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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Overcoming Economic Tsunami

When the crisis is over and India limps back to a semblance of normalcy, the Prime Minister has no option but to treat this adversity as an opportunity.

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The Covid-19 pandemic is an economic tsunami that is washing over the world. Western democracies like Italy, Spain, France, Britain and the United States have been hit particularly hard.

The pandemic began in a seafood market in Wuhan, capital of Hubei province in mainland China. By placing the entire province of Hubei under lockdown, China has controlled the spread of the virus in the rest of the country.

Nearly 200 million Chinese travelled during the January 2020 new lunar year festival when families living overseas meet their relatives. The existence of the virus was officially announced only on January 20. Thus the infection could have been spread right across the world by unsuspecting Chinese holiday-makers in the three weeks before that. 

China has close commercial ties with Italy. The northern Lombardy region hosts over 4,000 Chinese units making branded products. Over 3,00,000 Chinese live in Italy. Most are based in Lombardy where Milan is located. Significantly, Italy was the first West European country to sign up for China’s Belt and Road Initiative (BRI).

Thousands of Chinese fly between Wuhan and Milan on business; several thousand Chinese-owned factories operate in the Lombardy region. From unprotected Italy, when the presence of the coronavirus and its lethal infectivity was still not fully known, the pandemic spread across borderless Europe to Spain, France and then across the Atlantic to the US. 

Washington shut out all flights from China into America but its travel ban on infected Europe came too late. The virus had embedded itself into Europeans’ first port of call, New York, and then raced across to the west coast.

India has suffered fewer fatalities than the horrific numbers in Western Europe. But its economy will need extensive reconstructive surgery. Prime Minister Narendra Modi’s Rs. 1.70 lakh crore stimulus along with the Reserve Bank of India’s decision to ease monetary policy will serve as mere band aids.

When the crisis is over and India limps back to a semblance of normalcy, the Prime Minister has no option but to treat this adversity as an opportunity.

In 1991, bankruptcy forced India to embark on game-changing economic reforms. Modi and Finance Minister Nirmala Sitharaman must use the next few months to introduce reforms that should have been implemented during the first term of this government.

To begin with, catch a few straws in the wind. The price of crude oil has fallen to $ 25-27 per barrel. India was buying crude in a basket priced at around $ 64 per barrel.  Assume crude stabilises at $ 30 for much of 2020. The saving of $ 34 per barrel on India’s import of over four million barrels will amount to $ 136 million (Rs. 1,000 crore) per day or Rs. 3.65 lakh crore in a year.

The depreciation of the rupee against the dollar and the fall in revenue of refined petroleum exports will shave some of these gains. But at a conservative estimate, India should save around Rs. 2.5 lakh crore in revenue expenditure.

Most of this saving will go towards the Rs. 1.70 lakh crore stimulus and direct benefit transfers to the poor, including migrant workers.

The challenge is to get the wheels of the economy moving again. This will not happen before May. But when it does happen, the automotive and aviation industries will need special attention. So will construction and infrastructure.

This is also India’s opportunity to move rapidly to replace parts of China’s global supply chain in pharmaceuticals and manufacturing. Indian importers too will have to lessen their dependence on China, diversifying buying from other countries.

Moody’s has meanwhile downgraded India’s GDP growth rate in 2020-21 to 2.5 per cent. Even that may be optimistic. GDP growth in April-June 2020 will be negative. If growth remains below zero per cent in the July-September 2020 quarter, India will satisfy the condition of being in a recession after two successive quarters of negative growth. That would be an unmitigated disaster which the government and industry must work together to avert.

The rest of the world will be worse of. That will not ease India’s pain. Only decisive measures can do that. When an economy seizes up, the tendency of governments is to turn ultra-conservative. While prudence is good it is not effective medicine for an economy in shock.

Britain’s Indian-origin Chancellor of the Exchequer Rishi Sunak (who happens to be the son-in-law of Infosys co-founder N.R. Narayana Murthy) showed how leaders should respond to the sort of crisis the coronavirus pandemic has inflicted on the world. Sunak has rolled out a stimulus package of the 330 billion pounds sterling (Rs. 30 lakh crore) or 15 per cent of Britain’s GDP. In contrast, India’s stimulus of Rs. 1.70 lakh crore is just 0.7 per cent of India’s GDP. It’s not as if Britain has a higher budgetary surplus than India. It’s simply that in a crisis the treasury must boost borrowing significantly.

India too will need to ignore the fiscal deficit for the next year as it readies to borrow up to Rs. 10 lakh crore (still less than 5 per cent of GDP) over the next 12 months to get industry moving again.

With interest rates at rock bottom, the extra cost of servicing the additional debt of Rs. 10 lakh crore would be, assuming an average sovereign-backed interest rate of 5 per cent, Rs. 50,000 crore a year. That would add just 0.2 per cent to the fiscal deficit.

When Greece, Italy and Portugal were caught in the Eurozone crisis in 2011, then European Central Bank (ECB) chief Mario Draghi promised unlimited monetary support to the governments of the three countries. That saved their economies from imminent collapse. 

In 2008, following the Lehman Brothers bankruptcy and the ensuing financial meltdown, the US federal reserve flooded the market with liquidity leading to an economic boom after the bust.

India has its limitations but many are imaginary ones. Crises call for boldness. The government, once the immediate threat of the pandemic is over, must take courage into its hands. The true mettle of men is tested when confronted by a severe calamity. Modi and his Cabinet of men and women must exhibit nerves of steel to overcome not just the pandemic but the economic tsunami it has brought.


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economic situation COVID-19 coronavirus outbreak