The fifth largest economy in the world is in dire need of robust fiscal and monetary action as unemployment nears 30 percent.
Thousands of migrant workers crowd in a frenzy to get on too few buses and trains to travel home before a statewide lockdown takes effect. These images, taken in many major Indian cities on March 24, have come to symbolize the devastating impact of the coronavirus in India. Having given only a few hours’ warning, Prime Minister Narendra Modi was criticized for ordering the country’s 1.4 billion citizens to seek shelter in situ. What his government does – or doesn’t do – next will have a long-lasting impact on the world’s most populous democracy, though.
I recently spoke at the annual India Business Dialogue held by the INSEAD Emerging Markets Institute, where I emphasized the many advantages India enjoys as it faces this crisis. With US$480 billion, its foreign exchange reserves are also at an all-time high. The percentage of GDP that comes from borrowing from abroad is now barely 20%. The reserves are managed by the Reserve Bank of India (RBI), which is respected since it operates independently of the government. Second, oil prices (the largest component of imports) are at historic lows, and the government has nearly 11 months of imports stored up. With these two safeguards in place, the rupee won’t be subject to the kind of financial shock and currency devaluation that would have repercussions throughout South America.
There are a number of problems that are slowing the Indian economy down. One reason is that development has slowed noticeably during 2019 so far. Forty percent of India’s workers and thirty percent of the country’s GDP are employed by unregistered micro, small, and medium companies (MSMEs), making them difficult to assist. The Reserve Bank of India (RBI) has had a successful run, but the same cannot be said for Indian financial institutions more broadly. Even before the epidemic, many people were struggling because of their exposure to accumulating bad debts. COVID-19 endangers not just their lives but also their life savings.
Big, blunt, fast
The degree of the damage caused by the coronavirus in India is unprecedented, much more so than in the United States and Europe, and is just now becoming clear. The jobless rate in India hit a new high of 27 percent in April as 122 million people lost their jobs. In comparison, the unemployment rate in the US hit 14.7% in the same month. In April, economic activity in India was measured by the Purchasing Managers’ Index, which plummeted from 49.3 to 5.4.
When time is of the essence, it’s necessary to take drastic action that can be put into effect quickly. The original government reaction, released on March 27th, was deemed inadequate in light of the large number of migrant workers in India, the high unemployment rate, and the enormous burden on the health sector. As a percentage of GDP, the US$22 billion aid package for the poor was smaller than in any other Asian developing economy.
On May 11 the government proposed a US$266 billion stimulus program, equivalent to nearly 10% of GDP, as it attempted to deal with the significant disruption to businesses, employees, and consumers. It’s important to emphasize that the package is not only a fiscal stimulus but it also contains monetary measures from RBI. The success of a stimulus package, such as a collateral-free lending plan for micro, small, and medium-sized enterprises (MSMEs) and other firms, depends on how quickly and efficiently it is implemented.
Measures to guarantee a frozen economy can be promptly resurrected are also crucial, and they should be direct and swift. To keep employees from becoming bankrupt and to keep some consumer demand for when the economy opens again, one strategy is to provide them with cash. While it is true that cash transfers should prioritize the most vulnerable, it is essential to remember that this type of intervention is not aimed at alleviating poverty.
Read more: Three Keys to Ending the Great Lockdown
When there is a conflict between long-term goals and short-term efficacy, the latter should be prioritized due to the singular and extreme nature of the problem. For instance, the national basic banking system Jan Dhan now handles financial transfers to women. Just 21% of women, compared to 80% of people overall, hold a Jan Dhan account, limiting the scheme’s potential. Even if the danger of fraud and mis-targeting could increase, the plan would be more successful if financial transfers to the needy were expanded through other channels. Like the increase in monetary transfers, increasing in-kind transfers through the ration shops (public distribution system) administered by the government is also an excellent idea. Don’t start a new project right now.
Quickly target who you can
Unlike more developed economies, India does not have a system in place specifically to aid micro, small, and medium-sized enterprises (MSMEs) and the people who work in them. To combat unemployment in underserved regions, rural governments might implement the Mahatma Gandhi National Rural Job Guarantee Act. If the government is serious about reaching the millions of micro, small, and medium-sized enterprises (MSMEs) in metropolitan areas, it must put them ahead of the smaller ones. If the large players keep their jobs, the MSMEs will stay in business and the help will eventually reach the employees in the informal economy.
There will most likely be compromises, such as between speed and precision. People can be given money rapidly, but part of it will be wasted. We need to err on the side of haste and kindness right now.
The RBI has a lot of power and authority in India, therefore I have a lot of faith in the country’s monetary policy. Non-banking financial institutions, corporations, and insurance firms are all potential borrowers. Even riskier strategies to lend to small and medium-sized businesses can be conceived and implemented. The RBI must ensure long-term viability while providing assistance to illiquid but not insolvent banks and non-bank companies. The Reserve Bank of India has the power to prevent a monetary or financial crisis in India.
The economic impact of the COVID-19 pandemic on India will rely on the course of the epidemic, government actions (including health policies beyond the scope of this article), and their execution, as well as a huge helping of luck. Institutions and leadership are going to be crucial. Due to the country’s federal system, the skills of India’s state and municipal officials will also be crucial. As Warren Buffett once said, “You never know who’s been swimming nude until the tide goes out.” This calamity will be illuminating.