The economic cost of Covid-19 is going to be huge. A shutdown for a month literally means a hole of at least 8.5% in annual output. Consumption, which accounts for almost 63% of GDP, is not likely to recover to that level, for this year at least. The view among most economists is that the annual GDP growth is likely to be at about 0.5% or less. This implies that annual consumption will decrease by about 6%-8%. Many others think the decline in consumption will be greater and growth could be sub zero. How soon consumption recovers depends on how soon the lockdown ends and how soon job losses are restored.
The US is intending to pump $2 trillion or about 10% of GDP into its economy. Britain and France intend to pour in about 5% of their GDP, while Japan is injecting $1 trillion or a 20% of GDP. Our government’s economic revival package of Rs.1.7 lakh crores is about 0.6% of GDP. Even within it, a third is money already collected as a cess for the express purpose of assisting construction labour and unused for years. So the Modi revival package is no more than 0.4% of GDP. Clearly we need to do much better.
The collapse of consumption will not only result in a commensurate contraction of manufacturing, but will also choke the system with huge unsold inventories. Resuming manufacturing to even near old levels will take longer due to supply lines being disrupted. The automotive sector, which accounts for 7.5% of GDP or about half of all manufacturing will take longer to revive as consumer confidence has shrunk. The recovery of manufacturing depends on how soon this sector revives. The incidence of automotive taxes range from 29% to 46% of the end prices. To get the unsold stock moving, the government must consider a deep slash of the GST for a limited period to get customers rushing back into the showrooms with their chequebooks.
But most damaging of all is the loss of jobs. India has a labor force of about 495 million. A paper Santosh Mehrotra, Professor of Economics at Jawaharlal Nehru University co-authored with Jajati K. Parida pegged the share of the informal sector was at 90.7% overall and 83.5% in the non-farm sectors. Using National Sample Survey and Periodic Labour Force Survey data, they estimated that 260 million are employed in India’s non-farm sector and 205 million in agriculture. Thus, the number of informal workers totals about 217 million across services, manufacturing and non-manufacturing sectors.
Weak leadership team
The paper further suggests about 136 million workers in India, or over half the total workers employed in non-agricultural sectors, have no contracts and remain the most vulnerable in the aftermath of the corona lockdown. They are almost all daily wagers. The latest Centre for Monitoring the Indian Economy report estimates unemployment in this sector to be a little over 30%, or anywhere between 40 million-50 million rendered wage less. Daily wages are just about enough to meet the most basic daily food requirements of a typical poor household.
So what can Narendra Modi do now to get us out of this quagmire? As it is he is hamstrung with a weak economic management team with novices as the two key players, the Finance Minister and the Reserve Bank of India governor. Even if he addresses this, where will the money come from?
India has over $480 billion nesting abroad earning ridiculously low interest. Even if a tenth of this is monetised for injection into the national economy, it will mean more than Rs.3.2 lakh crores. At last count, the Reserve Bank had about Rs.9.6 lakh crores as reserves. This is money to be used in a financial emergency. We are now in an emergency like we have never encountered or foresaw before. Even a third of this or about Rs.3.2 lakh crores is about twice the present plan.
There are other sources of funds also, but tapping these will entail political courage and sacrifices. Our cumulative government wages and pension bill amounts to about 11.4% of GDP. After exempting the military and paramilitary, which is mostly under active deployment, we can target 1% of GDP by just by cancelling annual leave and Leave Travel Allowance, and rolling Dearness Allowance by the last two or three increases.
The government can also sequester a fixed percentage from bank deposits, say 5% of deposits between Rs 10 lakhs-Rs 100 lakhs and 15%-20% from bigger deposits for tax-free interest bearing bonds in exchange. The ten big private companies alone have cash reserves of over Rs10 lakh crores. There is money in the trees, and all it needs is a good shake up to pick the fruits. The pain of the lockdown must not be borne by the poor alone. The government can easily target 5% of GDP for the recovery fund as an achievable goal. The fiscal deficit goals can wait.
This money can be used to immediately begin a Universal Basic Income scheme, by transferring a sum of Rs 5,000 per month into the Jan Dhan accounts for the duration of the financial emergency; fund GST concessions; begin emergency rural reconstruction projects to generate millions of new jobs and get our core infrastructure sectors like steel, cement and transportation moving again.
Lockdown cannot be an option to exercise indefinitely. We need to progressively lift it so that the economic costs will not overwhelm us. Remember the case fatality of Covid-19 is still about 1%, meaning it is not much more dangerous than our usual seasonal influenzas. Its rapid spread is what makes it dangerous as it might overwhelm our medical care system.
The data available now makes it explicit that the Covid-19 virus is dangerous mostly to the physically weak and vulnerable. Over 63% of those who are afflicted with visible symptoms are over 60 years old. Clearly we need to insulate the senior citizens and children from infection. The lockdown can be targeted to protect them. Thus, while high schools, colleges and industrial workplaces can be opened, primary and middle schools can be shut for some more time. We should also keep all places of social and religious gatherings such as restaurants, temples, mosques, churches, wedding and function halls etc. closed for the present.
The time has come to make tough decisions. Just clanging thalis and lighting diyas won’t do.