Srinath Raghavan and Suyash Rai discuss the grave social and economic impact of the coronavirus pandemic on financial markets and its consequences for India.
Srinath Raghavan and Suyash Rai discuss the grave social and economic impact of the coronavirus pandemic on financial markets and its consequences for India.
Suyash Rai is a deputy director and fellow at Carnegie India. His research focuses on the political economy of economic reforms, and the performance of public institutions in India. His current research looks at the financial sector, the fiscal system, and the infrastructure sector.
Srinath Raghavan is a nonresident senior fellow at Carnegie India. He is also a professor of International Relations and History at Ashoka University. His primary research focus is on the contemporary and historical aspects of India’s foreign and security policies. He has written a number of books spanning international relations, strategic studies and modern South Asian history.
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(intro) Srinath Raghavan: Hello and welcome to Interpreting India! I'm Srinath Raghavan, and this is a podcast presented by Carnegie India. Every week we bring to you voices from India and around the world as we unpack the role of technology, the economy and foreign policy in shaping India's relationship with the world.
In the wake of the recent coronavirus outbreak. We are now recording and producing episodes of interpreting India remotely, so please bear with us if there are any issues with sound quality.
The outbreak of the novel coronavirus officially named COVID-19 has brought the world to a grinding halt. Governments across the world have ordered people to immediately adopt social distancing, to stay away from workplaces, educational institutions, businesses have been asked to shut down all in order to contain this contagion. Now this in turn has severely affected economies across the world. Global trade and markets taking a severe downturn, particularly in the wake of mass panic selling in the financial markets in this episode of Interpreting India, we want to understand the COVID-19's economic impact both globally as well as its consequences for India.
Joining me today is my colleague, Suyash Rai. Suyash is a fellow at Carnegie India and his research focuses on the political economy of economic reforms and the performance of public institutions in India. Those of you who follow us regularly, will know that Suyash is a very well-known commentator on economic and political economy issues in India. Suyash, Welcome to the podcast.
Suyash Rai: Thank you, Srinath.
Srinath Raghavan: Suyash actually I want to start by talking a little bit about the bigger picture. The coronavirus crisis has obviously been a major global health crisis, but it's also been a major shock to the global economy. We've seen particularly developing markets taking a major hit in the last couple of weeks. Countries across Europe, Britain, the United States, Japan, China have announced major programs of various kinds of economic stimulus to keep their economies on some kind of life support while they grappled with this crisis. And of course the problem of the economic crisis is kind of compounded in some ways by the energy crisis that is concurrently playing out. There is a kind of an oil war going on between Russia and Saudi Arabia, which has led to a steep drop in oil prices. That may be good news for some countries like India, but it has other kinds of consequences for the global economy. I was wondering if you could begin by getting your sense of what kind of a shock do you think the novel coronavirus has to the global economy and we can then get down to India
Suyash Rai: So this crisis is a totally global crisis. So, although it began in China, which is the main manufacturing hub for the world, and started with a much more of a supplier shock to begin with because large parts of China had to be shut down for some time so that they could deal with this crisis. And at that time, the countries to which China exports, were not as a significantly affected, but now it's spread widely, it's spread to the biggest markets in the world. Europe, the United States expanding to Australia, it's spreading too Africa and of course, much of Asia also. South America has also been affected, so it is a truly global crisis. And even though, as I said, initially it was a China based shock, it was primarily a supply shock for China. Now there's a big demand side to it globally.
There is a move to try and deal with this crisis by dealing with, by reducing the pace at which the virus transmits. In that process, there is a lot of emphasis on slowing down economic activity to lock cities down. To basically dissuade people from coming out in public for various purposes, but also economic activities. And in that process, overall consumption is also dropping significantly. And all of this is leading to a big, uh, increasing uncertainty because we don't know much about how this virus is going to behave, how we are going to deal with it in the next a few months. We are learning every day, but we are not yet in the situation where we can say that we can predict what's going to happen six months from now, let alone a year or two from now. So in that environment, there's going to be kind of a hunkering down by investors.
There will be a certain amount of trade decline also will happen at this time. And one of the first, set of indicators we have got are from China. So China is reporting some advanced numbers for the first quarter of this year and it's looking very bad. It's the worst indicators since its economic boom began in the late seventies. So we can look at that and then try to see what other countries, what would happen to Italy, for example, US UK, all these countries are grappling with it and it's going to affect all of us in a very big way because we are all very deeply integrated in the global economy to create financial flows and also flow of people. So for example, India depends a lot on IT exports and our people go in well physically in many of these Western countries and other countries and all of that is getting affected right now.
Srinath Raghavan: And this combination of a supply shock as well as the demand shock has elicited a response, which seems to be a very accelerated version of the 2008 global financial crisis playbook. So countries have really kickstarted large scale QE or bond purchasing programs. You know, they're making liquidity available by central banks to markets at extraordinary numbers. But do you think the scale of actions which have been taken, even though they are very large, is strong enough to stem the uncertainty that surrounds this crisis?
Suyash Rai: So, I think, in your community of security studies, there is some saying that armies fight the last war. So I think it's somewhat true of economic policy. Also, policy makers often are trying to fight the last war all by the instruments that they had perfected in the last previous war. But we have to be very mindful of the nature of this crisis.
Suyash Rai: It's primarily a public health crisis, which is having economic consequences. It's not the kind of economic crisis we saw in 2008-09. So for example, there is a reason why you are seeing factory shutdown, it has nothing to do with the productivity of the factories or the demand or the inherent demand for the goods that it produces. It's just the way the crisis, the virus is transmitting. You are trying to slow it down. You're trying to save lives, you're trying to reduce the long-term morbidity that will come out of this, for the people who will be affected by it. In the process you are seeing a slowdown in economic activity and both the demand and the supply shock are significantly a consequence, not fully. So there is an uncertainty angle to it. But significantly a consequence of the world trying to deal with this public health problem primarily.
So yes, as a consequence because they give you the uncertainty. There is a freeze in the market. So liquidity supply can help. It'll self-help only to the extent that liquidity is a problem, but the underlying issue will still have to dealt with. And primarily the public health problem will have to be solved. I mean as soon as possible. And we'll have to figure out how to deal with it for the economic, uh, consequences to ameliorate. And then we can also think about how the economic consequences can be mitigated, as of now just providing liquidity, because it's not the kind of financial crisis we saw last time. It was a financial crisis. People didn't know who, who should lend to whom on what terms. Central banks came in in a big way and provided liquidity to the whole world, large part of the world. But this crisis is very much a real economy crisis.
Real ways in which people build stuff, sell it, use it, it's all getting effected because of the public health, each of the public health crisis. And we will have to deal with it in its own terms.
Srinath Raghavan: No, I agree with you that this is a public health crisis in the first instance, that this is a crisis which affects the real economy. But surely there are very significant financial consequences as well. Right? I mean, one of the reasons we've seen this extraordinary sell off even in the safest quality of assets, us treasury bonds and last couple of weeks is primarily because people want cash. And the only way you can get cash is by liquidating whatever you know, good assets that you have attended. And that cash crunch is happening because suppliers are not getting, uh, money from other downstream buyers and vice-versa. So I think, you know, the financial economy is simply a bellwether of what is going on here in the economy, this case.
Suyash Rai: And on that, as I said earlier, also that the central banks are providing liquidity. So people who have assets but they want to liquidate it and turn into cash so that they can pay whoever they need to pay or they want to sit on that cash or put it in some other avenue, they think it's safe. I know they, they should continue doing that, but the underlying crisis will have to be dealt with, as I said, in its own terms. And it will require dealing with the economics of coronavirus itself. How do you deal with it while minimizing the economic costs of the virus?
Srinath Raghavan: That's true. And in the meanwhile, it seems that governments, particularly in the West are looking at instruments or ways of providing relief to the people which are quite unconventional. You know, you had, for instance, in Germany, which is otherwise such a fiscally conservative country, now agreeing to rule out this program of support. Uh, you know, even as we are speaking, the US Congress is debating a bill which is talking about giving $10,000 per head to a household. So you know, talk of helicopter money has once again made an appearance. So, so in a sense, even the way that people are thinking about the urgency of the problem and the kinds of instruments that might need to be deployed seems somewhat different and perhaps even more urgent than during the global financial crisis.
Suyash Rai: Yeah, and that aspect of the response, which is still, I mean, in most of part of the world actually is still under consideration is to do with the mitigation of the consequences of a crisis and also to do with how we can cope with the crisis. So for example, the idea of giving people some minimum income for some time to sustain themselves is not just tied with people living who will lose their jobs and not having an opportunity for some time, but also by creating opportunities so that they can, uh, yes, stay at home and not step out.
Suyash Rai: And they can actually, well practically to what is called social distancing. So they're linking it right now to the problem that they're facing. And I think that part is more interesting and to some extent the kind of fiscal transfers and all we talked about, overlap with the public health response as well. But beyond that, we'll have to think about in a couple of months where this situation is and do we need to do more than that?
Srinath Raghavan: But don't you think the discussion in India on the economic dimensions of this crisis is already at a significant lag to the focus on public health? I agree with you entirely that the public health dimension is first and foremost , but given the nature of the Indian economy with so many people working in the informal sector, people do not have security of job. They do not have contracts.
They do not have various kinds of, you know, health benefits, etc, linked to their employment. The, is it really possible to say that, listen, let's deal with the public and crisis first and you know, a couple of months down the line we look at what should be done because the government has just about only announced the prime minister said that's some kind of a economic task force is going to be constituted and led by the finance minister. It just seems rather to slow response to what's happening. Or am I getting it wrong?
Suyash Rai: We are also somewhat lagging behind on the detected numbers. So maybe, I mean I think we are, I mean we're lucky on this in the sense that it's, I'm a little late to us then from the rest of the world and the sense of crisis and urgency is much greater there. That's one reason why we are still considering economic responses and focusing much more on what is to be done in terms of well preventing it and dealing with it.
But I want to talk a little bit about the uh, economic response to the public health crisis and the public health response and its economic consequences. So, I mean if you want to just think rationally about what, what is going on right now, this is a virus that is transmitting and its consequences are that there's some mortality that is associated with it. Some people who get it are at risk of dying because of it. And in trying to deal with it, you are trying to reduce the transmission. If you look at India's context, what do you have? Is it, and you look at the viruses known characteristics from what is, how it is kind of shown to work in other parts of the world. What do you see is that it disproportionately creates mortality or leads to mortality in people who are of a higher age and that in India is a very small percentage of the population.
Suyash Rai: If you want to think in a very hard nose manner, 6% of the population is about 65 years of age. They are at real risk and they have to focus on protecting them first. Second, one more category of people who are in an enhanced risk are people who have some kind of respiratory disease which has been going on for a long time for chronic disorders that in India is a very big problem. So we are, we carry about a third of the disease burden of such diseases across the world even though we are less than one fifth of the global population. So that creates a enhanced risk for India. So when you're thinking about dealing with this crisis and you'd want to respond to it by a variety of instruments, but for simplicity sake, there are two types of instruments. One is that you wanted to lock downs of economic.
You want to restrict economic activity? The other instrument is just testing and isolating, quarantine, healthcare, that package of activities. You have to think about it rationally and say what kind of response can I give so that, the more mortality and morbidity cost that I'll avoid are actually, uh, more than the cost that I will reoccur in doing all of this. So and on that will depend a lot of hardships that come. If you look at what has happened in India today, part of the response that has happened is voluntary people are themselves kind of shutting themselves in their houses and taking some preventive, uh, precautions. A lot of it is also top-down. So government action is also there that you cannot do such and such activities. Such and such places are shut down and entire cities are being locked down, about 80 cities or so are in lockdown.
All these things. I hope that this has been to talk to rationally that each city there is a, risk perception and a reasonably rational exercise has been done about what will be the consequences, given what the information we have, there's a lot of uncertainty with what information we have and can that, is the lockdown, the right kind of measure to deal with that, once you've got that balanced right, that will determine the economic consequence that you actually suffer. Other than the, global demand and all that will all affect, but I'll come to that later. But that is endogenous for your own policy response. But when you shut down cities, it will lead to certain economic obstruction, you will see that as a cost of trying to deal with the public health crisis.
Srinath Raghavan: But let's say that that is already underway. That's now a given. Oh, I'm recording from Mumbai. Maharashtra is pretty much under lockdown till end of the month. Perhaps that can go on for longer. A lot of migrant workers from the state have left to other parts of India. They've gone back to their homes. In a sense, we are already in a situation where government policy has, and let's say with the best intentions and the best informed choice that they had, they've taken this decision, but clearly in, in that sense, the economic consequences are already playing out. Right? I mean it's, it's not.
Suyash Rai: Right now it's a shutdown of two weeks, 10 days. And one can argue that whether you need to compensate or think about some, uh, mitigating, using some instruments that mitigate harshly for this period. I think you should, but it's a debate one can have. But once you start talking about this has a month, several months off, uh, lockdowns downs and opening up lockdowns and opening up any, you need to have a serious conversation about what is the trade-off that you're making.
So right now we're talking about a week or two weeks horizon and it's just began. I mean this today was a first day when we are recording this and when there's an actual citywide lock down that is happening and we don't know yet how long this lock down will have to continue before we can say that we've contained this crisis and then we can think about what the steps are. If we go down this path and say there's several months of this process required, then we'll have to rethink whether the lock down is the right strategy and then we should maybe think more on the mitigation front. That's the calculation that you need to make right now you are in a position to make that calculation. You can do some short term mitigation strategies. In that, I would say that India is better off using its current capabilities cause I don't think in the short run you can build new capability.
So we have schemes, we have government schemes which any way reach a hundreds of millions of households. Oh, but and uh, so there you've got a public distribution system you can top up on that. You can give more through that and maybe at a further subsidized rate. You've got systems for again, delivery of food through for pregnant ladies and very young children from zero to six years old. You've got midday meal scheme. You can top off on that and give more through that. You've got uh, uh, social assistance program schemes like old age pension, disability, pension in top of, and maybe increase that, give some advances if you can. Then you've got now fairly robust infrastructure of bank accounts and identification and all of that. You have to think about how you deliver it because you may not wanting to create a situation in which delivering itself creates greater transmission by crowding up places and all of that.
But you can respond in using those as well. To the extent that this crisis requires. So again, as I said, if by 31st March or first week of April, you have sufficiently contained the whole situation and you are in control. Then you just have to respond to the first part. The other part of it, which is because of the general slowdown in the global economy, there's going to be a demand shock as far as export is concerned. Investment demand will also decline because of uncertainty. You will have a consumption decline because of the ongoing uncertainty, the problems of global economy, all that will be addressed, but you have to deal with it a little less intensively compared to if this was going on for several months. That we don't know about. I think in India's context it is much more difficult to make these trade off because we are not a $50,000 per capita income country, we are a much poorer country and anyway our economy is slowing down for two years.
You've got a, people have to make much more difficult decisions and have to be very hard, knows about decisions given our demographics, given our overall disease burden and all those things.
Srinath Raghavan: Sure. But if you can just talk about the first, you know, expansion of the immediate live support literary through these kinds of schemes that you're talking about. And in the past, you know, in this program discuss with you about the fiscal situation in India is you've always been a bit sceptical about calls for enhancing fiscal spending because when you're reading that more than just putting the money out, we also need to have effective ways of using any kind of fiscal stimulus. But in this case, maybe that's not a problem as you're saying, you know, there are ways in which we can push the money out so to speak. But yeah. Is there fiscal bandwidth?
Suyash Rai: Yeah. So on that there is very little fiscal bandwidth because we've been trying to get back to the fiscal deficit target that we had set under the FRBM law. But because the economy is struggling to grow and government expenditure has been, at least for the last couple of years, a significant driver of growth. Government has struggled too, maintain fiscal discipline. At state level, I think there is more the fiscal bandwidth. So, for example, this year on the aggregate, the States are actually budgeted to have well below the required, the allowed level of fiscal deficit they are supposed to have. 3% is a allowed in their budget and they have around 2.7% of GDP. So if the States can do more, I mean, depending on the depth of the crisis, again I said we don't know enough about it. If there's a depth to the crisis is much greater, we'll have think about export expenditure substitution.
So we have to think about cutting some expenditure and putting more money into these kinds of measures which have more real relief for people who are suffering dealership. Even very, I mean, unthinkable kind of things. For example, you don't think about giving pay cuts to government servants usually, or pension cuts or these kinds of things. But if the crisis gets really deep and prolonged, we'll have to think about these kinds of measures and you look at the economic point of view, that actually just substitution will be welfare enhancing because you're putting in more money in the hands of people who are more propensity to consume it immediately, in fact they need to do it anyway. So those kind of measures. But again, the main variable here is how do we deal with a public health crisis in a rational and in a robust way, which is keeping in mind the costs and benefits off dealing with any crisis in management strategy that you have based on that you will have other, other consequences.
You put the entire working age population. Uh, Oh at home by force. And that to vast majority having no formal sector of employment, 90% workers in this country don't have even and an obligation to be paid one day's wage when they fired among the rest 10% only 5% have some kind of a contractual obligation to be paid some days wage before they're fired. You're dealing not in a European or American context. The trade-offs here are much more complicated and uh, yeah as the situation goes further I think we'll have to think rationally about what kind of public health response and what kind of we can have and how can we cope with the crisis with this challenge without destroying operative capacity, without having a huge cost. You see the key variables, right? If you lock down, you are creating, for example, you just referred to migrant workers, why are they going back? Because they don't have enough cash to sustain even for\ a couple of weeks perhaps.
Srinath Raghavan: That's true.
Suyash Rai: In, Bombay it's expensive city to live in and the way it works is that India, more than a hundred million people who have seasonal migration, they come from, for example, Odisha, Bihar, UP to Delhi and Bombay, South Rajashtan to Ahmedabad and nearby areas. Large number of people who go and work for some time and they every week or every day in some cases, depending on the, the situation they give remittances back, they don't keep money with themselves and they don't have that much luxury to ride this out for months of it goes along. So we'll have to think about our demographics are different. We have only 6% people over 65 years of age. We have to protect them specifically. And that can be done through a different strategy than just locking down the entire, I mean, I'm just saying what we can do that we're not destroying more than we are protecting.
Srinath Raghavan: Yeah, sure.
And do you think this sudden sort of drop in oil prices, which is an happening partly as a result of I suppose demand drop, but also because of this oil war going on between Russia and Saudi Arabia? Um, I've, I've seen figures like saying that's going to give the GOI some three lakh crores or something like that. In terms of revenues….
Suyash Rai: Well that is all that is based on assumption that economic behavior will not change because of the crisis, the crisis when we import, because we use petrol and diesel. If railways are not running, what kind of thing can you have a lower price of oil? If cars are not running on 80 of the largest cities of the city, then what kind of savings can you have? Plus you will have layoffs in middle East and uh, your remittance income might also suffer because of that. So I think these things are much more complicated and uh, and in the, in the current situation where there is a clear disequilibrium. We are not at a stage where the last few years data will help us project what was going to happen in this year.
Srinath Raghavan: Okay. I want to talk a little bit about the forward looking aspect of it. On the assumption that this continues for even say a few weeks, then clearly we are going to be in a very different kind of terrain and I think there's going to be a lot of, uh, ask from the government to support various kinds of businesses, whether it's small and medium enterprises or its larger corporates. Uh, and I'd like to just talk a little bit about these two things. So, uh, SMEs, I think after the demonetization shock, this is perhaps another major crisis that has hit them. I really want to, what do you think are strategies for mitigation and coping with this situation are going to be?
As demonetization showed, you know, it's very easy to put them out of business and regrouping and getting them back on their feet is not at all easy.
Suyash Rai: Yeah. So if this crisis continues for a month, a weeks, maybe less, but if it goes on for months and if we respond to it in this way by a top download on orders and we are very much keen to look at only one side of this, then we will see many, many bankruptcies, uh, in not just in SMEs but also other firms because, uh, they may not have the reserves to ride this out. Some of them may cope by cutting costs and by dealing with layoffs and those kinds of things. But if you have revenue declining by a huge percentage, and if it goes on, for example, one of the largest categories of SMEs in India is the restaurants.
Restaurants and small hotel is very, I mean, hundreds of thousands of them. So if they have no revenue going on, where will they pay salaries from and from where will they be able to pay rents from and all of that. If economic value is destroyed, then beyond a point you cannot really do much. What government, I mean could consider going forward is a couple of things I think are worth considering. One is that you could maybe have a short period of moratorium on the bankruptcy filing process so that you get a little bit more time or a breather to deal with this big exogenous shock. Some countries are considering it. We could also consider it. We have a very strict otherwise bankruptcy process and that process, is fully adhered to in this time we will have many, many more bankruptcy just clogging up the system.
Suyash Rai: The other is perhaps you can consider, yeah, providing some form of bridge loans, which an equitable manner. I don't like the business of picking and choosing sectors and firms, in our political economy it might lead to behaviour which is somewhat perverse. So I would say we should create a mechanism, but again, it will all come down to cost eventually. But for some time we will tide over and protect some productive capacity. The key point here is that the bankruptcy is, I mean if, if it can be quickly resolved, somebody else takes over the firm and runs. It's just facts of the world. Somebody got unlucky while they were running the business, this raw shock hit them and they had to lose control of the firm. Lots of people shareholders get wiped out. But in the current context of crisis continues, the bankruptcy resolution will be very difficult because nobody will have the capital.
Very few people have the capital to actually take over and run the firm correctly. It's a very unique situation in that sense. If it continues for months, therefore I'm saying that these kind of special dispensation would be required. Otherwise I don't, believe that, well the government has any business trying to protect firms from bankruptcies in a crisis which is different from this kind of a crisis. So yeah, and then once you've given the bridge loans and all, some of them written off, they'll be NPAs and all, then you'll have to create a situation in which couple of years, three years down the line, the fisc absorbs part of the shock.
Srinath Raghavan: That's right. And uh, this crisis is also coming for corporate India at a time when corporate borrowing, especially as external commercial borrowing seems to have been on something of a high over the last few years. How do you think this loss of value is going to help them cope with that particular debt servicing and ability to really stay afloat.
Suyash Rai: So what happens usually in a crisis where there's a significant demand shock is not just firms, also individuals who make money off firms, they will be borrowing more to tide over this period. So that is going to probably increase and I'm hoping that government will allow more capital to flow from outside into firms to be able to tide over this period because especially if government goes on central or state government goes on expenditure spree to respond to this crisis, they will be crowding out most of the household financial savings in India. They are already crowding out a lion’s share of it. And if they further try to do a fiscal expansion in this context, which may be required. If this persists then firms should also find a way to get capital, individuals should also find a way to get capital. We should perhaps consider lowering of capital controls and allowing more and our current account balance situation is not bad on that front, so we should consider opening up more avenues for firms and individuals to seek capital from rest of the world.
Srinath Raghavan: But at this point we are seeing something of a flight of capital from, at least in terms of institutional investors from abroad pulling out from India, right? Not just India but all emerging markets.
Suyash Rai: Yeah. Institutional investors are pulling out, they're de-risking at the moment, but if at some sometime they will lend to you and firms have a right to be able to borrow and sustain through this period and clearly, I mean It depends on the lender and the borrower what comes, they'll agree with. I'm talking about the regulatory restrictions on borrowing and gaining capital from abroad, both at the moment especially because there's a good chance the government is going to crowd out most of the household savings in the incoming period.
Srinath Raghavan: Suyash, If you had to give the financial minister any couple of pieces of advice in terms of what she should be thinking about when she looks at this taskforce to be with this crisis, what would the top two or three policy suggestions from your side be?
Suyash Rai: I have two suggestions. Both of them I have already discussed.
One, think very carefully what the cost and benefits of the response strategy that you have with respect to the crisis itself. That's not in the finance minister’s domain. Yeah, but she sits in the same cabinet. She should work with her other colleagues about in India's context or is the right response. The second is while trying to mitigate the hardships caused by this crisis, use your current capabilities, your schemes, the accounts and identification system that you've built to reach directly to the households so that if you could put money in the hands of people who most need it. And the third, which is the additional, because I don't think you can be accepted, is consider very seriously expenditure substitution strategies. Is it necessary for government to always, meet its promise on so called committed expenditure on things like salaries and pensions and all of that. If the crises deepens and we have a real, once in a century situation. Those things also should be on the table.
Srinath Raghavan: Sure. All three sounds imminently sensible to me, but I hope somebody else is also listening. Suyash, Thank you so much for being with us today. I'm sure this is a continuing conversation, so we will keep, you're turning back to these issues in the coming weeks. Thank you so much.
Suyash Rai: Thank you, Srinath.
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