It was a September weekend bang in the middle of a hectic, turbulent US election season and a growing financial market turmoil. The year was 2008. As common people around the world tried to settle down to enjoy a hard-earned rest, policymakers, politicians, bankers were huddled around conference calls and in meetings desperately trying to put together a package of measures aimed at avoiding financial Armageddon.
One such meeting took place in the home of JPMorgan’s charismatic CEO Jamie Dimon. It was Saturday morning and Dimon was speaking to his management team. ‘You are about to experience the most unbelievable week in America ever & we have to prepare for the absolutely worst case,’ he said. ‘We have to protect the firm. This is about our survival.’ New York Times reporter Andrew Ross Sorkin, who chronicled the last desperate hours leading up to Lehman Brothers’ collapse and the eventual Wall Street bailout in his book, Too Big to Fail, recounts what happened next.
‘“Here is the drill,” Dimon went on. “We need to prepare right now for Lehman Brothers filing, and for Merrill Lynch filing.” He paused and went on. “And for AIG filing.” Another pause. “And for Morgan Stanley filing. The last one was the absolute bombshell. “And for Goldman Sachs filing.”’
Eleven-and-half-years after that fateful September, financial markets and economies around the world are teetering on the edge of a similar precipice. Stocks, bonds, currencies have been routed in a spectacular, unprecedented orgy of destruction caused by the spread of coronavirus around the world. The S&P 500 is down 29% from its peak and there is carnage everywhere.
Indian markets have been similarly battered, and the economy is entering the doldrums. Stock market crash aside, the closure and collapse in consumer sentiment will have a tremendous impact on hundreds and thousands of businesses big and small. Stay-at-home rules, restrictions on movement, closure of businesses and the collapse in holiday and tourist movements are a devastating blow to consumers, producers, traders and shopkeepers, not to mention millions of workers in the informal sector.
But every crisis has a silver lining, and India can take heart from the US reaction to the global financial crisis and ensuing panic in 2008-09. Since the mad September of 2008, US banks have taken a number of steps to strengthen balance sheets since then and introduce — some of it due to regulatory and legislative pressures — tougher rules governing risk-taking activities. Their financial health and business models have become sturdier and stronger, even as European banks totter on the brink due to bad loans and inadequate fund-raising.
Dimon’s fear about Morgan Stanley and Goldman Sachs quickly became irrelevant due to the turnaround abilities of American financial capitalism. India can, and should, exploit this crisis to bring about significant change in its near-term economic policies. A good place to start would be the obsession with reining in the fiscal deficit.
This obsession was already costing the economy a lot and had become anachronistic after this fiscal year’s sharp economic slowdown. But the budget continued to give it exalted treatment, which meant that despite higher expenditure and lower revenues, GoI continued to insist on following a path of ‘fiscal rectitude’.
Hopefully, the Covid-19 outbreak will put a quick end to the theory that India should try and control its fiscal deficit to 3-3.5% of GDP. GoI’s focus now, and for the next two years, should be only on growth and protecting people’s livelihoods and jobs and businesses from the ill effects of this deadly disease.
The second major change required is an end to incrementalism and tentativeness. Prime Minister Narendra Modi and home minister Amit Shah’s political astuteness, combined with sky-high ambitions, has made BJP the numero uno party in the country. They have forced the Opposition on the backfoot and set the agenda. Unfortunately — except in a few cases like corporate tax cuts — economic policymaking has been marked by tentativeness and the fear of favouring a particular lobby, business group or sector.
Media reports suggest that RBI and GoI are working on a policy package aimed at giving relief to certain sectors and small businesses. But here again, caution and tentativeness abound. Given the scale of damage, cash subsidies and payments should be across the board and target hundreds of thousands of small businesses and workers and informal sector employees.
Suspension of loan repayments and delay in recognition of non-performing assets (NPAs) should apply to all major sectors affected by the epidemic. Sure, hospitality, aviation and tourism are the worst hit. But there is likely to be a lot of damage in retail, real estate and manufacturing like textiles, which employs millions.
Globally, this is what is happening. The $1.2 trillion package aims at making direct payments worth $250 billion to American workers. French President Emmanuel Macron has announced deferral of tax payments and payroll charges, while in Canada, six banks have announced deferral of mortgage payments by six months.
This is India’s biggest social, economic and health crisis since independence. Half-hearted, tentative measures will not work. GoI’s overriding priority should be to revive growth and protect businesses and employees. ‘Go big, go bold’ should be the mantra guiding economic policy.