New Delhi: India has been sliding into an economic crisis since 2015 [I had called it the tailspin]. This was due to economic policies that have been followed since 2006 without a national debate on such policies.
Since February 2020, the slide to crisis runs the risk of being compounded by the consequences of a new variety of coronavirus, called Covid-19. We are now facing an imminent disaster unless sufficient remedial measures get taken.
As a rational person, I would rather err on the side of caution than commit the folly of being complacent. So on this forecast I would rather be wrong than right, which would certainly be the case, were necessary measures implemented to mitigate the additional effect of the Covid-19 pandemic on the national economy.
At present, on the statistics put out by governments, the pandemic is rapidly expanding across practically all the nations of the globe. As far as India is concerned, available statistics show India has not been, comparatively speaking, hit very hard. It is apparent from his actions that Prime Minister Narendra Modi is taking no chances and is focusing on the curative and preventive measures on a war footing.
When the news came out from China, and of the virus’ spread to Italy, we barely reacted. In February, Dr Jaishankar at the Ministry of External Affairs (MEA) had information. Based on this, a recommendation was made to the Union Health and Family Welfare Ministry (headed by the efficient and knowledgeable Minister, Dr Harsh Vardhan). This was to order the immediate quarantine, to begin with, in airports of all arriving visitors from abroad, especially from West Asia, Europe, US and China.
The foreign visitors to India included those infected, India has been sliding into an economic crisis since 2015 [I had called it the tailspin]. This was due to economic policies that have been followed since 2006 without a national debate on such policies.
Since February 2020, the slide to crisis runs the risk of being compounded by the consequences of a new variety of coronavirus, called Covid-19. We are now facing an imminent disaster unless sufficient remedial measures get taken.
As a rational person, I would rather err on the side of caution than commit the folly of being complacent. So on this forecast I would rather be wrong than right, which would certainly be the case, were necessary measures implemented to mitigate the additional effect of the Covid-19 pandemic on the national economy.
At present, on the statistics put out by governments, the pandemic is rapidly expanding across practically all the nations of the globe. As far as India is concerned, available statistics show India has not been, comparatively speaking, hit very hard. It is apparent from his actions that Prime Minister Narendra Modi is taking no chances and is focusing on the curative and preventive measures on a war footing.
When the news came out from China, and of the virus’ spread to Italy, we barely reacted. In February, Dr Jaishankar at the Ministry of External Affairs (MEA) had information. Based on this, a recommendation was made to the Union Health and Family Welfare Ministry (headed by the efficient and knowledgeable Minister, Dr Harsh Vardhan). This was to order the immediate quarantine, to begin with, in airports of all arriving visitors from abroad, especially from West Asia, Europe, US and China.
The foreign visitors to India included those infected, i.e., carriers/communicators of the deadly virus. The authorities were oblivious. The authorities could have also commandeered two or three large hotels in the airport complex in major cities to create ad hoc hospitals.
The hotels near Delhi airport should have been commandeered for admitting the suspected cases for quarantine, but not for treating the infected.
The same plan should have subsequently been executed for Mumbai, Hyderabad and Chennai, and to other cities if necessary. This was not done. Complacency?
Even later, in the month of March, for the Rashtrapati Bhavan breakfast meeting of some Ministers and MPs [in the third week, on March 11 and 18], no precautionary checks were made by the authorities. This led to subsequent discovery of an MP possibly being infected, and hence tests had to be carried out on the Ministers and the Rashtrapati also.
Now the situation is on the cusp of reaching the third stage, because of the danger of infected resident Indians communicating the virus to other local Indians, whereby those in India declared positive for Covid-19 would serially infect other Indians, and the spread would go up exponentially and could reach a large section of the population of India by June this year.
The entire medical system would then have collapsed long before—around April third week. Chaos would result. Alarmist as it may sound, it is now better to be over prepared and alive than being complacent and dead.
Fortunately, Prime Minister Modi has personally intervened and has now declared a 21-day total lockdown on March 25, just past midnight. This will give the authorities time to focus on the single task of ensuring all infrastructural arrangements are made to give Covid-19 positive patients the opportunity to survive and recuperate.
I would suggest that to make the lockdown very effective, Delhi should be made into a nerve centre for supervising and administering the entire nation, for which the law and order machinery needs to be handed over to the Armed Forces. Delhi Police already is overworked and lacks the necessary preparations to meet the demands of the nerve centre. The Armed Forces, by training, are equipped on a contingency basis situation to be hardware and software prepared.
The second step I suggest is for Union Government to get vacated AIIMS and five other hospitals in the Delhi airport area and designate and reserve them for Covid-19 patients only. The state governments, with Centre’s help, should replicate that modus operandi in their governance domain. The IAF should be given the task to move the infected in military transport planes to these designated hospitals.
I am suggesting all this because statistics show that “community infection” by the novel coronavirus, as we have seen in Northern Italy, has yet to begin in India. Once it starts, it will come in waves unless we are already sufficiently prepared for it. It is better to err on excessive preparation than underestimate the pandemic and regret it.
ECONOMIC CRISIS
The worrisome aspect is that India today faces a double whammy: That is, the gravely damaging Covid-19 pandemic, which is debilitating the nation, coupled with a pre-existing and rapidly developing economic crisis due to past flawed policies that have already hugely emaciated the financial system.
The good news is that the current developing economic crisis does not necessarily mean an irreversible collapse of the economy. In the last 73 years, India has always come out of several economic crises, once these were acknowledged as such, and then dealt with, bereft of any self-deluding spin, and by instituting urgent reform. The Green Revolution of the late 1960s and the economic reforms of the early 1990s are examples of this fact.
Thus, the food crisis of 1965-67 led to the Green Revolution and food self-sufficiency. The foreign exchange crisis of 1990-91 [when I had just become Minister] led to economic reforms by Narasimha Rao based on my blueprints of March 1991 [when the Chandrashekhar Cabinet had adopted it], which called for moving away from Soviet socialism to a market system based on incentives and thus led to unprecedented high GDP growth rates, rising from a 3.5% annual rate of four decades [1950 to 1990], to 8.5% in 1995-96.
The situation of crisis in the Indian economy today is also, according to this writer, retrievable and that turnaround can be achieved within three months after certain “real”, and not cosmetic, economic policy changes.
The nation today has been afflicted by a poorly structured economic policy since 2006, not only due to poor knowledge of macroeconomics in the Ministry of Finance, but today also due to some legacy issues of the UPA’s dangerously flawed policies, which for some inexplicable reason, the Finance Ministry has failed to comprehend.
The legacy issues today are: (1) the unbearably high interest rates for credit from financial institutions; (2) a rigged stock market; (3) debilitating tax reliefs for foreign portfolio investment; (4) cronyism in obtaining huge bank loans on spurious and corrupt basis that were never paid back; (5) the huge siphoning of black money abroad—about $2 trillion through the hawala route; (6) continuing incentive-killing income tax “terrorism”; (7) an insanely convoluted UPA-mentored GST; and (8) a half-baked gold policy implemented between 16 May 2014 and 22 May 2014, and continued subsequently on the insistence of Finance Minister Arun Jaitley.
The combined effect of such counterproductive measures [and more which are not mentioned here but available in my recent book titled Reset, published by Rupa, September 2019], has shredded the demand side of our economy today.
No recovery of the economy is possible without undoing and/or repairing the foregone years of systematic damage to the demand side of the Indian economy. We can spend a life-time hunting for green shoots, with no avail, since these never existed. Spin cannot make the grass grow.
Covid-19 damages our economy not only on the demand side [such as demand for iron ore, other raw materials, garments, pharmaceuticals, etc.], but more severely on the supply side of the economy. For example, the loss from tourists from abroad and from within the country refraining from travelling due to restrictions, will cause loss for airlines, railways, hotels, travel agencies, restaurants, connected retail sales, etc. In general, the service industries, which is a part of India’s fastest growing sector constituting over 51% of the GDP, will be adversely affected, which will cause increased unemployment.
The China impact on imports [which are 15% of total India’s imports] will also affect inputs for pharmaceuticals production, electronics, soybeans, and essential spare parts for vehicles, all imported from abroad.
Hence, to design a package for relief, the government would have to deal with both demand and supply impact.
So far, except for some ad hoc measures, no such concrete package has been prepared by the Ministry of Finance, the NITI Aayog, or the several Council of Economic Advisers in PMO or Finance Minister or RBI or even all put together.
Any publicly announced ad hoc financial package should be uncontroversial, and simply and honestly put out before the media.
According to the New Indian Express Editor, Prabhu Chawla [as published on the front page of March 27, 2020 edition], the MoF’s March 26, 2020 fiscal package released announcing a Rs 1.70 lakh crore relief includes Rs 70,000 crore, which was already budgeted for under pre-existing schemes. If true, this is unacceptable spin. I have no way of verifying this, and really it is the responsibility of the MoF to answer this, for protecting government’s credibility at this sensitive juncture.
Before I suggest a package, it is worthwhile to see what foreign democratic governments have already announced. I have sent a copy of the same to the Prime Minister and also uploaded it on social media.
In a letter to the Prime Minister I have included these packages as suggestions for consideration.
To seriously address the priority problems, it is essential to implement the following new menu of measures to uplift economic growth: (a) by dramatic incentives for the household to spend and yet to provide for the sentiment to save by measures such as abolition of personal income tax; (b) lowering the cost of capital via reducing the prime lending interest rates of banks to 9% to induce all sizes of industry to restart activity; (c) by shifting to a fixed exchange rate regime of Rs 50 per dollar for the FY20 and then gradually lowering the exchange rate for subsequent years to what is the PPP rate of Rs 7 per dollar. This is to encourage to buy raw materials and spares for their machinery. We have about half a trillion dollars in reserves to easily accommodate this necessary step to kick start the economy; (d) invoke the UN Resolution of 2005 on Corruption and bring back black money of about $2 trillion stashed abroad, and held illegally; and (e) printing adequate rupee notes to fully finance basic infrastructure projects and pay the workers to generate demand while keeping concerns about fiscal deficit ratio in the cold storage for the next two years.
Thus, the present possibility of an economic crash should galvanize the Government to review honestly the way we have failed to govern in the economic sphere in the past, and rise to new heights by appropriate change in policy and governance, and thus target to achieve gradually higher growth rates to reach within two years 10% annual growth in GDP with healthy structural changes for productivity, and incentives for developing innovations.
India today leads the world in the supply pool of youth, i.e., persons in the age group of 15 to 35 years, and this lead will last for another 40 years.
This generation is the most fertile milieu for promoting knowledge, innovation, and research. It is the prime work force that saves for the future, the corpus for pension funding of the old. We should therefore not squander this “natural vital resource”.
Modern economic growth is powered overwhelmingly (over 55% of GDP) by new innovation and techniques (e.g., internet). More capital deployed and labour utilized contributes less than 35% of growth in GDP due to the law of diminishing returns.
For innovations, we must, by proper policy for the young, realise and harvest the demographic potential through increased R&D expenditure of about 4% of GDP up from the present 0.5% of GDP.
Thus the Covid-19 calamity is an opportunity to restore public faith in the future by revamping our economic policy based on a proper understanding of macroeconomics.
Given India’s present economic situation, we cannot combat the setback caused—and will further cause—unless simultaneously we re-jig our present economic policy.
Today, India requires to seriously focus attention on identifying the main issue and charting the path, no matter how hard, to solution. It is my conviction that for meeting the developing Covid-19 challenge we need to set right the deteriorating economy, which has been on a tailspin since last four years and is heading for a crash.
Prime Minister has the necessary popular mandate as conclusively demonstrated by the voluntary Janta Curfew, for any step he thinks needs to be taken. I think he needs to take some drastic steps. The question is how much the follow up of the government machinery matches Prime Minister’s zeal and perspective.