Narendra Modi made a characteristically unexpected decision to impose a harsh lockdown on India’s 1.38bn people in late March. The prime minister must now reopen most of the economy. Doing this, while containing Covid-19, will be hard. The government also needs to spend. The health of both people and the economy has to come first.
The lockdown was extraordinarily severe. Only 6 per cent of India’s population is over 60, against 16 per cent in the US, 19 per cent in the UK and 23 per cent in Italy. A huge number of people toil in the informal economy: after the lockdown, over 140m migrant workers duly lost their jobs. With railways closed, vast numbers were stranded and forced to return home on foot.
While the confinement was sudden and brutal, the fiscal response has been a mere 1.1 per cent of gross domestic product. Inevitably, this meagre reaction, together with the difficulty of co-ordinating state and central government responses over this vast country, has left many Indians in hardship.
True, supporters of the lockdown can point out that cumulative deaths from Covid-19 were a mere 2,109 by May 10, or 1.5 per million. That death rate is 135th in the world, far behind the UK’s 465 per million. But deaths are rising. It will also be hard to push them down once the economy reopens. Yet this cannot be the sole concern. Since some 10m people would be expected to die in India in 2020, Covid-19 is not of vast importance, even in health terms. Nobody can yet tell how badly the lockdown will damage the economy. But, since it has been so severe and the fiscal response so limited, the economy may shrink even more than in high-income countries. This would be dire.
So what is to be done? First, policymakers must reopen the economy quickly, while doing what they can to manage the health consequences. Enhanced testing, tracing and quarantine is the ideal system. But, in such a densely-inhabited country with limited resources, full success at this will be impossible. At present, the government has divided the country into red (the most restricted), orange and green areas. But the first category generates 43 per cent of GDP and the second another 38 per cent. These kinds of restrictions cannot last for very long.
Second, the government should spend whatever it takes and in whatever way works, within reason, to support the people and the economy. Fiscal risks do exist. But economic and social risks are far greater. In a co-authored piece, Arvind Subramanian, former chief economic adviser, argues that additional spending may need to be at least 5 per cent of GDP. This is manageable. According to the IMF, general government debt was 70 per cent of GDP and the fiscal deficit 7.4 per cent last year. But India’s 10-year bond yield, at around 6 per cent, is also well below long-term growth of nominal GDP. India can surely grow its way out of higher debt.
Third, this is an excellent time to relaunch structural reform. India entered the crisis with a damaged financial sector, an overleveraged private sector, and much wasteful spending, at both state and central government levels. India can reduce its fiscal deficit and manage its debt with a combination of economic reform, fiscal reform and fiscal consolidation. But the time for the last is not now. That must come after crisis spending is over.
Above all, the Indian economy simply cannot be kept in deep freeze for long. The lockdowns must end soon or be far better cushioned, ideally both. The government must now be as bold in re-opening, supporting and reforming the economy as it was in closing it down.
Source: Economy - ft.com
