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Corona: What have you done to our economy and society?

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Kunal Kumar, Joint Secretary, Ministry of Housing & Urban Affairs, Government of India

Covid-19 crisis is a bolt from the blue. There is no precedent of this particular strain of the Corona virus and hence, any projections of its impact can at best be treated as intelligent guesses. Predictive numbers need to be relied upon with great caution. One can only hope to keep a very close watch on how the crisis unfolds and keep tinkering with different actions as facts regarding the virus trajectory, the effectiveness or otherwise of containment efforts, and reactions of various economic actors become clearer. The situation can be categorized as a natural calamity induced crisis which would, as any crisis does, effect both the supply and demand sides of the economy and threaten not only the financial markets but the socio-economic fabric of society.

What the current scenario shows about likely impacts on India?

The pandemic has made a frontal attack on the supply side of the economy. With a nationwide lockdown having been imposed in the country, production barring few essential services, has come to a grinding halt. This threatens to disrupt supply chains, exaggerate problems in industries which were already exasperating for breath due to an economic slowdown, thus leading to large scale unemployment and layoffs. The decision for lockdown, in crude terms, is essentially being seen as a decision between GDP and lives, though in the longer term the fallouts could be more nuanced. The initial supply shock in consumer goods will grow into multiple dimensions through cascading effects as gradually even supporting industries would cease to be functional.

Once, the supply shock has deepened, the stress on the supply side would spill into the demand side as money would cease to enter people’s wallets due to work-stoppages, layoffs, loss of jobs or even long-term unemployment. An indirect transmission of supply shocks to the economic system may happen through financial markets. As markets fall and households see wealth vanishing rapidly, they will tend to hold on to whatever they have and cut their consumption drastically. Covid-19 would by keeping consumers at home and making them feel gloomy about future prospects, severely dent consumer demand. The Rupee could collapse throwing the economy into a tailspin.

There would be other simultaneous shocks to the economy. Trade would take a brutal hit. Close to $180 billion worth of exports and imports of India are linked to highly affected countries. The most telling impact would be on the casual labor which comprises close to 25 percent of India’s workforce. They would not only face economic hardships but also a severe social calamity in the form of helplessness, malnutrition, alcoholism and criminality. Some sections of the industry like aviation, travel and tourism and large retail would be worse off than others. Most companies would face severe liquidity crunch, which was already hurting pre-Covid19 and they would not find any immediate succor. This is because close to a quarter of the liquidity deployed in the market through banks is in the segments of industry most effected by the pandemic spread and lockdown. Almost all such industries have seen and will continue to see a severe drop in revenues and thus worsen the overall liquidity situation in the country over time.

The country has been put under a nation-wide lockdown from the midnight of 25 March, 2020. While social distancing is necessary to prevent rapid spread of the epidemic, there is a huge economic cost which is entailed by the decision. There is no denying the fact that the choice seemed to be between GDP and lives. However, sooner than later, questions regarding rising unemployment, shutting down of businesses, increasing non-performing assets, supply chain disruptions, reduced investments and contracting demand would become serious challenges to deal with. The sooner we reframe the choice from being between GDP and lives to being between lives and lives, the better we would be able to manage the crisis

What’s best strategy now?

1. While this may seem to be the right time to undertake structural reforms which may help build long-term resilience to such crises in the future, our prime concern has to the revival of the economy in the present. To the extent possible, we should only focus on the short-term for the moment while trying to ensure that these short-term measures are in alignment with the needed long-term structural changes.

2. It would be vital to quickly seal the chasms that have developed in the supply side of the economy. We have to remember that the demand side shock is ultimately a fallout of the supply side shock and not vice-versa. Instead of relying on traditional methods which propagate increased public spending in asset creation, more fiscal resources should be targeted at directly helping individuals and firms that may have collapsed due to this sudden shock.

3. To begin with, expenditure on certain ongoing schemes of Government that are long term and will not produce any impact on economic revival/ job-creation in the near term (current financial year) could be brought down to maintenance mode. A list of such schemes may be drawn by respective Ministries and State Governments as Category M projects. New schemes of similar kind waiting for Government nod may be pursued upto the stage of approval by Government, however, deployment of financial resources on such schemes may be done only from the next financial year.

4. Expenditures on both Central and State schemes for infrastructure creation may be continued on the condition that projects to be undertaken from such funds may follow a revised priority which focuses broadly on two things:

a. Priorities on the health-related response
b. Priorities on the economic response.

5. The responses for every sector would have to be classified into short term (2 – 3 months) focused clearly on defeating the onslaught of the pandemic; medium term (3 to 8 months) focused on socioeconomic revival; long term (8 months onwards) focusing on pushing ahead on all cylinders based on new emergent realities.

Key focus areas and actions

Short term:

1. First and foremost, cities and States need to set up and augment crisis management efforts and build capacity to monitor key indicators regarding the spread of the epidemic, availability of supplies, preparedness and management protocols.Innovative use of technology and data science tools to not only monitor epidemic data, but also key indicators regarding the health of their local economy should be prioritized. Protection of doctors, paramedics, ramping up hospital facilities and critical equipments, supplies should be done on a war footing.

2. Flattening the curve of the epidemic below levels of available capacity in terms of hospital and ICU beds is a top priority. Mere lockdown won’t be enough for this to be achieved. A lockdown is actually not sustainable beyond a point as people will start to decide between a thin chance of dying from the virus and an almost 100% chance of starving to death. Faced with such alternatives, there will be a clamour to restart production. How should the lockdown be released so that the costs on society can be minimized and the benefits maximized? Israel has suggested the “poor man’s” strategy which is to isolate the elderly and let the young restart work in a gradual fashion. This would end up being a sub-optimal strategy because there would be a great risk of increased infections at any point of time going forward leading to uncertain, indefinite and on-and-off clampdown of lockdowns in the future.

Smart ways of leveraging the lockdown time period lie in the world of data. If somehow, a rapid testing methodology (NAT or equivalent) can be deployed at large scale which can allow for quick tests, then a sampling methodology can ensure that the working population can be screened as per need, if needed quarantined and then treated so as to allow them to get back to work as quickly as possible. Tests should not only be free, they should also be freely available. While discontinuing the lockdown, more ‘networked’ activities should be started later than others. Relaxation measures should be based on careful reading of the data regarding health and economy indicators at all times.

3. Social distancing and lockdown have to be augmented with fiscal action to mitigate the longterm economic impacts of the lockdown. Fiscal action needs to be directly focused on providing relief to individuals and firms most affected by the crisis and not on public spending on creation of economic assets like highways and sewage systems. The actions would include, inter alia, ways of ensuring people remain on payrolls or else are provided unemployment allowance etc. Merely providing cash in the hands of the poor would not suffice as there could be a deeper crisis impending in the form of shortage in availability of food, health services etc. The Government should therefore ensure availability of basic items of life to people directly. This is a time to err on the side of generosity. Instead of spending too much time in targeting specific vulnerable groups, the Government should act faster in a more broadbased manner. There is more than 50 million tons of food grains stored with the FCI. There could be no other opportune time when the country needs to deploy those resources to prevent the poor from falling into the trap of hunger and malnutrition.

For a brief period, the Government could actually look at passing a law against layoffs for certain kind of businesses, or could look at supporting workers in crisis-ridden industries through part payment of salaries. The crisis hit manufacturing sector needs to be supported through special loans, restructuring of loans and rescheduling of loans for firms, GST breaks, tax incentives, altered insurance premiums especially the SMEs. After individuals and firms, banks need to be supported. The role of the RBI in this context will be crucial. We have seen that in an unprecedented move, the Fed bought into municipal bonds in the US to provide for liquidity needs of local governments. Extraordinary times need extraordinary solutions and the bureaucracy should step aside from the playbook to make them possible.

4. Beg, borrow and steal to make as much fiscal space available for timely action. The country will have to be very creative with generation of resources. Fiscal deficit goals could be shelved for at least the next 6 months. Multilateral and bilateral development banks should be tapped into to borrow money for short term revival if so needed. Government’s existing schemes should be reoriented to look at channelizing money into the two most important priority areas – health and economic revival. There is no time to initiate new schemes nor would it be wise to do so. The existing schemes should be used to channelize money into those priorities. Part of our foreign exchange reserves should be deployed to meet with the crisis. Listing Bonds on international stock exchanges could be explored. One of the quickest ways to garner funds would be to capture the space created by the sudden collapse of the price of crude oil. Government can capture those gains and deploy them for crisis management at this juncture.

Medium Term:

1. The focus has to be on rapid economic revival. The Government has announced a crisis management package of 1.7 lakh crores recently, which may need to be scaled up to close to 5-6 percent of GDP considering the magnitude of the crisis. Within that package, resources would have to be found to support sectors (automobile, aviation, travel and leisure, construction, retail etc.) most severely impacted by the crisis. These sectors would have to be supported through incentives, moratoriums and easy availability of credit. NPAs, debt/earnings ratios may be allowed to be breached for a considered shortterm period in order to support quick revival.

2. Investments into expansion of the healthcare system would need to be continued. A major emphasis may have to be given on the development/ sourcing of a vaccine to deal with the Covid19 outbreak. Collaboration with international agencies and being nestled in global efforts in this direction would be immensely important. States are playing the most important role at the forefront of dealing with the crisis. They face constraints in using resources for the crisis as their hands are tied with laws like the Fiscal Responsibility and Budget Management Act, 2003. It is time that the restraints applicable by virtue of the Act are relaxed for the current financial year. A free hand would have to be given to the States to ramp up testing infrastructure, health facilities and buying vaccines as per their need.

3.  A new paradigm of trust-based collaboration between local government and citizens may be explored. This new paradigm shall be citizencentric and solution-focused rather than government-centric, and problem-focused. In this new paradigm, citizens may be invited to become suppliers of resources, data, solutions and actions at the local community level. In such a paradigm of demand-side-supply creation, the citizens (demand side), become solution providers (supply side) thereby igniting a virtuous cycle of complementary value that is amplified through mutual trust. Such platforms would be of great value in not only creating awareness in society regarding important messages but can stir local action in times of crisis rapidly and in great numbers.

4. Focused attention to informal and unorganized sector should be a top priority as they are mostly lost sight of from such economic interventions in absence of proper documentation and structured institutional arrangements. However, even though gradually moving them towards formalization should be the long-term goal of policy, it should not be a priority in the short term. NREGA could act as a great source of relief for the labor force who cannot join back work immediately. PDS systems should be expanded and extra amount of grains may be provided to large sections of the population, without bothering too much about targeting any particular economic classes. Special focus on checking malnutrition amongst the poor, improved outreach to the poor through ASHA workers, Anganwadis and other similar infrastructure could be looked at.

Long Term:

1. One of the telling criticisms of globalization has been that incomes of owners of capital have risen much faster than providers of labor. In fact, median real incomes have either flattened or sloped down in many parts of the world, thus giving rise to increasing levels of income inequality on the globe. Capital begets more capital. Initial endowments play a critical role in defining future incomes. A society with unequal levels of ownership of capital and unequal access to basic services like health and education would see exacerbation of such differences as it attempts to push frontiers of economic growth. The pain having befallen on migrant workers, casual labor during the current crisis is a symptom of this larger problem of a capitalist society. Today the State essentially looks at supporting their livelihoods through entitlement driven programs (social pensions, public distribution system, subsidies, housing etc.); employment related programs (NREGA, BOCW Act for construction workers, Contract Labor Act etc.); free services (free healthcare OPDs, Aayushman Bharat, free education in Government schools etc.). It is important to stress that the country’s expenditure on the health and education sectors needs to go up. Merely increased expenditure won’t suffice. Public institutions need to be held accountable to quality benchmarks. It is then that such institutionswhether schools, colleges, hospitals would start to set service level benchmarks even for the private sector. No matter what else public sector institutions achieve, if they are able to achieve this much, they would have played their part in improving social sector services in the country by miles.

While these are laudable efforts, they still will not bestow foundational equality. A case in point is that while some academic institutes could embrace online education during the lockdown most couldn’t, highlighting society’s digital divide. Such welfare schemes cannot act as the scaffolding to catapult the poor from poverty to prosperity because they do not make them owners of capital. The reasons are many- poor quality of services, no direct incidence on growth of income etc. Government has to prioritize redistributive justice to the poorest through effective implementation of land reforms. In a country where more than 70 percent farmers have less than 2 hectares of land and almost 40 percent of the workforce in agriculture is landless, no amount of support services can provide the foundation for sustainable upliftment from a state of perennial crisis. When I talk of land reforms I do not mean it in the cosmetic sense that it has been carried out so far, but in actual redistribution of land between the haves and the have-nots. The political economy has to bite this bullet before it is too late.

2. Revving up the economic engine in the long run would need more than liquidity, doles and incentives. I propose the new paradigm can be represented by the acronym FITFreedom, Incentives, Transparency. India’s industry needs more freedom to experiment, to fail, to try new horizons. We live in times of rapidly shifting landscapes in the world of products, business models, technologies, scale and speed. An army with powerful capabilities in maritime situations, when faced with an onslaught from the enemy may see its strength on paper collapsing rather rapidly. Dealing with crises is a different ballgame than business-as-usual operations. Crises like Covid19 provide us an opportunity to reflect on how well prepared we are to deal with unimagined onslaughts on various kinds. The Indian industry has to evolve to be like an army which builds resilience through trying, failing, reflecting and building its strategy and armory through a process of continuous learning. Such industries or firms which demonstrate resilience and keep performing better over time should find support through positive incentives while others who fail to perform should be allowed to perish without pride or prejudice. For example, while SMEs or MUDRA loan receiving entities should continue to be encouraged by providing seed capital to allow for experimentation learning to begin with, support should be continued only if they show performance on pre-decided metrics. All this should happen in a fully transparent system, where all data about the working of the ecosystem, who gets what etc. is made available in the public domain.

3. Government’s aspirations towards becoming a 5 trillion-dollar economy are laudable However, actions belie the aspirations. There are many priorities, programs, and policies currently. In the absence of harmonization amongst them, different actors in the economic system end up working towards different goalposts in a fragmented and inefficient manner, sub-optimally addressing the national imperative leading to its under achievement and wastage of resources in the process. While the need for different policies in different sectors cannot be denied, their tendency to work at cross purposes to each other needs acknowledgement and minimization. The classic case is of labour laws. Even taxation laws that may seem prudent from the viewpoint of revenue collection may sometimes be detrimental to long-term economic growth. Similar is the case with urban and rural development policies, which instead of working in a symbiotic fashion, work at cross purposes to each other. Direct efforts to increase entrepreneurship have been less useful than long term investments in the acquisition of productive knowledge and building appropriate infrastructure. Even today, nearly half of India’s labour force is in agriculture, contributing merely onesixth of its GDP. Macroeconomic policies like monetary policy, fiscal policy, industrial policy, regulatory and judicial environment, etc. have an important role to play in supporting this upward mobility in the economy but they cannot be looked at in isolation. The need of the hour is to harmonize these policies and create an escalator that supports the movement of people away from agriculture into manufacturing and services.

4. There is a need to focus urban investments through the lens of Economic Complexity. Cities contribute close to two-thirds of the country’s GDP. Government programs in the urban sector largely consist of sector (water, solid waste, etc.) programs, focused on the creation of general infrastructure through implementation of top-down designs. They have, no doubt, been laudable initiatives with tremendous achievements across the country in the provision of basic infrastructure and services like roads, water supply, waste management, streetlighting, etc. However, actions to support economic growth have never been a direct priority in their design. Any such correlation is indirect and not measurable. While on the one hand, the need to substantially increase such investments cannot be exaggerated; on the other, there is an urgent need to focus existing investments on the achievement of tangible economic outcomes. Perverse incentives have got embedded in the urban ecosystem through over-reliance on ‘grant-based’ funding. One, the focus of city governments on enhancing their own tax revenues has declined, and they show no appetite for raising commercial finance due to the availability of ‘easy’ grants.

Central and State Governments need to recognize the principle of subsidiarity and implement the 74th CA in true spirit. Some examples of specific inputs needed by a city whose economy depends on agro-based industries are cold storage units, packaging units, marketing centres, transportation infrastructure for fast transport of fresh produce etc. A good sewerage network, water supply system are examples of general inputs, which by no means are unimportant. However, by themselves, they would not lead to improved economic growth unless specific inputs are provided for. Investment in creation of a market for better seeds could cause an agricultural revolution; improved freight infrastructure could open up new possibilities for light manufactures; clarifying property rights and land-use regulations may lead to growth in the real estate sector. Going forward, provision of specific inputs like these as per the need of a city/ region’s context should be the most important goals of urban investments at all levels.

5. The importance of decentralization in solving problems in an agile manner cannot be exaggerated. Economic growth has to be a key objective of local governments. While it applies to both urban and rural local bodies, I stress on urban local bodies to begin with because they carry two-thirds of the country’s economic burden. They should be able to anchor the city’s economic imperatives. Each city’s context, history and aspirations are different and ULBs being the closest to the context are best placed to decide on relevant actions to fulfill them. For example, before the crisis if a city was entirely dependent on tourism rather than multiple other economic activities it shall need to review its strategy as tourism is a sector which won’t recover in the short to medium term post the crisis. Value-driven organizations are empowered and autonomous entities. However, lack of authority, autonomy, accountability (3As) has incapacitated our cities. The 74th amendment, though enacted to solve lack of the 3As, has in practice, burdened our urban local bodies with huge responsibilities of service delivery without granting them the requisite autonomy to manage their own affairs. Over-dependence on State and national governments threatens to sever their links with citizens and creates a complex principal-agent problem, wherein the principal, i.e., the citizens, have poor control over the way their agents govern them.

The underperformance and lack of capacity of our ULBs are mere symptoms of the underlying disease, which is a lack of control over their destinies. They are governed by risk-averse bureaucrats, who are transferred frequently at the whims of State Governments. This creates a very difficult problem of lack of ownership, continuity, and fearlessness. They do not have powers to formulate human resource policies suitable to their context or enact laws and regulations on subjects devolved to them as part of the 12th schedule. They lack full fiscal powers to levy and modify different taxes and financial powers to raise commercial finance from the market based on their capital needs. All these decisions need to be ratified/ approved by State Governments, which defeats the spirit of the 74th CA. ULBs as City Governments should be able to take these decisions independently. There needs to be statutory sharing of GST between all the three tiers of Government- Centre, States and ULBs. This may necessitate an amendment to the Constitution to allow for trifurcation of GST receipts between the three tiers of Government. The FIT paradigm as proposed for industries can be suitably applied to this context for building the capacities of our urban local bodies to become resilient to these crises going forward.

6. An integrated Ministry for Economic Growth, both at the Centre and State levels could be examined. I propose the setting up of an integrated Ministry, both at the national and state levels to bring convergence between the functions of industrial policy, urbanization, regional development, and economic growth through the ‘whole of Government’ approach. Reduction of income and spatial inequality, promotion of symbiotic urban and regional development policies to foster the growth of systems of cities in the regional context should be its key objective. Mechanisms to achieve these objectives could be manifold, and, more importantly, different for different regions.

Rather than having its own top-down, onesize- fits-all approach, it will support specific actions needed to catalyze inclusive economic growth in those regions. The Ministry, both at the national and state levels, would foster right synergies between various actors and address evolving situations in an agile and effective manner. The core argument in proposing the integrated Ministry is not to centrally direct the course that cities and regions should take, but rather to support them in their local endeavors through creation of appropriate institutional, policy alignment and coordination between different actors in the federal system- funding agencies, government departments, other public and private entities and so on. Economic prerogatives are path-dependent and hence, different for different regions and cities. Cities and regions should continue to be the primary drivers of economic growth.

7. The crisis has brought the use of technology into limelight. States and cities have set up war rooms, command and control centres equipped with the latest gadgets and applications for effective communication with citizens and stakeholders; gathering information from various sources; management of activities, essential supplies and lockdown; and predictive modelling for keeping up with needs of the future. Technology has been used beyond crisis management in many innovative ways. Work-from-home, a hitherto talked about but a concept which was not taken seriously, has ensured that productivity does not dip in times of crisis. Online education has also been an eye-opener. Many academic institutions could switch over to online medium of teaching to ensure disruption less pursuit of their academic goals. Many world leaders embraced video-conferencing technologies to collaborate and share messages amongst each other to effectively fight the crisis. Innovations have been observed in the use of drones to gather information, enforce the lockdown and ensure supply of essential items. Sensors and cameras deployed across the cities have helped administrations keep eyes and ears on the happenings on ground. Mobile Apps provided quick solutions to coordination, information and management problems.

The success of these efforts in the field of technology demonstrate its power and should not end as the crisis subsides. Government has to become nimbler in the use of technology. Traditional ways of evaluating projects for funding tend to get applied to new-age technology and innovative projects which either kills them before they materialize or end up making a mockery through achievement of sub-optimal and mediocre outcomes. If anything, the Government needs to take home as a long-term lesson from the crisis is to become nimbler, more open in experimentation with cutting edge technology and innovation going forward. To say the least, technology can play a tremendous role in increasing access to quality health and education services to the masses. Even though such gains would be tremendous, they would still account for only the tip of the iceberg, as the potential of modern technology to transform governance and citizen outcomes goes much beyond these two important sectors.

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