In response to the pandemic, global economy has shutdown. To re-start, the economists must be prepared to make bold and creative actions.
We need to Learn to Live with the Coronavirus
After 01 April, 2020, most of the world has remained in lock-down. In a historically unprecedented manner, governments across the world, forcibly shut down social and economic activities. In the last four months, the virus has spread from Wuhan, Hubei Province (China) to South Korea, SE Asia, Europe, Americas, Africa and indeed the rest of the world. As on 15 May, 2020, with 4.4 M cases and 3L deaths world-wide, it is most likely (almost obvious) that the contagion cannot be controlled, in the near future. Importantly, governments have realized that they can ill-afford to keep the economy in shut-down much longer; hunger and riots may breakout, if mean of livelihood are not restored, soon.
What has the Shut-down done to our Economy?
International and domestic travel has ground to a standstill, along with the vibrant tourism and holiday sectors of our economy. The international price of oil has hit historical lows, demand for automobiles is virtually non-existent and public transport is yet to resume operations. India’s labor-intensive construction industry, just stopped; leaving migrant workers, in a horrific ordeal with no livelihood and no means to get to home. In most of India, there was very little production of goods and services. Concomitantly, consumer demand contracted, as people stayed at home and observed Janata Curfew. Except for essentials, consumption of goods and services, the world over, virtually ground to a halt. Unlike previous slowdowns and recessions, this time the impact was near universal, all over the world and in all sectors; affecting both the supply and demand sides of the economy. In simple terms, most people stopped working, stopped creating wealth and became dependent on consuming reserves.
Two Strategic Recommendations to Revive the Economy
As we emerge from the unprecedented lock-down and endeavor to revive the stalled economy, there are two strategic recommendations that deserve attention.
Remove the Burden of Interest. At this juncture, companies and individuals leveraged by debit find themselves most disadvantaged. Despite the absence of income (because of the lock-down), they are still required to pay back both the principle and interest. The RBI had issued instructions for banks to postpone repayment of loans, for a three-month period, from 01 April till 30 May, 2020. However, while interpreting the RBI guidelines, all banks, without exception, have offered only delayed repayment, with additional interest. Some economists call interest as rent on capital. When economic activities were stopped in the interest of public safety and by government decree, is it justifiable that banks should continue to charge interest, on capital invested in the stalled economy?
Analysis: Interest rates change over time, depending on market conditions. Central banks of nations, use interest rates as monetary tools, to stimulate the economy in times of economic difficulty or contract money supply in times of high inflation. Currently, five countries with the lowest interest rates are Switzerland (-) 0.75%, Denmark (-) 0.6%, Japan (-) 0.1%, Sweden 0% and Spain 0%. The Bank of England has dropped their interest rate to 0.1%, while the Federal Reserve of US has brought interest rates down to 0.25%. The RBI is still maintaining the REPO rate at 4.4%!
Assessment: The RBI should adopt the ZIRP (Zero Interest Rate Policy) for the duration of the economic recovery from the pandemic. By adopting ZIRP, economic activity should take-off; because, firms and individuals will gain access to low-cost borrowing and cheap credit. To deal with extraordinary challenges, we should not hesitate from adopting extraordinary measures.
Downside: If the RBI were to adopt ZIRP, it would no longer be in a position to reduce interest rates, rendering conventional monetary policy ineffective. However, the RBI could still resort to quantitative easing and in extreme situations even offer negative rates like Switzerland, Denmark and Japan.
Inspire the Consumer. The other unique challenge thrown up by the COVID-19 pandemic, is reviving consumer demand, while the threat of the coronavirus persists. It might be idealist, to expect governments to publicly admit that efforts to contain the virus have failed. However, governments should now not hesitate to inspire people, to learn to live productive lives, in COVID threatened environments. The same agencies (public health and police), who implemented the lock-down should now advocate the new policy – resume normal lives, observing pragmatic precautions.
Assessment: As we emerge from the lock-down, we need to inspire the public with positive messages. These messages should be issued by government agencies and endorsed by local leaders, so as to reach the common man. Consumer demand needs active participation of the public and they need to be informed that a new strategy has been adopted – to resume normal activities, despite the continued threat of the coronavirus. Some of the messages could be as follows: -
(a) COVID-19 is NOT the most dangerous virus in terms of mortality. The SARS coronavirus, which infected parts of the world in 2003, had a higher mortality rate!
(b) Though the COVID-19 virus is contagious, almost 90% of infected humans are asymptomatic or display minor symptoms.
(c) During the lock-down phase, governments have succeeded in creating necessary medical infrastructure, to monitor the infection and to treat patients, in the event of spikes.
(d) There is no stigma in getting infected by the coronavirus. World-wide more than 4.4 M people have been infected and those who recover, can enjoy some immunity from the disease, perhaps even up to one year.
(e) Some people will die from COVID-19; the elderly and those suffering from co-morbidity are more vulnerable. Some young people will also die but their proportion will be less.
(f) We must take pragmatic precautions but we cannot let the coronavirus take control of our lives and deprive us of a livelihood!
(g) Actually, the coronavirus is dumb and with no brains. All we need to do to kill it, is spray it with alcohol-based disinfectant.
(h) Did mankind make too much of a big deal over the coronavirus?
For eight weeks, the economy was non-productive. During this period, we appreciated the magnificent efforts of doctors, nurses, medical staff, health workers, police and administration, in saving lives. Now is the time for the other sections of society to do their parts. As we emerge from the COVID threat, we need to invigorate cash in the economy by introducing ZIRP and improve public sentiment & morale, through correct messaging.
Author -- Maj Gen Moni Chandi, CSO, Synergia Foundation