Shutdowns and fiscal stimulus packages being used to address the financial crisis caused by COVID-19 may not hold up in the long run, write Saswati Chaudhuri and Biswajit Mandal
A well designed cooperative farming model to produce food and other agricultural commodities and a properly monitored public distribution system would, to some extent, be able to slightly heal the economic wound
The main concern facing the global economic leaders is twofold — how to combat Coronavirus and how to survive once the debacle wanes off? The first question is relatively short-run in nature but will certainly have some long-run implications whereas the second anxiety is a long-run problem with sustaining greater repercussions. Hence these two should be administered very prudently, keeping the required balance in a proper perspective.
In anticipation of a grave economic upheaval, various countries have already declared several economic relief packages to stimulate their trembling economies. Britain has till date announced fiscal stimulus and emergency package in four tranches. The first package was of 12 billion pounds, which was closely followed by a 330 billion pound stimulus package comprising government-backed loans as well as grants and taxes for struggling companies. A third instalment package meant 7 billion pounds of extra welfare spending when the government decided to pay around 80 per cent of the salaried employees' wages up to a maximum of 2500 pounds a month. The last emergency package of 9 billion pounds is meant as support for the self-employed. This, of course, is more than the package announced by the then Labour government during the financial crisis. The package stands at about 3 per cent of GDP, compared with 2 per cent during the financial crisis.
The US Senate also unanimously approved a $2.2 trillion stimulus package to address the economic impact of the Coronavirus. The package is mainly comprised of assistance to large and small business ($881 billion), health spending ($180 billion), expanded unemployment benefits ($60 billion) and food stamps and safety nets ($42 billion). The package also aims to send direct cheques to tens of millions of families to stimulate the economy. The taxpayers would get $1,200 per adult and $500 per child.
Australia has also announced a $17.6 billion economic plan to help its economy tide over the crisis. A second stimulus package worth $54.2 billion including, among other things $24.3 billion in small business loans was also announced. France announced a $49 billion aid package allowing for substantial social-security tax cuts, unemployment benefits for people forced to work part-time and also a fund to help shopkeepers and the self-employed. Germany lent out as much as $610 billion to companies to cushion the effects of the Coronavirus along with $172 billion in increased spending which included assistance to small businesses and the self-employed and safety net programs.
In what follows, the International Monetary Fund has finally officially affirmed that the world has entered into a phase of global economic recession. India is no exception. The Indian government announced a $22.6 billion spending stimulus package, just like the other economies facing the crisis. The main focus of India's package has been to take up measures so that the hardships on the poor are eased to a certain extent. The plan includes cash transfer in the form of advance payment to farmers under an existing income support program, free cooking gas to the poor under the Ujjwala scheme and insurance cover of Rs 5 million to medical workers are also part of the plan. Wages under the MGNREA have also gone up to Rs 20 per day. However, India's stimulus package constitutes only about 0.8 per cent of the country's GDP and pales in comparison to the measures taken by all other countries. In addition to the government's fiscal stimulus, the Reserve Bank of India announced a moratorium of three months. The prime motive behind all such measures is to inject some more disposable money into the system or maintain the current flow unabated. This is perceived to be able to keep the economic ball rolling which would naturally retain the pace and process of operation in the economy.
Infusion of money into the system is mainly targeted to control the scarcity of disposable funds in the hands of masses including salaried and non-salaried individuals. On the one hand, this would help them to procure essential goods like food, medicines etc., during the crisis such that a part of the stimulus package is meant for the survival of those who are not yet infected. This is also consistent with ensuring the smooth functioning of the production-consumption cycle in the post-Corona chapter. On the other hand, once the health crisis comes to a halt, a normal cycle will gradually start. We would thus need healthy people to work for the economy, to produce goods and services and to transport them to the consumers staying in different parts of India and the globe. This must not be ignored while dealing with the current phase of the outbreak. At the same time, the existing regular demand for whatever is needed is extremely important as it also supports the farmers and the manufacturers who have already produced their bit and are still continuing to produce. Otherwise, these unsold goods and food would yield losses to them in particular and the economy in general. This may beget another round of financial stimulus to compensate for their losses.
Besides the lockdown, hand-washing liquids and sanitisers are not things everyone can manage to pay for in a country with around 50 million people living below the poverty line with a population density of 464 per square kilometre, and with a very lopsided distribution of income and wealth. To enable them to have daily necessities and to allow them to afford very nominal hygiene, this stimulus package is imperative. This will not only help them resist the current health crisis but also qualify them to carry on with their daily livelihoods.
A complete lockdown for a longer span of time would certainly cause disruptions in the supply chain. It affects both domestic and international sequences. For the time being, we can disregard the international supply line as ignoring domestic demands is not a wiser option. But unfortunately, a prolonged lockdown will surely lead to disruption of the domestic supply chain as well. The produce would not reach the market on the one hand, and on the other hand, producers won't be able to get hold of requisite inputs to carry on their production process further.
In spite of commendable state intervention, commodity prices are showing a northward movement even when supply dearth is yet to be clearly visible. From this, one can easily gauge the extent of the price hike when markets become prey to supply bottlenecks. Given the level of supply, an increase in demand due to panic buying, hoarding or whatever, must result in a price increase. The market has nothing to do with whether the burden of this price hike is affordable for the general public, let alone the poorest of the poor. This is precisely why a free market economy may not always establish socioeconomic justice in a welfare state, even if it guarantees an incentive-based increase in productivity. Here comes the role of the government. Anticipating a sharp rise in the aggregate price level, the government must prepare a suitable scheme beforehand to curb the veracity of inflation during a plausible post-Corona phase. A well designed cooperative farming model to produce food and other agricultural commodities and a properly monitored public distribution system would, to some extent, be able to slightly heal the economic wound.
The ongoing complete lockdown and isolation remind us of a textbook-like phenomenon that ensures an all-round increase in global welfare. This is very popular among economists, and is also known to all economics graduate students – 'Pareto improvement'. This famous theory was developed by an Italian economist, Vilfredo Pareto. The concept is: making someone better off without making anyone worse off leads to welfare enhancement. Interestingly, the phenomenon of lockdown, self-isolation, quarantine are all in line with this principle. So, follow the Pareto principle, come out of the health crisis and then we can again continue with the same philosophy in economic front to break the shackles of economic recession led disorder.
Dr S Chaudhuri is an Associate Professor of Economics at St Xavier's College, Kolkata. Dr B Mandal is the Associate Professor for Economics at VisvaBharti University, Santiniketan. Views expressed are strictly personal