Fiscal lift needed: The extraordinary scale of disruption caused by Covid-19 requires a sharp fiscal response

The economic consequences of the Covid-19 outbreak are unprecedented. Governments across the world are in uncharted waters, and we could be looking at a Great Depression-like scenario soon. The 2008 financial crisis was preceded by warning signs. But now, in less than 12 weeks after WHO was told by China about the virus, economies are in a state of seizure. An extraordinary situation calls for a proportionate response. Such a response has to be led by the government, using every available lever in the fiscal policy toolkit to mitigate the scale of disruption.

Social distancing, the primary defence against Covid-19, has already resulted in economic disruption and attendant job losses. The most vulnerable are workers in the large informal sector. Government expenditure needs to be switched, unproductive subsidies slashed and the ubiquitous banking channel used to transfer benefits directly to rural households and vulnerable urban households. The direct transfer of income will partially arrest a fall in household consumption, and thereby mitigate the economic dislocation. This should be supplemented by an adjustment in taxation measures, another lever of fiscal policy.

Many sectors such as tourism and transport are reeling under Covid-19’s impact. The government needs to quickly put together a fiscal package which supports the most vulnerable sectors at this juncture. Unlike 2008 this will not be a bailout occasioned by poor business practices. It’s a measure to mitigate the economic hardship of an unprecedented situation. Fiscal policy is the most effective tool because government spending and resource transfer can have quicker impact than any other tool. Moreover it can hasten the recovery from a disruption which will later give the government a chance to pull back its deficit.

Across the world, both governments and central banks are pulling out all stops to cope with the situation. In India, RBI has already unveiled measures to stabilise the financial markets and make enough liquidity available. More such measures may be needed because India’s financial sector was fragile prior to the current crisis. Therefore, the central bank’s armoury must be used to make sure that financial stability is maintained. This will also lead to a reduction in lending rates across the economy. The primary tool however will have to be fiscal policy. Even as it’s deployed, government should use the opportunity to usher in long overdue structural reforms. That will enable tax revenues to rise, thereby bringing fiscal deficits under control.
This piece appeared as an editorial opinion in the print edition of The Times of India.

via Fiscal lift needed: The extraordinary scale of disruption caused by Covid-19 requires a sharp fiscal response

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