From UPSC perspective, the following things are important :
Prelims level : Not much.
Mains level : Paper 3-What economic measures and reforms are needed to deal successfully with the crisis.
The article discusses three fronts on which actions are required viz- health, economy and geopolitics. How much the global economy is going to be affected? how the US-China rivalry would affect the recovery? what the lack of global coordination means? all such questioned are discussed here. It also suggests actions that India should take to deal with the crisis.
Many unknowns than knowns about Covid-19
- The virus currently has many more unknowns than knowns.
- We don’t know for sure how it spreads, whether people can get re-infected, whether it is mutating, whether the hot weather kills it, and what the real fatality rate is.
- We don’t know for sure how far we are from an anti-viral.
- We know that we are at least 18 months away from having a vaccine that works and is available at scale.
- Till an anti-viral is found, economic activity will be constrained, and this will affect people, industries and countries in disparate ways.
The extent of damage to the global economy
- Loss of ten trillion dollars: The global economy is set to lose close to ten trillion dollars because of the “self-induced coma” it has been put into — to use Paul Krugman’s evocative phrase.
- Loss of effectiveness of monetary policy: The preceding global financial crisis (GFC) has exhausted the efficacy of monetary tools.
- In addition, corporates globally are leveraged to the tune of $12 trillion.
- The slump in demand: The accompanying oil price collapse, beginning due to a spat between producers Saudi Arabia and Russia have been compounded by a precipitous slump in demand.
- The Chinese economy can’t help as it did during the GFC, as it is hemmed in itself.
- Even if it could, there is too much global suspicion of China to allow it to do so. So, countries will largely be on their own.
Tensions between the US and China
- The tensions between the US and China have escalated into a full-scale superpower crisis after the virus spread.
- Since 2010, there has been great concern in the US about China’s rise.
- China’s muscular foreign policy together with its aggressive stance on multiple issues, most importantly on technology and technology standards, has created conflict.
- The coronavirus is spreading in the US in an election year and smashing its economy.
- The virus infected over three-quarter of a million people in the country and killed more than 40,000.
- After this, China could be seen as enemy number one in the US.
No global coordination
- No wonder then that at a time when the world yearns for global coordination, there is almost none — in healthcare responses and economic coordination.
- Multilateral agencies, especially the WHO and UN, suffer a complete loss of credibility.
- India needs to chart its own course in these turbulent times.
- If India takes the requisite actions it may come out well.
Following suggestions are important from the UPSC perspective. The suggestions deals with three fronts-health, economic and geopolitics.
How India could come out of the crisis?
- India needs to act at three levels — health, economic and geopolitical.
1. Actions at the health level
- The Union Ministry of Health and Family Welfare has done well to stem the spread of the infection.
- It has sensitised the public, introduced the concept of social distancing and isolation in the most challenging situations.
- Now it must test at scale and isolate.
2. Actions at the economic level
- Indians cannot afford to stay locked much longer.
- We are too poor and too many of us live on a day-to-day basis — not even on a paycheck to paycheck basis.
- Economic activity will be subdued in the near-term, but it must be “unlocked”.
- The current IMF projections suggest that India will have the highest growth rate in the world this year.
- Oil prices have collapsed, really helping our balance of payments.
- Our food stocks are plentiful, the rabi crop has been good, and the prognosis for the monsoon is positive.
- Low inflationary pressure: This, together with the fact that aggregate demand is down, will dampen inflationary impulses.
- The “new RBI” has acted boldly and strongly.
- It has taken prompt actions to reduce rates, increase liquidity, adjust prudential norms, allow moratoriums, and protect financial entities.
- Indian is better placed: The weakened rupee will help our exports and with a debt to GDP ratio of about 73 per cent, along with better growth prospects, India is relatively better placed than several other countries.
- We should, therefore, not unduly worry about our credit rating. This both allows and actually requires the government to act on the fiscal front.
- The government needs to implement the following four steps to spur the economy.
- (1) It should do so by “printing money” given the moderated inflation
- (2) It needs to provide additional direct benefit transfers of Rs 2,000 every month for three months to Jan Dhan accounts, together with foodgrains release from the FCI, to the tune of around Rs 65,000 crore, to alleviate people’s miseries.
- (3) It needs to protect MSMEs directly by providing them working capital (with an RBI backstop) and, like in the UK, provide 80 per cent of the salary to employees of the “GST-paying MSMEs” for six months.
- (4) It needs to launch a massive public works programme outside the Budget as suggested by the chairman of CII’s National Committee of Infrastructure and PPP, Vinayak Chatterjee.
- This fund should be earmarked for infrastructure and a quarter of its budget should be set aside for strengthening and upgrading primary health centres.
- The allocation should not be less than Rs 200,000 crore.
- Push through pending reforms: The government should take advantage of the crisis to push through much needed pending reforms in agriculture-especially those pertaining to APMC), power-pricing and discoms, banks-government ownership at 30 per cent and bad banks.
- Revenue from private gold: Given the paucity of tax revenues, the government could also consider having the PM making an appeal for private gold from people and temples.
- It could target 1,000 tonnes of gold worth $30 billion and offer a five per cent tax-free return repayable ($1.5 billion a year) after 10 years, in rupees or gold.
3. Actions at the geopolitical level
- India can come out ahead if we act now.
- Super-power rivalries will create opportunities to replace China as a major supplier to the US and Japan.
The battle to deal with the corona disaster has to be fought on many fronts. India must form a strategy and act on various front i.e. health, economic and geopolitical- to be victorious at the end.