Helicopter view on Impact of Covid-19 on Global Economy,India (Part 1)

The great shark of Covid-19 has caused partly spontaneously and partly due to the Government deliberate policies of Lock down the cessation of great deal of economic activities around the world , while efforts are being made to take control of the disease. It is pretty clear that 1st quarter and 2nd quarter of 2020 has seen the most dramatic decline in world output , probably the biggest peacetime depression in speed ,extent and scale even bigger than big depression.

China closed down in first quarter .And by the 2nd quarter all developed economy were hit by 20-30% .This also has hit many developing countries later and they are still experiencing shocks . It is clear in developed countries particularly Europe, japan,Australia,NZ , economic collapse have passed since the end of April led by a couple of months of recovery .It is expected that there will be a positive rate of recovery in the 3rd-4th quarter .None the less, this year there will be overall significant economic contraction in developed countries .

IMF recently concluded that in developed countries the economy will shrink by 8% and the world economy will shrink by 5%. Except in United States, the Developed Countries have started to recover slowly.However in emerging and developing countries the trends are different. The disease came later,lock-down reactions came later,the incidence of disease is raising , sustained lock down are not sustainable and the economy has been hit.

The economy has been hit directly by the government who have done lock-down as in India. but also due to indirect reasons such as huge collapse in world trade,huge collapse in commodity prices,huge fall in tourism,huge fall in remittances.In addition to that there was a big financial disruption as a result of which massive capital got wiped away. This has created enormous turmoil for most emerging and developed countries.Some better managed,better cushioned like in India get through it,whereas the South African countries ,South American countries will find it extremely hard to cope with it.

In developed countries.the central bank have acted very dramatically much more than so in 2008-2009.They have stabilized financial markets.As a result emerging markets have been able to begin to borrow again.Stock markets are back up and they have been managed very well.There has been massive fiscal support in developed countries and quite a bit of support in emerging and developed countries too. Lot of money coming from the IMF and the shock is smaller than we were fearing two months ago.But still the emerging markets are yet to recover strongly and though they will eventually ,there would be a lagging effect on them. At global level we should be able to pass this recession but this is a very big recession. Next year we will see the recovery but it will be very weak.Most countries won’t be able to recover next year, some will be able to do so and there will be longer term losses. This depression is very short,very sharp,and has hit the economy massively , in multiple ways . The recovery depends on the impact of disease. If there are further waves like it happened in case of Spanish flu hundred years ago then we could be in trouble back again.

Developed countries that have done the best in mitigating the disease-:

in terms of curbing the disease,where it started bringing it to control china has done very well in a ruthless but efficient manner.In developed countries next in the queue are Japan,south Korea,Germany .These countries managed the disease very efficiently , undertook relatively small economic hits and are on a path to recovery.

Developed Countries that are worst affected by COVID-19

The hardest hit in terms of death is UK.The other countries that witnesses high death rate and economic hit and are Italy,Spain,France .The US falls in a category of its own.It is slightly different than others as it did not have extraordinary death rate but the incidence is still rising.It did not face extraordinary economic shocks because the markets were open . However, it is beginning to close now. What works for them is that they are decentralized big country with lots of economic space.The US will come in the category of the biggest countries who mismanaged it completely.

Emerging Countries handling of Covid-19

In Emerging countries Brazil,Russia are terrible, with their death rate per million being highest in the world. Coming to India, death rate is very low, the infection incidences are rising , but not dramatically. In fact so far, when it comes to Coping with the disease , India is doing well. No Doubt the economy has been hard hit but the Indian govt handled it substantially better than Brazil and Russia. However with India we don’t know where the Covid-19 infections will end up as the population density is very high, with very large cities.If the virus spreads too much, it will be very hard to control.

IMF sees India’s economy contracting by 4.5 % this year . India was growing 5-6% earlier before Covid -19, which anyways was very disappointing with the unemployment issues. If it shrinks further by 4-5%which is a 10 percentage basis points,then it would be an insult to injury . India should be doing better than this with a younger population demography and low Covid death rate .This would be equivalent of going from 2 to -8% in developed countries and It will severely hurt the life of Indian people . It seems as if India did not make the stronger use of fiscal tools to address the issue.

What The Indian Government can  do on the  fiscal side?

Govt has to provide a lot of support to demand.Simply give people money. Use systems to give money  to people to maintain their lifestyle,encourage spending in a scale that people can do it despite losing their job and livelihoods, so that the demand is maintained.Also the Government  needs to figure out how to manage the debt situation of the company so that they do not collapse.The key thing is to maintain a sustain demand by providing sustained income to people and small business which average Indians rely largely upon . Unlike Other emerging countries India is in a very good position as India’s domestic saving is very high, and it finances itself through it. If India goes back to  normal growth it can manage debt interest very easily,The relationship between debt interest and growth rate is favorable in India. Without worrying for  deficit this year, India needs to spend.That way,the economy decline will be smaller,business confidence will be stronger,the heath of the people will be maintained.

The debt in the economy can be allowed to rise by 20% but the fiscal policy needs to be tightened after that.There are risks associated with that,but it is worth taking.For example currently,the ratio of public sector debt to GDP is about 70%, it can go to 90%, provided with a plan to get it back to 70% again.We can afford a large deficit for a short period.Because Real GDP is growing at 6-7% a year,nominal GDP growing 10-12% a year,Long term debt rate is way below the nominal growth rate and also we are borrowing domestically on our own currency not on foreign currency and monetary policy is reasonable.

Modi needs to act fast and needs to make bold decisions. We have to understand that there is huge employment problem in India that existed even before this crisis. With this pandemic, it has only got exaggerated, and an entire generation might have their prospects blighted . Modi has to do, whatever he can do to not let this happen. Modi has show signs of that he is bold.His boldness sometimes has been unwise.His overnight demonetization and sudden lock-down of nation was not wise and Sensible. Some of the bold moves taken by Modi are sensible like 1. The Allowing of coal mining in the private sector giving how politicize the issue is and how strong the coal unions are.2.The invitation to private sector for running a bunch of trains given how strong the railway union are.3. Big Corporate tax cut announcement last year .

On the next part we shall look at the reforms that Indian Government should take to woo investors for Investment in India who are pulling their business out of China.