virus-spread-will-have-a-cascading-effect-on-growth-summary

Context: As the novel coronavirus spreads, a double crisis looms over India: a health crisis and an economic crisis, as the nation goes for an all-out shut down. 

More about the news:

  • In terms of casualties, the health crisis is still very confined, but the numbers are growing fast. 
  • Meanwhile, the economic crisis is hitting with full force, throwing millions out of work by the day. 
  • Unlike the health crisis, the economic crisis is not class-neutral, but hurts poor people the most.
  • Even if discontinuing public services helps to contain the health crisis, the economic consequences need to be considered.

Need for such shut down

  • When one decide to stay at home, there are two possible motives for it: 
    • a self-protection motive and 
    • a public-purpose motive. 
  • In the first case, one acts out of fear of being infected. In the second, one participates in collective efforts to stop the spread of the virus.


India slows down

According to the experts, as the coronavirus pandemic resulted in the biggest shutdown post World War II, this is bound to slow down economic activity and growth in the days and months ahead as factories and services are shutting down around the world. 

How will the shutdown impact growth?

  • According to an old law in economics - Say’s law - the production of goods ensures that workers and suppliers of these goods are paid enough to be able to buy all the other goods that are being produced. In simple words “supply creates its own demand". 

Current situation: 

  • With factories being shut down around the world, production is bound to take a hit. 
  • No factory produces everything itself, it has suppliers. Once production at a big factory shuts down, the impact is felt down the value chain.
  • Impact on services economy:
    • For instance, the airline industry
      • With many countries suspending international flights, aircraft have been grounded and airlines are doing little overseas business. 
      • Even domestically, the number of people travelling has taken a beating. With social distancing being practised across many cities, people are staying at home and not going to work. 
    • This has impacted incomes of taxi drivers and taxi businesses
    • Malls, theatres and restaurants are also shut. Informal businesses of different kinds - from street vendors and those employing daily wage labourers to small shops - are also suffering.
    • With transport routes dislocated, even the coming wheat harvest - a critical source of survival for millions of labouring families in north India, may not bring much relief. 

How are businesses dealing with the current situation?

  • Mass lay off: Many businesses are firing employees or slashing their salaries. Some Indian airlines are an excellent example of this. 
  • Not paying contract staff and freezing new hirings: 
    • Many businesses have contract staff, who won’t be paid in this situation. 
    • Even businesses that are not firing employees have had to cut down on production and, in that sense, they won’t be paying their suppliers. Also, new hiring has been put on a freeze.

The overall picture

  • Spending less: 
    • People who are fired will spend less money than they were doing before. 
    • Even those holding on to their jobs will spend less just to be on the safe side. 
    • Also, with people staying at home and trying to isolate themselves, there will be a natural tendency to spend less on discretionary items. 
  • Lower private consumption: All this will lower overall private consumption and, thus, slow down economies around the world.
  • Growth  forecasts for India have been cut: Bank of America projects India will grow at 4.7% in 2019-20 as against 4.8?rlier. The government’s growth forecast is 5%. 

Way ahead:

The Government of India  needs to devise rescue packages, particularly to help small businesses tide over the crisis. This economic crisis calls for urgent, massive relief measures.

  1. Tap social schemes: The first step is to make good use of existing social-security schemes to support poor people - pensions, the Public Distribution System (PDS), midday meals, and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), among others. 

               Initial measures could include 

  • advance payment of pensions, 
  • enhanced PDS rations, 
  • immediate payment of MGNREGA wage arrears, and 
  • expanded distribution of take-home rations at schools and anganwadis. 

Some States have already taken useful steps of this sort, but the scale of relief measures needs radical expansion. This requires big money from the Central government.

  1. Display creativity: Keeping public services going in this situation is likely to require some initiative and creativity.
  • For instance, anganwadis could play a vital role in public-health outreach at this time, even if children have to be kept away. 
  • Many public spaces could also be used, with due safeguards, to disseminate information or to impart good habits such as distancing and washing hands.

The urgent need for effective social security measures makes it all the more important as it will soon be very difficult for some State governments to run the essential public services. 

That would push even more people to the hardships and worsening not only the economic crisis but possibly the health crisis as well. 

Source: https://www.thehindu.com/opinion/lead/the-perils-of-an-all-out-lockdown/article31136890.ece

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