Covid19 is a global pandemic. It has badly affected the health and wealth of nations in a short span of few months. Many governments resorted to economic stimulus of varied sizes and spent heavily on creating suitable infrastructure in a desperate attempt to save people infected by it while keeping the economic activities under mass lockdown.
However, no government can possibly continue its benevolent welfare measures on a large scale while keeping the household or business under lockdown indefinitely. Moreover, there are no clear indications as to when a suitable vaccine/medicine could be developed for the containment of covid19 pandemic.
At the end of the day, the governments too need to raise revenues even to keep financing its welfare measures. Many governments are already reeling under heavy debt burden. The unemployment rates are at record levels in due to the suspension of economic activities in the covid19 affected economies. And India is no exception.
Economic Stimulus was need of the hour
A UN report has recently projected that GDP growth in developed countries may plunge to minus 5.0 per cent in 2020, while output of developing countries may decrease by 0.7 per cent. To make things worse, the cumulative output losses during 2020 and 2021 could add up to around $ 8.5 trillion which is big enough to wipe out most of the output gains achieved in the previous four years. Further it projects that the growth rate of the Indian economy could drop to 1.2 per cent in the year 2020 much lower than the already disappointing growth rate in the year 2019.
Earlier the IMF had further lowered India’s growth estimate for fiscal year 2020-2021 to 1.9% from 5.8% estimated in January. However, it added that India and China would be the only two major economies likely to register growth, with all others contracting.
Recently the Government of India has announced a huge economic package to the tune of Rs. 20 lakh crore (nearly 10 per cent of India’s GDP) in four successive trenches to kick start economic activities. The current mega stimulus by the Indian government will give further impetus to its earlier attempts to ease out liquidity in the economic system through measures like giving direct cash transfer to vulnerable sections of society, tax relief to corporates, debt moratorium extension for the MSMEs and permission to resume work with safety measures. These measures were largely supported by the Reserve Bank of India through a wide range of steps to inject/enhance liquidity into the financial system and to strengthen the financial markets.
The objective of economic stimulus is to build a Self-reliant India
The goal of the economic stimulus is self-reliance. It is based on five pillars as represented below:
The focus on self-reliance is not a new concept. About two decades and a half before, every developing country would strive to be self-reliant because of scarcity of foreign exchange to pay for imports due to unfavourable terms of trade with its much more developed trading partners!
However, the advent of globalization marked a shift in the way countries engaged in global trade. The concept of freer movement of trade, technology, capital and people across international borders was broadly accepted as a mutually beneficial strategy for the trading partners. Globalization brought many changes in the world economy and helped many countries, including China and several other emerging economies to increase their GDP as well as general well-being.
But of late there was a growing wave in favor of protectionism as many of the world economies grappled with problems such as recession, unemployment or lower growth rates. Covid19 has further aggravated this disgruntling realization.
Globalization is here to stay but its scope will get re-defined
When countries moved farther than simply engaging into trade of goods and services across borders towards setting up global supply chains and allow freer movement of funds, little did they know about the complications arising out of sudden outbreak of a disease like covi19 hitting all nations all at the same time. In a situation like this when travel and movement of goods and people is highly restricted, countries are struggling to make up for shortfall in medicines or other essential goods required for fighting out this crisis.
When any two nations engage into trade wars, the world economy can still bear the shocks if everything else is normal or if there are moves being taken to sort the things out. But here the situation is such that all countries are fighting an invisible enemy and no one knows when it all will get over.
In such a scenario, when India talks about self-reliance it probably may not be a move away from globalization but it categorically marks a definite shift in policy paradigm. And it seems, similar moves may replicated by many other economies as well.
In the coming years, though globalization is going to remain there, as the benefits of an open economy are far superior to a closed economy for sure, but I think its structure and volumes may shrink as countries jostle to increase jobs in the local economies.
Foreign trade is an important constituent of the circular flow of money into an open economy and it is important that there is long term stability achieved in this sector.
The Economic Stimulus adopts a Multi-pronged Strategy to tackle Covid19 attack
The economic stimulus covers both the micro and macro level prescriptions for almost every sector. It has a typical mix of many short term and long term measures. Covid19 is a crisis but there is an attempt to convert it into an opportunity to refurbish and rebuild Indian economy.
It is very important because the country has to not only address the short term covid19 crisis but also continue its pursuits to attain long term objectives such as inclusive growth and economic development.
In the pre-covid19 times, India’s economy has consistently been one of the fastest growing economy of the world for quite some years, and it is but natural that every possible effort be made to restore the rhythm and pace of economic activity back in the country breaking out the vicious circle of unemployment.
Covid19 has hurt the household and businesses badly and so the circular flow of money in the economy is bound to be disrupted. The external trade and fiscal equations of the government are bound to get constrained if remedial actions are not taken in time.
The economic stimulus announced by the government has targeted the covid19 affected micro, small and medium enterprises (MSME) sector. It is estimated that the MSME sector generates around 100 million jobs through over 46 million units situated across the country contributing nearly 38% to India’s GDP and 40% to her exports and 45% in the manufacturing output.
Besides, the economic stimulus also extends general relief to nearly all businesses in general in the form of various relaxations and other incentives in continuation of the measures taken earlier. It also talks about bringing structural changes in the agricultural, defense, infrastructure and power sector and providing immediate relief to the covid19 affected households and employees.
In a nutshell the economic stimulus has tried to directly address both demand and supply side of the vicious circle of covid19 (see article). However, its benefits shall only emanate in medium to long term as it is a big challenge to push a halted economy back into motion, particularly, in view of the extended lock-down in some of the major cities including Mumbai, the financial capital of the country, where covid19 is still thriving.
It continues to be a challenge to open public transport services in covid19 infected regions and so there is a need to find solution (see article) to the problem of safe carriage of the employees to their offices and back home and providing safe work environment.