Covid-19 is straining not just global healthcare systems

The Corona is the newest and most dangerous virus infection the world has seen in this infant of a decade. The virus has brought global life to a standstill, with China shutting its major cities, Italy on complete lock down and India inching toward it. The one thing this virus has done, is expose the severe frailties in the global economies and supply chains that underpinned the bull market we are living in.

With countries moving into lock-down, there is an obvious hit to global economies and supply chains. The first problem that has emerged is the strengthening of the US Dollar. As the global economy weakens and global stock markets continue their downward trajectory, investors are looking for a haven, and have invariably chosen the US Dollar. A strong dollar creates complications for emerging markets as investors look to flee uncertainty and look for surety. At a time when emerging markets are looking to grow their economy and infrastructure through foreign investors, this creates an added strain on their economies. Additionally, research from the Bank of International Settlements shows that since the start of the financial crisis, unexpected dollar growth has hampered the global trade growth. This is primarily attributed to the slower lending of the dollar in emerging markets to combat the steep appreciation of the dollar. Since the onset of the COVID-19 crisis in Asia, almost all economies are currently sinking, with central banks trying to balance their rate cuts with their currency management goals.

Response of Central Banks all over the world. Source: Bloomberg

This is where the RBI comes in and has inadvertently helped allude some of the stress our economy would have faced. Last year, RBI created a dollar/rupee swap to increase its USD holdings and infuse liquidity into the market. This step increased India’s dollar holdings to a record-high of $455 billion. Although initially designed as a mechanism to increase the liquidity, the step had also helped cover India’s import goals for the next year. As investors look to flee India, the RBI’s gambit last year has helped temper some of shocks from the sudden bout of capital outflows. This has led to India being one of the few countries that has not cut its rates to manage the sudden changes in the global economy.

However, the picture is not all rosy for Indians as we go into crisis mode. As the banking sector continues to waddle in the wind of NPAs, the overall confidence of Indian consumers remains low. The slew of economic policy initiatives over the last 6 years have hit Indians hard. From Demonetization, to the GST roll out the Indian consumer has been scarred. The Indian consumer is now wary of buying things from cars to houses as projects remain stalled in metros and non-metros alike. According to Gautam Sharma, head of Nissin foods, “People aren’t consuming because they fear the future, there is an atmosphere of mistrust.” Unsurprisingly, the Indian economy has been slowing over the last few months with the IIP tracking downwards, and the GDP continues to remain unstable. With this bleak outlook, rating agencies downgraded the Indian economy to one level above junk. Moody’s said its ‘negative’ outlook partly reflects lower effectiveness of government and policy in addressing long-standing economic and institutional weaknesses than it had previously estimated. This is leading to a gradual rise in debt burden from already high levels, it said.

There is a more troubling story that remains under the surface, the expanding inequality in the Indian economy. Even as the Indian stock market reached new highs, the majority of the Indian public did not reap the rewards of this boom. This inequality in the Indian economy has stood the test of time, and is now answering the question policy makers have, why are we not growing? Studies have shown sustained inequality hampers the growth rate of economies and prevents economies from sustaining any momentum. Now as the country grapples with a pandemic ready to wreak havoc on our health system, it is also expanding the fractures in our economic system, There are large swaths of Indians who are unable to afford basic daily necessities in this time of panic, who cannot miss a day of work regardless of their health conditions.

To overcome this problem, the government cannot continue to employ old tactics to solve new problems.

1. The government should declare a financial emergency and must look to cut the spending in non-critical sectors and focus on the ones that have the most impact on the lives of the public. The focus of the recovery and stability has to be the Indian public and not the Indian firms. Bailout money needs to be redirected to the public and specifically to those who are going to suffer the most from this virus pandemic., i.e. laborers and self-employed individuals who are now unable to find work for themselves. The concept of a UBI for the next few months might be our best bet at ensuring that a pandemic does not escalate to an economic meltdown. To accomplish this the government can postpone the proposed dearness allowance scheduled to be given to government officials and use those funds to shore up the most vulnerable.

2. Policy makers must stop trying to meet steady-state budget goals in a crisis-state. The government recently hiked the excise duty to capitalize on the steep Saudi-orchestrated drop in crude oil prices.

3. the government has to keep food on the table for the public and improve supply chains. There has to be a mechanism for systematic delivery of necessary grains and vegetables to the public without sacrificing the health of the farming community.

4. For long term sustainability, the government needs to tax large farmers and religious institutions that are cash rich and escape taxes. This will help create a new avenue for income for the government and maintain the current income tax structure for the general public.

There must be a focus on preparing for such scenarios. As climate change related effects increase, the number of pandemics and natural disasters will grow. The government needs to have a new plan for this and be cognizant of its role in creating and solving the problem. If the economically disenfranchised are to reach critical mass, the economy of India will suffer its biggest shock in decades, and one that we will not be able to recover from.