 2019-20 and 2020-21.
  • As of now, the first priority is to mobilise adequate resources to meet all health-related expenditures which includes the supply of accessories such as masks, sanitisers and materials for tests.

Conclusion:

There is a serious concern about people who have been thrown out of employment. These are mostly daily-wage earners and non-permanent/temporary employees. In fact, some of the migrant labour have gone back to home States. The government should advise all business units not to retrench workers and provide some relief to them to maintain the workers.

Source: https://www.thehindu.com/opinion/lead/dressing-a-wounded-economy/article31167337.ece

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