Article Type : Review Article
Authors : Deepak S
Keywords : Covid-19; MSMEs; Health
The Indian economy has been hit hard by the ongoing COVID-19 driven global crisis. As on 1 May 2020, about 25,000 people in India have been affected by COVID-19. With some variations, there has been an unprecedented rise in number of Corona patients across the world. A health crisis worldwide has generated a global economic crisis. The entire world is passing through great uncertainty. There are, primarily, two major challenges that the Indian economy is facing at this juncture. First is to save the country from the spread of COVID-19, which is a health emergency. Saving lives is the principal concern of the Indian government. Second is to save the economy from the unfolding economic crisis due to the dual effects of the COVID-19 pandemic and the global and national lockdown. Countries across the world are facing serious consequences and damages to the economies. According to the International Monetary Fund (IMF), many economies may face negative per capita income growth in 2020 due to the COVID-19 pandemic. In its recent forecast, the World Trade (Figure 1).
Figure 1: Pandemic-driven Crisis and Potential Foreign Policy Effects in India.
13 % and 32 % in 2020,
perhaps the highest fall since the Great Depression of the 1930s. The IMF has
also slashed growth forecast for the Indian economy, projecting a GDP growth of
1.9 % in 2020. In its recent World Economic Outlook, the IMF does project a
rebound in the growth of the Indian economy in 2021, at a rate of 7.4 %. So,
there is hope! Although India has managed well till date in containing the
spread of the virus, the COVID-19 pandemic has already disrupted normal
economic activity and life in the country. India’s trade has been severely
impacted. At the moment, businesses are very vulnerable to the unfolding
economic crisis. People have been facing a sudden loss in their incomes,
causing a major drop in demand. To rescue the economy, India has announced a
range of fiscal and monetary stimulus packages. The major aim of this stimulus
is similar to the traditional Keynesian prescription of ‘pump priming’, whereby
income transfers to people having higher marginal propensity to spend can boost
up the sagging demand.
Social
protection and other income support measures in announced fiscal stimulus
packages
The measures implemented or announced so far are encouraging. Namely, actions to support businesses include provisions to help them secure employment and wages by, for instance, providing income support to workers who may be temporarily laid off or those whose working hours have been reduced. Regarding measures to protect people, most fiscal stimulus plans offer income support to sick workers and their families by, for instance, Figure- Social protection and other income support measures extend paid sick leave to self-employed workforce or expanding its duration. There is some support for workers who cannot work from home, including help with caring responsibilities. Many plans extend access to unemployment benefits to workers who are not covered, ease way in to benefits or help to ensure that families can stay in their home (by suspending evictions, for instance). (Table 1).
Table 1: Social protection and other income support measures.
Type of measure |
Concrete actions |
Measures to support businesses, with
a focus on small and medium enterprises |
Securing workers jobs and incomes by
introducing or expanding support to laid-off workers or those whose wages are
cut training programmers. |
Measures to protect individuals and
households |
Expanding income support to sick
workers and their families; extending or easing access to unemployment
benefits; supporting workers who cannot work from home, including through
offering care options; easing access to targeted benefits or providing a one-
off universal income transfer. |
Measures to strengthen public health
systems |
Increasing health spending a |
The recent monthly
trade data for India reveals that the overall exports in January, 2020, compared
to January 2019, was down by 1.9 %.3 Looking more closely at the HS 2 digit
level data, it is observed that the major sectors which caused this slowdown
are vehicles other than railway or tramway rolling stock (HS 87), natural or
cultured pearls, precious or semiprecious stones (HS 71), nuclear reactors,
boilers, machinery and mechanical appliances (HS 84) and organic chemicals (HS
29). The sectors which helped prevent further slide in export growth are
mineral fuels, mineral oils and products of their distillation (HS 27),
pharmaceutical products (HS 30) and electrical machinery and equipment and
parts thereof (HS 84). In case of sectors causing the slowdown, it was seen
that the traditional markets were buying less from India. Given the impact of the
COVID-19 pandemic, the situation is expected to be worse. If the trade reduces
on an average as predicted by WTO then the slowdown will reach double digits,
and hence, maintaining the market share in case of a general slackening of
demand may be the only option left.
This global pandemic turned economic crisis affects India’s economic and national security. The effects of the crisis on trade and foreign policy are not only complicated but also widespread. The financial crisis has begun with the US-China trade war, and then the rise of Corona virus pandemic accompanied by the global and national lockdown has occurred. As a result, we see a fall in global trade, capital flows and remittances; disruption in supply chains; contraction in outputs; rise in unemployment; and then rise in poverty. Health crisis, if not controlled, may generate further social unrests and complicated health hazards. Barring few, countries across the world have already entered into recession. The sudden drops in oil prices may cause a further contraction in growth, particularly in developing and emerging economies. Several business units may have to shut down and face bankruptcies, and with the fall in business orders, both international and domestic, the value of the currency may deteriorate further. Taxing people and economic units are politically not sustainable. What next? Pandemic then may lead to shooting up protectionism as it has been happening for the last few years, resulting in a further escalation of a trade war, and finally, the collapse of multilateralism. In India, there might be a parallel rise of anti-globalisation activities along with sub-nationalism. Political instability may rise as well. Funding for aid and diplomacy may shrink. Therefore, social and economic effects may pose greater foreign policy challenges, which ultimately may lead to the weakening of foreign policy and allowing the dominance of foreign power. So, the effects are quite diverse. These short-run economic conditions can also have long-lasting impacts. In other words, economic recession can lead to long term damage to the Indian economy (Figure 2).
Figure 2: Rebooting the economy.
It would be too early
to estimate economic costs of the COVID-19 outbreak, but uncertainties looming
around economic recovery are many. A large part of uncertainties could be
internalized if we manage to get back to normal economic activities without
compromising on safety and security of individuals life. There will be reservation
for people to take part in normal economic activities, given their individual
preferences (reservation) for security of health and life. There will be
several factors which will influence individual choice to work or not, e.g.,
age, human capital (level of education, health status, per capita income),
stock of accumulated wealth, alternative sources of income (interest, rents,
profits, royalty), immunity level, value of life, prospect of future stream of
income. However, it is the task of the policymakers to take into account median
individuals’ preferences while making policies. Keeping in mind safety and
security of old people, they may be allowed to avoid taking part in economic
activities physically. Mandatory health check-up may be suggested to avoid any
risk of life.
It is expected that
demand for public expenditures will surpass the available fiscal space, and
therefore, reprioritization of expenditures (or, expenditure switching) may
play an important role in prudential fiscal management. Any public expenditure
programme which does not have immediate economic or social benefits may be
deferred. Effectiveness of any fiscal stimulus would be dampened during the
present crisis due to uncertainties on time required to get back to normal
economic activities. Therefore, it is expected that fiscal stimulus would be
required for a longer period and much larger in size than the stimulus rolled
out during the global financial crisis. On revenue mobilization, the government
may consider acceleration of disinvestment programmes, auction of licenses of
natural resources extraction and utilization (e.g., 5G spectrum, coal blocks)
and reduction of unproductive subsidies. Given the uncertainties associated
with revenue generation from GST, providing GST compensation to states would be
an additional fiscal burden for the union government. Therefore, exploring a
suitable design of GST compensation cess – either as a concurrent tax or
central tax –may be a win-win situation for both the union and state
governments. Strengthening tax administration to reduce tax frauds (evasions)
and plugging the loopholes in taxation of inter-state trade of out-of-GST goods
may be timely interventions. On monetary policy, dedicated credit lines to
informal sector enterprises may play an important role to revive livelihoods of
lower strata of the society. Institutions like self-help groups and
microfinance institutions may play important roles to monitor activities of
informal enterprises and also facilitate credit off take and recovery.
On the supply-side,
easier accessibility of finance and reshuffle of regulatory bottlenecks would
go a long way in expediting recovery in the aftermath of this pandemic,
including via trade. Despite marked improvements in the ease of doing business,
India is still ranked 77th amongst 190 countries on the World Bank’s Trading
Across Borders index. A vast majority of Indian firms continue to identify
customs and trade regulations as a major constraint. Similarly, despite a
largely liberal Foreign Direct Investment regime, the country attract less than
2 % of its GDP as inward investment, signifying that other investment
environment and regulatory issues remain a challenge for potential investors.
Addressing these challenges would also facilitate commercial presence or Mode 3
trade in services, which is not only the most dominant mode for supplying
services abroad but often also a essential precursor to cross border or Mode 1
services trade. These two modes together account for nearly 90 % of global
trade in services, thereby brilliant their overwhelming importance from a
policy perspective. The RBI has already announced several policy measures to
ease the flow of credit in the economy. These include a 25 basis-point cut in
the reverse repo rate; extension of the realization period of export proceeds
from nine to 15 months; reduction of asset classification norms; an increase of
the limit under the Ways and Means Advances for states to avail short term
funds to 60% of the existing limit; and a special refinance facility of Rs.
50,000 crore to boost liquidity of NBFCs like NABARD, SIDBI and the National
Housing Bank.
The government has been
announced a Rs.1.7 trillion stimulus package that includes direct cash
transfers and food security measures targeted at the poor, farmers, health care
stuff, women, construction workers as well as the organized sector. However,
this allocation is less than 1 % of India’s GDP and clearly not adequate for
its 1.3 billion people, a section of which live in abject poverty, with about
60 % of the country’s total population living on less than US$ 3.10 a day,
which defines the World Bank’s median poverty line. The government thus needs
to apply more targeted stimulus packages over the course of the next twelve
months, also planned to address falling require as businesses shutdown and
people lose their job as a result of this emergency.
While COVID-19 is
primarily a health crisis, trade policy also provides options to address some
of the second-order effects emanating from the pandemic. First and foremost,
the government must avoid the use of export barriers on COVID-19 goods and
services, from both trade policy and charitable perspectives. It should also
use the pandemic as a prospect to ease up imports by sinking both levy and
non-tariff barrier and not just on medicine, medical supplies and necessary
equipment. Such liberalization may be even more necessary for services sectors
like traveller transport, service, health and education, which are likely to
observe imposition of regulatory precincts on health grounds. The government,
however, must ensure that such restrictions do not become unaffordable and that
borders, both domestic and international, remain open. Lowering of trade
barriers on goods and services used as intermediate inputs for domestic
production and exports will also reduce economy-wide costs for both consumers
and firms, facilitate recovery from both the demand and supply-side.
There are a range of
areas given below where the government can undertake involvement to boost
domestic production and trade opportunities in COVID-19 related products.
Trade cannot grow
without commensurate policies to revive the economy. A combination of fiscal
and monetary stimulus is required. The Reserve Bank of India (RBI) in its
policy statement on 27 March, 2020 reduced the repo rate by 75 basis points.
Along with that a slew of measures to increase the liquidity in the country
were undertake. Policies to lessen stress due to debt burden through moratorium
on debt repayment and also not classifying them under 90 day NPA norms and
allowing more advances to states under ways and means advances are policies in
the right direction. Increasing provision for higher liquidity should also
match with renewed business and customer sentiments. The lockdown has caused
severe stress on mostly the daily-wage earners and also employees in the formal
sector who fear losing jobs due to slackening economic activity. o, the
monetary stimulus will only work when 90 % of the labour force who are either
working in the informal sector or are casual workers in the formal sector get
some relief in terms of direct cash transfers to boost their income during this
difficult period. Given that most of the highly affected countries have
announced bail-out packages which include income transfer, this should be
followed in India as well. The fiscal stimulus announced by the government
seems inadequate when compared to the measures taken in highly affected
countries.
However, the situation
is expected to improve in the third and fourth quarters of the ongoing financial
year as Christmas and holiday seasons in the US and EU, which is historically
demand driven, could lead to boost India’s exports. Once most countries lift
the lockdown and the global economy begins to kick-start, a weak rupee against
the dollar could also boost India’s exports and India’s niche in certain
products such as pharmaceuticals, which will be in high demand due to the
pandemic will also help India’s export sector. The government has extended
serious attention to the external sector as most of the issues being faced by
India’s exporters and importers have prevailed for several years including
before the pandemic. The pandemic has only aggravated the problems. For
instance, India’s foreign trade policy (2015-20) is outdated and needs a major
overhaul and restructuring, which is long overdue. Last year, all the export
incentive schemes under the FTP were ruled to be WTO non-compliant by the
global trade regulator. Though the government is negotiating with the
multilateral body, it is given that India needs to do away with subsidies given
to the export sector in the form of various schemes, which are WTO
non-compliant. Recently, the government abandoned the Merchandise Exports from
India Scheme (MIES) and replaced it with the Remission of Duties and Taxes on
Exported Products, which is called the RoDTEP. However, whether the scheme is
better than MIES and more beneficial it is too early to say. The Indian exports
scenario certainly looks bleak. With more and more countries becoming
protectionist and India largely into the export of intermediate goods and raw
materials and with manufacturing in a slump across the world, the demand
scenario is not encouraging.
Global shock like the
COVID-19 pandemic require a global, co-ordination response, which in turn
requires leadership, which unluckily is missing at this point in time. India
should, therefore, use the COVID-19 pandemic as an opportunity to galvanize
support for coordinated action at the multilateral level and play a lead role
in this regard. That would be the best response to this crisis. Trade policy
reforms can be a vital element in our response to the Corona crisis. Limiting
the negative economic and social impact will require reforms that reduce the
cost and improve the accessibility of corona virus goods and services. Measures
to rationalize trade procedures and facilitate trade can add to the response to
the crisis by expediting the movement, release, and authorization of goods,
including goods in transit, and enabling exchange of services. Reforms can be
designed to reduce the need for close contact between traders, transporters and
custom/port officials to protect stakeholders and limit the spread of the virus
through use of eBL process, while maintain essential assessment to ensure
revenue, health and security. Interventions to sustain and enhance the
efficiency of logistics operations are also critical in avoiding substantial
disruption to distribution networks, and hence, to regional and global value
chains. These measures will address the COVID-19 related downturn and support
the eventual economic recovery. Trade in both goods and services will play a
vital role in overcoming the pandemic and limiting its health and economic
impact, across nations. Trade contributes by providing countries access to
essential medical goods (including material inputs for their production) and
services to help contain the pandemic and treat those affected; and only if
necessary inputs to the industry and maintaining economic activity in the face
of a global recession, disruption to regional and global value chains. Trade
policy must stay open.