Covid19 has spread fast. It has crippled lives of millions of people and consequently hurt economies of several nations in a span of a couple of months. It has not even spared the nations which are known to have the state of art health facilities or infrastructure.
Many people have lost their lives. And many others lost their jobs in businesses that were closed down, locked down or reduced their capacity utilisation.
To add to the woes, the future remains uncertain for all of us. However, as the curve starts to flatten in many parts around the world, leaders now are focusing on how to kick start a halted economy back into motion. But then how and in what way?
COVID19 has sent the world economies spiraling down a vicious circle. Moreover, it has affected the developed, emerging and underdeveloped countries all at the same time.
In context of to covid19, the vicious circle begins with low employment leading to low incomes, low investment/demand, liquidity constraints, low production and low employment as depicted below:
Millions of people have lost jobs worldwide. Uncertainties about future would further make people thrifty. People may keep their money in liquid form at least to the extent that is required to sustain their families in the intervening period till they may resume work or run their businesses profitably.
Many businesses have learnt how to manage work with the least number of staffers. They may also retain their earnings and employ minimum number of people when they open their operations and till they are able to achieve normal volumes of business. All this is going to badly hurt the investment sentiment in a large number of sectors.
Thus covid19 vicious circle starts with low employment and low income is the next stage. This leads us to the subsequent stages both on the demand and supply sides.
Need to break the covid19 vicious circle
Many governments have resorted to 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 and things of those types. The Central Banks worldwide have adopted accommodative monetary policy and taken wide range of steps to enthuse liquidity into the financial system and to strengthen the financial markets.
The idea is to somehow bring the covid19 affected economy back on to the track, so that the people who have lost their jobs can get back to work. However, economic stimulus, direct cash transfers and treatment for the ones infected by covid19 – are all at best immediate response to deal with an exigency that arose all of a sudden with the least amount of preparedness to handle it. There is uncertainty also how far the governments would be able to manage fiscal imbalances as expenditure on the health infrastructure and upkeep of the vulnerable sections of the society through direct cash transfers or providing food and shelter escalates if the pandemic continues unabated.
But do we require a big push? Yes we do; but then there has to be a carefully charted strategy to channelize the limited resources of the country in a targeted way rather than giving a generalized package. We have to boost economic activity in a direct way so that more and more people get back into their jobs. I would like to call it a “Strategic big push” or “Tactical big push” in order to break the covid19 vicious circle.
There is no doubt that the generalized approach to ease out constrained liquidity in the economic system helps in boosting the investor sentiment and eventually the economic activities. But then when you adopt a direct approach to help out the targeted groups and sectors, the results could be faster and better.
Reach out to certain sectors first
Unfortunately, the number of casualties is so high world-wide that we normally end up counting the number of total infections, recoveries and deaths in nations, regions and cities. Due to the possibility that the contagion may spread fast through human transmission, many countries have resorted to complete lock-down.
The impact of covid19 has affected the people in direct and indirect ways. Firstly, the families where one or more corona casualties have occurred may have lost an earning member of the family. Their incomes are directly affected.
Secondly, we have to tackle the issues related to reinstatement of people who have lost their jobs or businesses due to lock-downs. They are not directly attacked by covid19, but are affected indirectly due to closure of various economic activities due to mass lock-downs.
In a nutshell, we need to create more and more employment in the economy so that the average income levels can be restored for the corona affected families.
Already, many economies were grappling with unemployment problem. According to the World Employment and Social Outlook: Trends 2020 (WESO) report released in the month of January, 2020, much before covid19 infected the world at large, around half a billion people were reported to be working fewer paid hours than they would like, or were not getting enough access to paid work. Further it was projected that unemployment will rise by about 2.5 million in the year 2020.
Things obviously have gone worse now. For instance, total non-farm payroll employment in the United States fell by 20.5 million in April, and the unemployment rate rose to 14.7 percent in the same month. In India the unemployment rate is estimated to have increased to 23.52 percent in April 2020 compared to 8.74 percent in March 2020. Similar trends are seen in other covid19 affected economies.
There is a need to rebuild the industries that got closed down due to covid19 war. We may have to give priority to the industries that can quickly increase their plant capacities or its utilisation rate particularly those which produce essential goods to meet the domestic demand as well as for export to other covid19 affected countries. Incentives like concessional credit, subsidy or tax rebates can be given to them.
Also, we may have to support industries that can be made operational on account of proximity to labour or raw material markets. Practically, every industry or service that can be started with covid19 social distancing and other safety measures should be allowed to resume work. Slowly and steadily we have to revive the other sectors as the pandemic subsides and normalcy is achieved.
There is also a need to be vigilant that no company indulges into profiteering and they pass on the benefit of reduction in costs due to increased capacity utilization or economic stimulus, if any, on to the buyers. Good corporate governance practices and corporate social responsibility are the two essential benchmarks for a responsible covid19 fighter/survivor business entity.
Covid19 is not a self-correcting equilibrium syndrome
When the stock indices nosedive on any odd day, there is awe, distress, shock or dismay among investors but the stock market players know that the bearish and bullish phases are part of life. Some quit, some sustain and some new investors join. It depends on the risk appetite or aspirations they hold. But at the end of the day, some make money while some others lose.
When oil prices slide down, a particular sector or the economy involved in its production and distribution is affected adversely. In this highly competitive industry at the global level, sometimes they are unable to react immediately keeping the long term competitive equations in mind. We have seen the oil indices falling even below zero at one point of time indicating that the production was more than the storage capacity when demand was dwindling due to mass lock down in several cities or provinces. But then the producers know that as and when the economic activities resume, the demand for oil would eventually pick up in the long run to catch up or even surpass the production of oil. This is the beauty of the market economy. In the long run every economy is supposed to find its equilibrium.
However, covid19 is unprecedented in its occurrence as well as impact on the world economy. It is not a market or sector facing adversity. It is not just an economy that is suffering. It is the entire human race that is facing the adversities – financial, social, psychological – all at the same time. And on the top of it there is uncertainty about when the normalcy could be restored. All this is causing anxiety, nervousness, and a feeling of helplessness across people, markets and even nations.
There is a need to attend to people who are infected with this deadly virus on one hand and to generate gainful employment opportunities for others in every sector where they can be safely employed.
A huge chunk of every country’s scarce resources are being diverted to deal with the challenges covid19 has presented. It is important therefore to use the available resources in a strategic way so that maximum employment can be generated with the minimal of resources to begin with. The two well-known mantras could prove useful in devising the optimal strategy to break the covid19 cycle – “small is beautiful” and “Slow and steady wins the race”.