Coronavirus Crisis, Lockdown Will Result In Unprecedented Economic Devastation: Jayati Ghosh

The government recently announced Rs 1.7 lakh crore economic package to help the poor deal with the impact of coronavirus and a 21-day nationwide lockdown imposed to contain the spread of the disease. Experts think that the complete lockdown may deepen India’s economic slowdown. In an interview with Outlook’s Rajat Mishra, development economist, and professor at Jawaharlal Nehru University (JNU) Jayati Ghosh explains how the COVID-19 crisis will impact the Indian economy and what the government needs to do. Excerpts:

Indian economy was already in the grip of a slowdown. And now the government has announced a 21-day lockdown to contain the spread of coronavirus. How do you think it will impact the economy?

The Covid-19 crisis and the nationwide lockdown will together result in serious economic devastation. And, I think it will be to the extent that we have never experienced before. We are in a peculiar situation where there is a demand as well as supply collapse.

Finance Minister announced Rs 1.7 lakh crore relief package for the poor. Do you think it is enough given the degree of economic damage unleashed by this pandemic?

First, it is not Rs 1.7 lakh crore package. Many relief measures that were announced were already included in the budget earlier, for example, PM Kisan Yojna. Just because the government hasn't paid several dues for the current year and it is bringing forward existing payments; it hasn't doubled or tripled them as it should have been.

Also, the NREGA wages were going to increase because they are linked to the Consumer Price Index (CPI). This is not part of the special package. Some of the other things that the government announced include allowing people to withdraw their own money from the Employee Provident Fund (EPF). Now when our economy is going downhill, we need a large fiscal stimulus. Many countries are coming up with large fiscal stimulus which is 2, 3, 4 per cent or sometimes even 6 per cent of the GDP. But what our government has announced doesn't even come to 0.5 per cent of the GDP.

What, in your opinion, is stopping the Centre from announcing a large fiscal stimulus?

I think the government is still caught in the view that you can't have a large fiscal deficit. But it is meaningless in the current situation. Most governments have realised that when your economy is going down at such a rate, you have to spend just to keep it afloat, not to generate growth. So, just to keep it afloat, you have to spend more. And if you don't spend more, then your economy will keep sliding and your fiscal deficit to GDP ratio will rise.

Do you see the measures announced by the Reserve Bank of India (RBI) as providing little relief to the sliding economy?

First, the situation isn’t ripe for monetary policy. Monetary policy can accommodate but it is not going to do anything.  Who is going to borrow to do an economic activity at a point when you cannot go step out of your home? So from where does the question of borrowing arise? RBI’s announcement can be a supporting measure, but you need to have physical activity.

Will this recession have some parallels with the global financial crisis of 2008?

So far, this is a completely new and unprecedented kind of challenge. Also, this is not a finance-induced crisis. The global financial crisis of 2008 was an imported crisis created by a financial crash in the US and then it came to us via financial markets. But the current crisis is due to a disease. So, it is not even like a war economy because in a war economy, you can produce more because you can make people move around. But now you are stopping people from moving around that is causing your economy to crash. So, we're in uncharted territory, we have never experienced an economic incident of this magnitude and nature.

Any suggestions that the government could have taken to compensate for the economic damage?

The government needs to have a large fiscal stimulus. It needs to put more money in the hands of the poor and vulnerable. There should be direct cash transfers of around Rs 7000-Rs 10000 into the accounts of the poor. The government also needs to work on keeping up the supply chains, ensuring the production of necessities.

What, according to you, can be the best- and worst-case scenarios for the economy to be in after the lockdown is over?

The best-case scenario is that we have a pretty serious recession, but the death toll is low, and when we will eventually recover from this, we will start picking up pieces in about six months. The worst-case scenario can’t be described and I don’t want to contemplate.

Moody’s slashed India's GDP growth forecast to 2.5 per cent. Do you buy this projection?

In the next three to six months, the economy will have negative growth. So, I really don't know. It depends on how quickly we recover. I would say the growth in the current fiscal year will be around 2.5 to 3%. In the coming years, the first three months will be terrible. Maybe the first six months will be bad.

Now, there is a clamour for the universal basic income…

I think it's absolutely essential at this point. I am personally not in favour of UBI in the general situation. But right now, there is no other option because people cannot go out and work. So, you have to give them something to survive. For making these transfers, you can use Jan Dhan accounts; you can use the NREGA account, and you can then ask state governments to prepare another list identifying the poor. Apart from this, there must also be other ways to capture those who would be left out of these lists.