7 PM Editorial |Priorities for Post Pandemic Economic Recovery| 3rd July 2020

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Priorities For Post Pandemic Economic Recovery

Context:

COVID 19 pandemic has brought global economic activity to a standstill due to movement restrictions and lockdowns. Expectations of a V shaped quick recovery of the economy have been proven wrong. IMF estimates global GDP contraction of about 5% and trade contraction of 4.3% in 2020-21. Only by the end of 2021 will global GDP become the same as 2019. This points to a gradual recovery.

Macroeconomic outlook:

Spending of households and firms will come down due to policies to tackle pandemic and precautionary behaviour in anticipation of economic uncertainty.

  • Sectors with human contact will contract. Sports activities are example
  • Salary cuts and job layoffs will deter households from non essential spending. This weakens overall demand in economy
  • Weakened liquidity, reduced availability of credit and economic uncertainty will prompt firms to withhold new investments
  • Trade decline will reduce demand in economy directly and indirectly(layoffs in export oriented firms)

This leads to dramatic changes in consumption and production patterns which inturn will bring about a structural transformation in the economy. People preferring digital means over physical in areas like education, newspapers etc is an example.

This sudden structural transformation gives rise to problems. These are:

  • Sectors which are emerging are less labour intensive and more skill intensive. This imposes problems of reskilling. Market forces are unable to adapt to these sudden transformations.
  • Income and substitution effects: Spending on emerging sectors cannot compensate for reduced spending in declining sectors due to declining incomes. This leads to overall contraction of demand and hence growth.
  • Automation driven inequality: Unskilled work will be automated to reduce dependency on labour. Firms will prefer this to circumvent labour shortages which arose due to pandemic. This will lead to reduced incomes of low income households and hence increase inequalities.

In such structural transformation, monetary policy can address liquidity concerns of firms. But it cannot address solvency of firms. In addition, if policy rates are near zero, monetary policy will be ineffective in economic stimulation.

At the same time, Fiscal policy is constrained by limits on deficits and borrowing. Hence there is a challenge in mobilization of funds needed for unemployment allowances, health care, social support for the vulnerable.

Priorities for quick economic recovery:
  1. Addressing healthcare requirements and containing pandemic: Provision of adequate PPE’s, testing kits, hospital beds etc to control spread. Without containing the virus, no reliable economic recovery is possible. Reinfected countries reimposing lockdowns shows this.
  2. Providing short term liquidity to prevent bankruptcies
  3. Social support policies for vulnerable to prevent poverty and inequalities rise
  4. Maintaining worker – firms relationships to quickly restart production after the virus is contained.
Conclusion:

Fiscal and monetary stimulus must consider priorities while allocating resources. Care must be taken that public funds are not used to support unviable firms whose decline is not due to pandemic. US federal reserve support to the junk bonds market is an example of such misallocation of funds.

Funds must be channeled to those firms which contribute to social and racial justice, improve health care and shift to a greener economy. This will enable sustainable economic recovery by creating employment and growth.

Source: www.business-standard.com

Mains Question:
  1. In the context of reduced demand and supply due to COVID 19 pandemic, what should be priorities for sustainable economic recovery? [15 marks, 250 words]
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