Is there a way out of the gloom and doom?

‘The government has said it has kept its powder dry to fight the true battle against the debilitating influence of the pandemic.’
‘The release of the shocking economic data this week should act as the fuse for using that powder now.’
‘Further delays will make the battle that much harder,’ notes Shreekant Sambrani.
.

Impact of the pandemic

Except for those just returning to the earth after a long sojourn in outer space, everyone knows what an enormous toll the coronavirus pandemic has taken in terms of lives lost and stalled economies worldwide in the first eight months of the year.

We also know that virtually every national government and its head has enforced restrictive measures varying in degrees of harshness to contain and combat the spread of the virus.

Even the patently recalcitrant ones such as Presidents Donald Trump of the United States and Jair Bolsonaro of Brazil have been compelled by circumstances to do so.

The immediate consequence of any lockdown, even the mildest one, is a slowing down of the economy, local, national and global. And in 2020, it materialised in next to no time.

Closed offices and factories caused significant unemployment and resulted in massive losses of household incomes.

In the developed world of Europe and North America, the ranks of people rendered freshly jobless applying for unemployment benefits swelled week after week.

In India, heart-rending pictures of urban workers from out-of-state trudging on foot to their homes, hundreds and thousands of kilometres away, in the wake of the world’s harshest lockdown, spoke louder than any interpretation or analysis.

That made economists and policy-makers everywhere scour experiences of the past in search of a feasible course of action.

The recession following the financial crisis of 2008 seemed relevant at first, but it soon seemed to be too modest in scale.

We turned our attention to global depression after the crash of 1929 and rediscovered the greatest economist of the 20th century, John Maynard Keynes, who wrote the playbook to deal with that catastrophe.

The world realised anew the need to prime the pump through consumer spending. Countries rushed to announce stimulus packages worth billions of dollars and Euros which would put sizeable amounts of money in the hands of those affected.

India, too, sought to create its own stimulus package. Despite the hype surrounding it, this turned out to be a patchwork collage of some measures announced earlier, some welfare schemes of free grain distribution and reincarnations of several other tried, trusted and failed schemes of the past.

The actual additional expenditure amounted to just over 1 per cent of the gross domestic product (GDP), rather than the Rs 20 trillion (10 per cent of the GDP) the government claimed.

More importantly, it provided nearly nothing by way of additional disposable income. Many economists criticised it on various counts.

I called it the stimulus that wasn’t because it did nothing to spur household consumption which had collapsed (Business Standard, May 19, 2005).

The mood now, in late August and early September, is very sombre. Most large economies, including those which had administered very large stimuli, experienced double digit declines in the April-June quarter, coming on top of similar, if smaller, declines in the previous quarter.

India now has the entirely unenviable distinction of not only reporting the highest daily increases in coronavirus cases worldwide, but also topping the major economies in terms of economic downturn in the most recent quarter with a 23.9 per cent decline.

Clearly then, the stimuli were not working as effectively as expected, if they were working at all.

The fate of economies with very large stimulus packages was not significantly different from those with more modest ones. And yet, after a severe initial fall in March and April, share prices in all major markets had nearly reached their pre-pandemic highs!

Thus our thinking on economic policies and growth has become a major victim of the dreaded coronavirus. Why did this come about?

***

Irrelevance of stimulus in pandemic

We know from basic economic theory that consumption has a multiplier effect. One family’s expenditure becomes income to the supplier families or firms, who in turn spend it on their own consumption needs and the wheels of the economy keep running.

The higher the consumption, the greater is the multiplier. That is why an addition to the income in the form of dole in times of collapsing demand is considered to be an essential stimulus.

The devil, as always, is in the detail. In this case, not all additional income leads to either added consumption or investment and not all consumption has the same multiplier.

This is best illustrated through a parallel. Many years ago, a knowledgeable person in the film distribution business told me that people like me who see a film once in an auditorium do not even help it recover its production and distribution costs.

It is the crowds which throng cinema halls for their nth viewing of Sholay or Dilwale Dulhaniya Le Jayenge and repeat dialogues and shower coins who make films money-spinners.

That made abundant sense to me. I realised that people like me who bought perhaps a couple of sets of clothing and a pair of shoes a year did not set the apparel and footwear business on a growth spiral.

Those who liked to have a closet full of clothes and a rack overflowing with shoes, who did not repeat the same outfit for many weeks on end, actually provided the acceleration for these activities.

Big fat weddings, Indian or Ruritanian, holidays abroad, repeated acquisitions of white goods, even monthly family splurges at the local multiplex with movies and outrageously priced snacks, all fall in the same category.

In other words, Joseph Schumpeter and Thorstein Veblen were spot on with their theories of creative destruction and conspicuous consumption being engines of growth.

Now in the time of pandemic, it is not just that demand has collapsed, but the discretionary expenditure as described above has all but disappeared.

Those who have lost their livelihoods or have had their income severely reduced simply have no means to engage in this behaviour.

Their main struggle is to keep the body and soul together by any means. Those who are not so constrained are not forthcoming to indulge in such expenditure either.

Everyone is scared of what the future holds with the rampaging virus. The natural tendency is to hoard any surplus income for meeting contingencies if the family should unfortunately become a victim.

This is not invested and is in the form of idle, unproductive cash. The media is full of horror stories of astronomical expenses incurred by the sufferers of the virus which makes an average family conserve all its liquid resources.

And then there are the restrictions imposed even when the lockdowns are partially lifted.

Travel is no longer an experience that an average person looks forward to and avoids it with a vengeance even required for business purposes. The same is true of eating out.

Movies are what one watches on television or OTT platforms, not in theatres or multiplexes. Soon most people will not remember when they took a family holiday or a long leisurely drive. And many are actually seeing virtues in the new normal.

No wonder then that apart from manufacturing, construction and trade, hotels, travel etc have been the major contributors to the decline of the Indian GDP in the last quarter, all shrinking by 40 per cent or more. Some of these, such as travel and leisure activities may never regain their previous vigour.

When will this change and will we return to our pre-covid behaviour patterns? Not any time soon.

Even if the pandemic in any given geography recedes or is under control, the uncertainty will persist as will the fear arising out of it and consumers will not easily abandon the caution they have learnt through hard knocks.

It is only when there is more than adequate reassurance of safety from the ravages of coronavirus will our thinking start to get back to the earlier normal.

For that to happen, we will need a reliable and affordable vaccine readily available with proven results of giving us immunity for a reasonable length of time, and not like the swine flu vaccine of the late 1970s which caused more harm than good.

Present indications are that despite political coaxing, a trusted vaccine is at least six months away, in the spring of 2021.

It would then be several more months before we begin to be comfortable with it. That means that until the end of 2021 at the earliest, we will continue to be chary about doing anything that even remotely jeopardises what little ability of fighting the virus we have.

This is as true of a family in Dharavi as it is of one on Long Island or in Monaco.

The traits of self-preservation are universal, irrespective of race, religion or economic status. This is why Bill Gates recently said that he does not expect any return to normalcy before 2022.

And as for the exuberance of the stock market, former finance minister P Chidambaram had observed long ago that whoever thought they were indicators of economic health?

So the failure of the stimuli was a chronicle of the possibility foretold.

***

The prognosis: Massive public spending

The question asks itself: Is there a way out of this doom and gloom? Yes, there is.

The mistake that people like me made while strongly advocating pump priming through private consumption is not realising these underlying fears and uncertainties will overpower any stimulus.

We forgot what the sagacious Keynes had said: If private consumption has collapsed, it must be replaced by accelerated, sizeable public spending.

Americans wisely undertook massive public projects in the 1930s, such as the Tennessee Valley project. Added public expenditure for munitions and war materiel in the latter half of that decade created massive employment.

In the post-war Eisenhower era, spending on the Cold War with the emergence of the military industrial complex and the creation of an enormous Interstate highway system created and sustained unprecedented growth.

The populist governor and presidential aspirant Huey Long of Louisiana was prescient enough to instinctively realise this.

He built thousands of miles of tarred highways in the 1930s in his poverty-affected state with not many automobiles to ensure that his electorate had a chicken in every pot. That made him virtually a god-like figure in his state.

In India, we do not often attribute the high growth in the 2000s to the right reason. We customarily believe that it is because of the enlightened policies of the government under the wise economist Dr Manmohan Singh.

We ignore that the very large highway building and widening programme ushered in and nearly completed by the Atal Bihari Vajpayee government not only created a very large number of jobs but also opened up the hinterland and provided incentives.

The continued opening up of the economy resulted in families satisfying their pent-up demand for the good things of life through higher and accelerated spending out of their increased incomes. Thus set in motion a virtuous cycle of growth never before seen in India.

Of course, no two situations are ever alike and therefore, the replicability of solutions must be judiciously assessed and subject to fine-tuning in view of ground realities.

But all previous experiences suggest that large public spending on infrastructural activities has almost always had salutary effect on the economic well-being of society.

It is not as if there is a dearth of areas in India which can absorb such expenditure. Many of the favourites of the present political dispensation, such as assured supply of electricity to all houses and farms, optical fibre connectivity and availability of broadband Internet in all villages and more recently, piped water supply to all houses, all have enormous last mile problems.

Solving them is not glamorous, but adds hugely to their effectiveness in delivering the envisaged benefits and has tremendous potential of generating multiplier effects.

In fact, undertaking such activities on a very large scale would be a great boost to the advancement of the most recent favourite of Prime Minister Narendra Modi, atmanirbhar Bharat.

The government has said that it has kept its powder dry to fight the true battle against the debilitating influence of the pandemic.

The release of the shocking economic data this week should act as the fuse for using that powder now. Further delays will make the battle that much harder.

There is hope yet in the time of pandemic, but only just.

Feature Presentation: Rajesh Alva/Rediff.com

Source: Read Full Article