COVID-19: Is the wind blowing in the right direction Economically?

Gauri Singh is a 2nd year law student at Durham University, UK. Aryan is a 3rd year law student at Jindal Global Law School, Sonipat.

The COVID-19 pandemic has created havoc loss of life and has led to an economic slowdown. Economists fear that the downturn could be more devastating, as the government plans to intensify the restrictions on businesses to halt the spread of the pandemic. The GDP growth rate has plunged, and the macroeconomic fundamentals appear bleak globally. This has posed major challenges to economists and policymakers worldwide, including India. The Indian Government (GOI) and the Reserve Bank of India (RBI) have announced certain measures to ameliorate the after-effects of the COVID-19 pandemic and reign in the resilience of the Indian economy. This article critically analyzes the key measures adopted by the GOI and the RBI.  In this article certain other additional measures are suggested, which are thought to be necessary at this junction. Few macroeconomic theories/principles are also intertwined along with the measures discussed off. In the hindsight, the state of the economy before the outbreak of the coronavirus pandemic is also kept in mind.

Germany, one of the western economic power horses recently declared that their economy has entered recession on account of the Covid-19 pandemic. Similarly, most economies are on the verge of collapsing and entering into a recession that is the worst since the 1930 great depression. The world has not seen anything like present pandemic since 1918 Spanish flu and the same has left policy makers across the world clueless. The medical crisis has devastated not only the society but also the economies of most countries. Though China, where the virus first set foot has recovered and is starting to open up, all the other countries are now at the center of the virus. As a result, every nation has taken a protective measure by locking the whole country down and stopping all but essential work. These measures also include acting against globalization and restricting all travel between nations by closing the international borders. India has arisen as one of the major war zones against the virus. Though the number of cases my seem little as compared to the massive population of India, India resorted to all precautionary measures like the closure of all factories and offices. Therefore, India has also had to face the economic repercussions of imposing these restrictions.^[1] While the RBI governor has strongly asserted that India will manage to be fine in the aftermath of the virus, he has also stated that economic costs of this pandemic will surpass the 2008 global recession.^[2] In addition, the pandemic is bound to cost corporations immensely and also result in a fresh wave of unemployment’s. This is a major concern for India as it already has a very high level of unemployment rate i.e. 7.7%.^[3]

With India losing a lot of money on a daily basis,^[4] the RBI and the finance ministry has initiated several reforms in the hope of mitigating the drastic implications of the spreading virus. In the hope of creating a balance between precautionary measure and pro economy measure, several monetary and fiscal measures have been adopted by the government to ensure equilibrium in the economy. While recession may seem inevitable at the moment, it will be interesting to see if these measures can ensure that the demand doesn't fall alarmingly in the economy. A handful of measures have been taken by the government. As a first measure, the finance minister, the government announced a relief package for the poor people in the country. Acknowledging that the lock down will cause extreme troubles to the people who are daily wage workers or don't have enough resources, the government pledge ₹1.7 lakh crore to provide for the basic needs of all the needy people. However, this relief package also received some criticism as many scholars believe that the relief package brings only 0.7% of the GDP,^[5] doesn't provide adequate safeguards. However, the government is expected to launch a new set of graded relief measures soon to provide additional safeguards. Secondly, the relief package also acknowledges the concerns with respect to employment crisis that may arise because of the virus. Therefore, the government has sought to increase the money provided under the MGNREGA programme. This addition has been made by ₹20 and the same is bound to impact a massive 136.2 million families.^[6] Also, the relief package covers the whole provident fund contribution for all the workers who earn lesser ₹15,000 per month.^[7] Primarily, the government is trying to ensure that these vulnerable workers are able to afford their livelihood and not be discarded by their employers. Similarly, the government has also vouched to support the sections of the society such as poor farmers, senior citizens and widows, etc.^[8] Lastly, similar of the US, in a separate announcement, the finance ministry has agreed grant tax and GST extensions and extended the due date for filling returns to 30 June 2020.^[9]

While another set of relief measure is expected soon, the RBI has taken a strong stand in the wake of the pandemic. The RBI has released its measures in the following three steps.

1. In the first announcement, RBI announced various measures intended to secure enough liquidity and cash flow during the pandemic. Primarily, the RBI to ensure that there is demand reduced the policy rates. The reverse repo rate and repo rate were reduced to 4.4% and 4% respectively.^[10] Moreover, to grant more scope to banks, the cash reserve ratio was also cut down to 3%.^[11] These measures of the RBI were focused on installing ₹3.74 lakh crore into the economy.^[12] Another big update from the first announcement of the RBI was the introduction of the 3 month long moratorium on the payment of loans and EMIs.^[13] This measure was widely regarding as a lifeguard for all borrowers.^[14] Among the other measures announced the RBI targeted cash flow in the economy.
2. The second set of measures were announced a few days later, wherein the RBI shifted its focus on the liquidity of resources available with UTs and States and decided to elongate the Way and Means Advances (WMA) limit by 30%.^[15] Also, to give assurance to exporters in light of pandemic driven crisis in other nations as well, the RBI allowed them to file their profits Moreover, as a measure to support the exporters facing the brunt go the pandemic, the RBI in 15 months instead of 9.^[16]
3. The third set of measures came on 17 April and was a further indicated of RBI’s attempts to increase the liquidity in the economy. The RBI decided to further diminish the Reverse Repo Rate to 3.75%, allowing banks to lend more.^[17] Moreover, to ensure solvency of NBFCs, the RBI has injected ₹50,000 crores through long term repo lending operations.^[18]

As we know, the RBI is responsible for managing the Monetary Policy of a country. Therefore, the RBI decides the supply of credit in the economy and increases the credit availability to spur demand. Essentially, an economy is at equilibrium when the Aggregate Supply is equal to the Aggregate Demand in the economy. However, in extra ordinary situations such as the present pandemic, the supply and demand curve are bound to faultier. Since the lockdown as resulted in the unsettling of the supply curve, the availability of the credit in the economy has suffered. Therefore, in order to ensure economic growth as protect the economy from the hands of recession, it is imperative for the government to take measures that increase the aggregate demand and trigger investment. All prior notions of policy rate reductions have been redefined by the RBI as it hopes that the people will borrow more and there will be more money in circulation. These attempts of the RBI must work together with the efforts of the government to fix the broken supply chains and ensure that there is no deficiency of essential commodities for every citizen.

These measures of the RBI can be best understood from the Keynes understanding of Macroeconomics. As we have studied about the Keynesian economics, the economic growth is triggered by an increase in Aggregate demand. It is in line with this theory that most states have taken the route to reduce their lending rates in order to incentivise demand. Such measures find support in the Aggregate Demand model proposed by John Keynes, wherein he emphasised that an economy is driven by demand and spending’s.^[19] Here it is instrumental for us to understand that the slowdown infused by the pandemic is essentially distinct from conventional economic slowdown like the one India was facing prior to the introduction of Covid-19 in India. This economic slowdown has come with immense number of social restrictions as well. Thus, the decision to inject funds to NBFCs and MSME’s will be a major saving factor for farmers and small business. Moreover, the favorable interest rates are an indication that the RBI is focused on ensuring that there are no deadly demand shocks in the economy due to the virus and negative demand shocks are a recipe for recession. Targeted Long-Term Repo Operation is a tool that is being relied upon by the RBI immensely in its fight to generate liquidity in the economy. Therefore, these measures may mitigate the damage of the pandemic by allowing easier cash flow and liquidity, thereby incentivizing investment. It is in this respect that the role of government becomes important. They have to ensure that the supply chains are fixed because long durations of disruption in supply chains and lead to there being a conflict between the Aggregate Supply and Aggregate Demand in the economy. Furthermore, the introduction of a moratorium in the market will also enable investors and borrowers to seek trust and faith in the economy. Taking notice of the economic situation, the RBI has provided a sight of relief to all the corporations and investors by extending the dates for filing of interest and NPAs. This will allow investors to be more confident in the support being provided by the economic framework of the country.

However, already suffering from high rates of unemployment, the Covid-19 situation has been a nightmare for migrant workers and daily wage employees. They have taken to the streets to show their displeasure and have criticized the government of not planning the lockdown adequately. While the government has been working hard to provide food to all the citizens in these troubled times, unemployment rates are bound to increase as supply chains falter and corporations are not able to match their costs. It has also been predicted by the ILO that millions of workers will end up losing their jobs as the world economy enters depression on account of the pandemic. In order to fight laying off of workers, the government has been trying to provide relief to corporations and providing them with liquidity. Unlike the USA, where the government has provided massive stimulus packages, the same is still awaited in India. However, the government has provided for relief measures and also contributed to the provident funds of the poor workers. With the partial opening of the economy from 20th April, the government has adopted the notion of ‘life with livelihood’ and will be allowing workers to resume work in some sectors. This is important for famers are fruits and vegetables grow well in this season and they are perishable good. Therefore, fixing the supply chain and allowing them to sell their products is a key policy decision post the first phase of the lockdown.

The economic responses to the pandemic have also once again established the need for state intervention in times of crisis of such magnitude. Similar to the great depression, where the market forces couldn't rectify the pitfalls in the economy on its own, state intervention has become a key instrument again it is keeping economies afloat. Therefore, as against the neo liberal understanding of the economy, the state has taken the driving seat in implementing reforms and ensuring that there is no recession. The changes in prices for the poor and targeting demand through policy rates is key in mitigating the dramatic effects that the virus may have on the people of India. Moreover, as the fight against the virus is being conducted at local levels, the measure of the RBI towards expounding the WMA limit is essential as it allows the states to possess enough resources at its disposal.

Whether the virus could have been avoided by India is a question of the past. We are now facing one of the deadliest crises in 100 years and our response needs to be up to the mark. Reports have made it crystal clear that the development of a vaccine for the virus will still take some time, therefore precaution is the only cure at the moment. However, precaution must be taken along with measure to save the economy. Saving people from the virus but allowing them to succumb to hunger is also not a viable scenario that the government can allow. While the economic effects of the pandemic will last much longer than the virus itself, the country has started to see its implications in the form of lack of security. Money to lend doesn't automatically correspond to more money in the economy. The investors must be willing to borrow the same. However, there is a lot of uncertainty surrounding the pandemic right now and the same is deterring many investors to bear the rick. Therefore, the RBI has been injecting money themselves in the hope of ensuring adequate liquidity in the economy. The IMF has predicted that India’s grow rate will be amongst the best in the world. However, it is safe to say that the measures of the RBI are not to boost the economy at the moment. It is solely to protect it from the worst consequences of the pandemic. It is in these situations that sometimes India takes respite in its black money economy.