Economic Impact Of COVID 19
The way in which the econs behave and the response of the commodity and financial markets to overcome the health crisis, will determine the path of the economy.
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The famous British economist, John Maynard Keynes (1883-1946) once wrote, “In the long run we are all dead”. Those who are interested in knowing why he wrote that line, may revisit his arguments to fix the “gold standard”. We are in a new era where not war but a virus has shocked the world economy. When the spread of the virus was at an early stage in China, no one could have believed or forecasted that within five months, the Econs (borrowing the word from Richard Thaler) all over the world would be forced under lock down. There are many opinions on the economic impact of the pandemic, now globally affecting more than 200 countries. The Indian economy is affected by the pandemic with the BSE Sensex (on 3rd April 2020) plunging to a record low, with the index equaling the figures last recorded in January 2017.
In the above paragraph, I have consciously and rather cautiously used three key words: long run, econs and the stock market index. First, consider the stock market. Over the last couple of weeks, many have debated how bad the current conditions are in comparison to the global financial crisis. The need to draw parallels seems obvious because it was due to problems in the US economy that Sensex dropped 1408 points in a day on 21st Jan 2008. The index continued the rollercoaster trend and fell by almost 11000 points over the next 365 days.
In comparison, the index took only 30 days to fall by over 15000 points and reached the lowest on 23rd March 2020, as shown in the figure below. The investors were seemingly worried with the government in the drawing room planning for the relief. It is important to note that from 30th January 2020 (the first COVID case confirmed in the country) till 3rd March 2020, only 4 actives cases were there in the country. Therefore, the investors and the stock market reacted to some changes or concerns happening externally and any relation with the incidences of the number of COVID cases may be a coincident. The figure also explains that although the numbers of cases are rising, the market is relatively stable in the recent weeks.
The second keyword is econs. The impact of extreme events or natural hazard induced disasters are highly localized in nature. The economic costs related to disasters could be calculated by some meaningful approximation of the loss of lives and livelihood along with the estimates for damages, rehabilitation and rebuilding. There are several rigorous studies on disaster impacts as well as studies documenting the impact of epidemics like MERS and SARS on a selected economy. COVID brings completely different kind of a challenge altogether. There is no direct threat to livelihood except the fact that labour disruptions and associated production delays are expected with an unpredictable time horizon. Further, there would be export/import delays and scarcity of essential goods that are not produced within the country due to the lockdown and border restrictions. The scarcity and associated price rise anticipated by the econs (who were earlier worried of poor returns in the stock market!) would suddenly increase consumption of essentials (or hoarding) and a short term demand-supply mismatch will be created as the supply chains are affected due to the restrictions. It is to be noted that such behavior would not lead to optimal consumption but increase wastages. Therefore, the behavior of the econs in the near short-term (next 3 to 6 months) would be very important to assess the impact of COVID on economy. Before I move to the last keyword, it is important to note that the economy need to allocate financial resources for those who may fail to procure the minimum required consumption because of wage losses following disruptions or simply because they are too poor. At the same time, the government should plan for fiscal stimulus for the manufacturing and service sectors in particular construction, transportation (including aviation), trade, hotels and construction.
The last and final keyword is “long run”. In recent conversations, somehow the long term issues have been kept aside. Understandably, the short term crisis management assumes priority and depending on the fiscal measures adopted by the governments, the innovative solutions and the support of the private institutions, the long run impact would be determined. There are however several forecasts as estimates which shows that the global reduction in GDP could be 2.2% (EIU-Economist Intelligence Unit), 1.9% (Fitch Ratings' ), 0.1%-0.4% (ADB), to mention few. The impact on India is estimated to be low with GDP growth expected to be in the range of 2.1% (EIU) and 2.5% (Moody’s). The reason why the different agencies are optimistic about the Indian economy are the following. First, our financial year starts on 1st April. Therefore, if at all the economy is affected, it would be reflected in the Q4 outcomes for the year 2019-20.
Other major economies will be losing their Q1. Second, the agrarian outlook of the economy. Millions braved the lockdown and chose to walk to their villages rather than depending on the government assurances in the cities and urban centers. It truly reflects that though we associate poverty with rural areas, villages and the social fabric are still the crucial ventilators for the poor. Third, it is being reported that the country may witness another successful cropping season. Finally, the timely announcements and policy initiatives undertaken by the government is expected to act as cushions in the short term. Therefore, it could be premature, at this point in time to critically comment on the long run and forecast a number.
To sum up, it is true that the 21-day lockdown will have its own repercussions on the economy. The growth rate proportions that we expect to see sometime in March 2021 will be dependent on steps adopted in the coming weeks or months. Further, the way in which the econs behave and the response of the commodity and financial markets to overcome the health crisis, will determine the path of the economy.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.