The government should ensure that businesses, especially in the unorganised sector, are kept alive and workers paid regularly
The world stands united against its war on the Covid-19 pandemic. As the social-distancing measures across the globe get more stringent , Prime Minister Narendra Modi announced a 21-day lockdown to break the Covid-19 chain and a ₹15,000-crore medical aid. The lockdown measure aims at reducing infection and transmission of the virus. However, a cause of worry is how to minimise the impending economic slowdown during the pandemic.
With countries across the globe doing their best in fighting the pandemic, they have also tried to keep their economies afloat. In the last two weeks, the US recorded its highest ever weekly job losses in its history. Stock markets have plunged, supply chains disrupted, and the measures of social distancing have gravely impacted service-driven industries such as aviation, retail, and tourism.
With business activity likely to be hit for months, the global economy is facing a Great Depression-like scenario. The Asian Development Bank estimates highlight a potential loss of $350 billion of global GDP due to the Covid-19 pandemic. Taking into account how SARS affected air travel, the IATA is looking at a potential loss of $29 billion in passenger revenues.
Nations in overdrive
In the light of these events, the UK has already unveiled its biggest economic recovery package in history. Germany is moving forth with “unlimited government financing” to tackle the threats faced by its economy. Japan announced a comprehensive $270 billion package to combat the economic and health crises in the wake of the corona outbreak. Similarly, Singapore unveiled a $4.2 billion stimulus packages to businesses and households to tide over the crisis. The world economy needs such impetus given the wide-scale disruptions caused by the virus
The situation is not very different for India. A recent report by McKibbin and Fernando of Australian National University points out that India could incur a potential loss of 5.3 per cent of its GDP. Businesses, especially the service industry, are finding it difficult to survive. Companies are now asking its employees to go on unpaid leaves and some are even going to the extent of laying off its workforce.
Now, if this is the case in the formal sector, it is gloomier in the informal sector. With 93 per cent of India’s workforce dependent on the informal sector, Covid-19 has affected the livelihoods of daily wage workers. With the country in a 21-day lockdown, survival for such workers is going to be challenge. Therefore, an economic recovery package becomes all the more critical.
What govt can do
The recovery package does need to take into account the fact that this economic slump is an outcome of the health crisis and, consequently, efforts to raise demand would not yield any fruits since people are unable to spend during the lockdown. As argued by two prominent economists Emmanuel Saez and Gabriel Zucman, the ideal stance would be for the government to act as a ‘buyer of last resort’ and swoop in to replace the disappearing demand. If the evaporating demand is not replenished, there would be substantial output losses for businesses, which in turn may lead to more lay-offs.
Further, for the gig workers and the self-employed who stand to lose the most, the government needs to replace lost earnings. On this front, the Centre has already made provisions for the private sector to make use of their corporate social responsibility spending to fight the pandemic. Further, given the large section of daily wage workers in the country, a direct benefit transfer (DBT) to this section would help them tide over the impact of loss of subsistence earnings and lay-offs.
The DBT should at least be over the existing minimum wage, which would enable these workers to smoothen their consumption during the shutdown. In addition, paid sick leave and unemployment insurance would aid the workers.
Coming to businesses, in trying to keep them afloat and curtailing mass lay-offs, the government would have to take measures to provide sufficient and sustained liquidity buffers for enterprises in the affected sectors.
In this regard, letting banks make use of their capital conservation and counter-cyclical buffers may be the way ahead. The RBI should be ready to take up its role as the lender of last resort.
Hence the key objective of the recovery stimulus should be targeted at keeping businesses alive and making sure that workers are paid regularly even if firms have halted production due to the lockdown. The economic recovery package needs to let the businesses hibernate in the coming months so that they can re-emerge when the dust settles down.
The writers are Research Scholar and Associate Professor, respectively, at IIT Madras. Views are personal.