The current experience
As the pandemic incessantly hammers at mankind, spreading its dark shadow across continents, the focus is on saving lives, whatever be the cost. The overwhelming fear for collective safety has surpassed all other concerns, giving little space to decision and policymakers while choosing between saving lives and saving the economy.
But we all are aware that an even greater calamity waits for us on the other side of lockdown, one which was already in a nascent stage even before the pandemic - a collapse of the international financial system, the likes of which we cannot imagine.
The duration of the contagion will decide the shape of the economic landscape; the longer it lasts, the more severe will be the impact and greater and more painful will be the recovery process. The lockdown is bringing down the infection rate and flattening the curve encouraging governments to resume economic activities gradually. In China, it is being reported that almost 60% of companies resumed operations between March and April and the rest of the world is likely to follow by mid-May or early June. In India, also it is being predicted that all businesses will re-start operations from June; farming activities have already started in a staggered manner. The Eurozone economy has shrunk by almost 3.8 percent, the highest since its creation, and it has no option but to resume economic activities at the earliest.
The prognosis for the Economy
Broadly, two scenarios are being considered; a best-case scenario with a return to full normalcy within the next three months i.e. by August 2020. The worst-case scenario is a full year of the pandemic, going up and down like a yo-yo, and the world alternating between lockdowns and short windows of controlled activities.
While the economic cost globally will be spread across the entire spectrum- rich and poor- the severity of low-income countries in Africa, Central America and South-East Asia will be disproportionately severe.
In the best-case scenario, following the Chinese example, major countries would have ended the lockdown by mid-May or early June. The optimum economic activities in core industries would start reaching the peak values by August. But it is unlikely that the economic losses suffered by all segments would have been offset. However, this is where the government will have to step in through guarantees, liquidity support, short term work schemes and a moratorium on loans. In this case, if effective policy interventions are implemented immediately, the recovery will be V-Shaped.
This scenario is based upon the assumption that there will be no second wave of the pandemic for at least one more year. In case a viable antiviral treatment is found or a vaccine created by the end of the year, together with more widespread testing protocols, higher surge capacity created in health care and more disciplined approach to life and work through social distancing and hygiene, full lockdowns can be avoided even if some infection re-emerges in the winter months. Of course, leisure travel and tourism and their ancillaries are unlikely to be revived during the next 12 months, which will have a huge impact on the overall recovery. Recession would be experienced by most economies, but by 2021 growth would accelerate.
In this case, a rebound can be expected, which can mitigate a long drawn recession which is bound to occur.
There may be a variation to the best-case scenario, with a second wave sometime in December-January, as winter returns. Hopefully, by then, the entire world would have become wiser and better prepared in managing the crisis than in the spring of 2020. While some areas would again see a total lockdown, the containment measures would be more tailor-made, ensuring that some regions/ sectors are kept up and running. In this case, the economic recovery will get pushed into the spring of 2021. Pre-crisis level recovery in most segments will not be before late 2022.
In the worst-case scenario, due to surges in infection which come on the heels of every opening of the lockdown, major economies, including India, are constrained to impose lockdown measures until the end of 2020, at least. In this scenario, economic activities would reach pre-crisis levels only in the second quarter of 2021. By now, hopefully, a vaccine would be available worldwide as also a tried and tested antiviral regimen. A considerable number would have acquired herd immunity. Even if the virus makes a return, it can be dealt with without a lockdown. Even air travel and tourism would benefit from the renewed confidence of mankind.
However, one must not rule out the extreme economic, social and political turmoil which we will see the whole of 2020. It goes without saying the most economies will experience an unprecedented and almost unimaginable contraction in 2020. The rebound in the second half of 2021 would be muted, and we can safely assume that pre-crisis levels in economies will not be reached until 2023.
The crisis can be understood through different faces of the economy. On the demand side, a combination of low income, fear of contagion shifting spending choices (lower demand for tourism and catering services) and lower levels of consumption. On the supply side, a sudden stop in manufacturing has caused massive supply chain disruptions which cannot be met by inventory stockpiles. Manufacturing shutdowns, if they continue for longer than two months, will result in worldwide bottlenecks as no major manufacturer builds all components in house and relies entirely on supply chain hubs like China, South Korea, and Vietnam etc. In the financial side of the economy, capital flight has caused course correction in many markets, and volatility has increased in the foreign exchange market. This pushes emerging markets to become more vulnerable to the consequences of the crisis as fresh capital will be diverted away from them.
It would be pertinent to outline the crisis in the aviation industry, a driver of economies. Industry pundits estimate a loss of $ 252 billion for 2020. If aviation is not functioning, the economic damage goes far beyond the sector itself. The livelihood of 65.5 million people who are dependent on the industry, including sectors such as travel and tourism is at stake. IATA has calculated that 25 million jobs in the aviation and allied sectors are at risk across the world
Some ways forward
Some countries have already taken unprecedented steps to tackle the economic consequences of the crisis. Immediate/ short term measures include direct-cash transfers to citizens as unemployment levels sky-rocket and lowering of interest rates by central banks to ease the flow of money and moratorium on payment of loan EMIs or credit card dues. To save businesses that have run dry of even working capital, governments are promising bailout packages. Estimates through the Global Policy model suggest that national incomes might rise by $1.4 trillion for developed countries because of these expensive packages, however many fear that developing economies might not be able to meet the crisis head-on.
Comparison between the Global Financial Crisis (GFC) and the economic consequences of COVID-19 have already begun. However, things are different this time. Firstly, unlike GFC we still do not know when this crisis will end. Uncertain future can cause confusion and delay in taking effective policy action, and even the massive packages announced currently may prove to be too little and too if the crisis continues to grow.
Secondly, many countries do not have the effective mechanism to bounce back like the last time. China's large stimulus and increased global south-south trade had positively impacted growth in many parts of the world. Shrinking fiscal space, lacking state capacity and truly global nature of this crisis constraints us from using the same methods. Due to increased fear of future supply chain disruptions, countries and companies will rethink their supply chain strategy, and this will cause longer delays in global trade to rise, unlike after GFC it was relatively easy to boost trade after large companies recovered.
Financially, developing countries face different types of problems. While developed countries have the financial strength and administrative ability to buttress the social protection schemes, developing countries do not have this option. A decline in revenue causes tighter fiscal space while people demand increased social protection schemes, currency depreciation causes an increase in the cost of importing essential products, and lack of administrative ability increases the toll on their health care system while limiting their ability to respond. This creates a vicious cycle that developing countries will struggle to get out of, creating an opportunity for social unrest and destroying the development done over the years.
Recent pledge taken by G-20 countries to inject $5 trillion in the global economy to mitigate the crisis is commendable, however much more can be done. This crisis could be the right time to discuss changing the rules of Special Drawing Rights (SDR) practised by the IMF. SDRs are kind of a current account held by the IMF; countries can use this mechanism to obtain hard currency and as a means of payment between countries. Each country has a quota, which is directly proportional to the amount shared with the IMF, therefore developed countries have better access to these funds than developing countries. In 2009 of the $183 billion that was allotted as SDRs, only $12 billion went to African countries. This time IMF can allocate more funds to the developing countries based on their need and ability to recover.
Another solution is a globally endorsed capital control measures; such a move can stop the outflow of capital and restrict the depreciation of currencies and asset prices. This move must be legitimised globally and for effectiveness, needs to be assisted by International organisations like IMF.
A third possible policy decision is to have a temporary standstill on loan repayments; this can happen when creditor countries choose to extend debt repayments for a couple of years. During this time creditor institutions should not have the option to take legal course of action that would force countries to repay their debt.
Indian Economic Landscape
The most severely impacted segments of the economy in India, which will face a long term uphill struggle to recover are automobile, entertainment (multiplexes, restaurants, bars etc), tourism, hospitality, jewellery. The banking sector too will take a severe hit with the RBI prediction of an increase of about 10.5 % in NPAs by the end of the third quarter of 2020.
The Indian airline industry is in grave danger of insolvency. The industry contributed 1.5% to India's GDP, an economic contribution of $35 billion and supported 6.2 million jobs. Centre for Aviation (CAPA) estimates that the Indian airline industry including companies providing auxiliary services like airports and ground handlers could incur losses of between USD3.3 to 3.6 billion in the first fiscal quarter of 2020 ending June 30
- Now, more than ever before, solidarity between nations is the need of the times. While we still have to witness this spirit in the fight against COVID-19 as each nation is fighting the virus in its own silo, and there seems to be little global collaborative effort in finding the vaccine, we can hope, and pray, that the world will come together to deal with the financial ruins. In a globalised world economy, we sail together or sink together.
- Global leaders have to rise to meet the challenge by not only tackling the crisis in their own countries but also helping others. Such help can come through debt-relief measures, postponing debt repayments, lowering tariffs or entering in trade agreements with developing countries. On their part, developing countries will have to make watertight commitments and ensure 100 percent transparency of utilisation of economic support rendered by richer countries at great cost to their citizens.
- However, our priorities must be clear- first defeat the virus and then look at the economic turnaround. Public debt concerns come second to public health concerns.