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India

For The Economy, Lockdown Is Worse Than War

A view from India on the prospects of major upheaval in the short-term and the possibility of a lasting economic depression.

Locked down in Kolkata.
Locked down in Kolkata.
Arun Kumar

-Analysis-

NEW DELHI — It has now been over two months since China admitted that an epidemic had broken out in Wuhan city in Hubei province. As countries begin announcing lockdowns to limit the spread of the virus, economic activity is grinding to a halt in large parts of the world economy. Not only are there supply shocks leading to reduced production, but there is also a decline in income as people are not able to work and have reduced purchases to a bare minimum. China, the largest car market in the world, has reported an 80% drop in sales.

It is not just business sentiment that is declining – as reflected in the collapse of global financial markets – but also in consumer confidence, resulting in reduced demand. The two feed into each other. Most analysts have been arguing that the world economy, which was already slowing down before the crisis had hit in January, is headed into a recession. China, India and so on were slowing down officially while Japan and German economies were close to zero or negative rates of growth in January 2020. The US was the only major economy that was still robust, but now large parts of the country are in lockdown and there has been a decline in production and demand.

Since we do not know enough about the disease as yet, no time frame can be given as yet. We neither have a cure against it nor a vaccine and, according to experts, developing these may take more than a year. Initially, the disease was thought to affect infants and the elderly, but now it is clear that though not many children are getting infected, the young are vulnerable. It was thought that warmer weather would stop the virus, but its spread in tropical climates suggests that one cannot depend on that either.

The situation in countries facing a lockdown is worse than during a war. During a war, production of armaments rises but now, production is collapsing as people are not able to move around or go to work. Only some can still work from home and that too at reduced efficiency. During a war, demand is high. But now, it is collapsing, since incomes are falling with retrenchment and layoffs and salary cuts. People are only buying the bare essentials and even hoarding them. Huge swaths of the economy are not working as the drastic fall in demand for energy shows. This is corroborated by pictures from space, which show a considerable reduction in pollution levels.

In a pessimistic scenario, if the pandemic persists for more than two months and there is slow recovery after that, the world would have entered a depression. So, on top of a health crisis, there would be an economic crisis.

In a recession, many businesses would fail and especially those that are highly leveraged or those that have small amounts of working capital. Many banks and financial entities would also collapse. Failure of some will lead to a failure of many others, since they are all interlinked, as we learnt during the global financial crisis 2007-08. In a depression, there would be widespread business failure and even after the pandemic dissipates, the situation may not recover any time soon.

A depression will result in widespread social breakdown.

A depression will result in widespread social breakdown, since work is unlikely to be available for long periods and many will not have income to buy the basic necessities. Homelessness and hunger would grow. Many children would be out of schools. Incomes of elderly people dependent on pensions and interest incomes on financial assets would collapse. Many could be bankrupt due to medical expenses.

Several governments did not take early action to prevent the spread of the disease. Now, they are declaring an emergency and setting up a task force to tackle the impact of the pandemic in their countries. They are putting in place a slew of measures like, income support. Prime Minister Narendra Modi, in his address to the nation, announced the setting up of an economic task force, which must anticipate and act in advance to help India tackle the crisis. It needs to plan for the various scenarios that may unfold in the future.

In India, the first task is to prevent the general spread of the virus. The infected need to be identified quickly and isolated. Those who have contracted the disease need to be provided immediate and free medical assistance. More hospital facilities, even in hostels and stadiums, are needed. Production of essential medical supplies like, masks, protective gear and ventilators should be ramped up.

In economic terms, it is not like a usual business cycle so monetary policies can only be accommodative and fiscal policies can slow down the impact but not reverse the decline. An increase in fiscal deficit is going to occur but that should not be a worry. The arbitrary limits under the Fiscal Responsibility and Budget Management (FRBM) Act should be given a quiet burial.

People losing work in urban areas are migrating to their homes in rural areas and chances are that the disease would spread there as well. So, the creation of work in urban areas is important. But the Catch-22 is that to provide work, the lockdown would become unfeasible. Workers also typically live in congested localities and isolation is next to impossible, so health facilities will have to be provided for the isolation of a large number of people.

Simultaneously, business closures have to be effectively tackled so that laying off workers can be checked. In this context, the cottage and small sectors need special assistance. Reaching them will be a tough task for the government, but necessary. Because of loss of work and fall in demand, workers need to be supported through cash transfers. Further, given low levels of savings, workers will not have the purchasing power to buy essentials in bulk. They will need weekly supply of basic items through PDS. More shops to distribute essentials will have to be drafted from the private sector.

The army may be needed.

To prevent hoarding and malpractice by shop owners, the help of the army and police may be needed. There are enough stocks of basic grains to give provide them free of cost to the marginalised sections. Movement of milk, fruits and vegetables from the farms to the consumer will need to be ensured. Government machinery will have to be strengthened by shifting manpower from less essential tasks to ensure better distribution.

Banking and financial procedures need to be simplified. When people's mobility will be impaired, smooth functioning of the financial system is essential. So, all needless hurdles must be eliminated. For instance, working of bank accounts, fixed deposit accounts and especially the accounts of the poor need to be made easier.

Farmers will face a problem of demand, with their incomes adversely impacted and in need of greater support. Government procurement and distribution to consumers of various agricultural produces will have to be greatly increased.

In brief, the spread of COVID-19 sees India facing a situation worse than war. India should draw lessons from the experiences of other countries. Markets will not be able to deliver and massive government intervention will be needed all around and collective will is required to tackle the situation.



For the coming weeks, Worldcrunch will be delivering daily updates on the coronavirus global pandemic. Our network of multilingual journalists are busy finding out what's being reported locally — everywhere — to provide as clear a picture as possible of what it means for all of us at home, around the world. To receive the daily brief in your inbox, sign up here.

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Geopolitics

One By One, The Former Soviet Republics Are Abandoning Putin

From Kazakhstan to Kyrgyzstan, Armenia and Tajikistan, countries in Russia's orbit have refused to help him turn the tide in the Ukraine war. All (maybe even Belarus?) is coming to understand that his next step would be a complete restoration of the Soviet empire.

Leaders of Armenia, Russia, Tajikistan, Belarus, Kazakhstan and Kyrgyzstan attend a summit marking the 30th anniversary of signing the Collective Security Treaty in Moscow on May 16.

Oleksandr Demchenko

-Analysis-

KYIV — Virtually all of Vladimir Putin's last remaining partner countries in the region are gone from his grip. Kazakhstan, Armenia, Tajikistan, and Kyrgyzstan have refused to help him turn the tide in the Ukraine war, because they've all come to understand that his next step would be a complete restoration of the empire, where their own sovereignty is lost.

Stay up-to-date with the latest on the Russia-Ukraine war, with our exclusive international coverage.

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Before zooming in on the current state of relations in the region, and what it means for Ukraine's destiny, it's worth briefly reviewing the last 30 years of post-Soviet history.

The Collective Security Treaty Organization (CSTO) was first created in 1992 by the Kremlin to keep former republics from fully seceding from the former Soviet sphere of influence. The plan was simple: to destroy the local Communist elite, to replace them with "their" people in the former colonies, and then return these territories — never truly considered as independent states by any Russian leadership — into its orbit.

In a word - to restore the USSR.

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