March 29, 2020 ☼ The Intersection ☼ economics ☼ Covid-19

Even as we grapple with the anxieties and uncertainties of the Covid-19 pandemic, two things are clear. First, its impact on Indian society will be unprecedented. Second, the crisis will pass, leaving us with the task of recovery, reconstruction and rejuvenation. While much of our management of the coronavirus outbreak has been reactive in nature, it is both possible and incumbent upon us to start planning for life after the pandemic. It might sound presumptuous to say this at a time when the energies of our Union and state governments are focused on the gargantuan task of managing the consequences of the outbreak and subsequent lockdown.

But if India is to emerge from this crisis with the best prospects of resuming on its development path, it is crucial that we align relief measures and economic stimulus efforts with a medium-term reconstruction plan. With last week’s announcement of a ₹1.7 trillion relief package, amounting to under 1% of gross domestic product (GDP), the government has set the ball rolling on a fiscal response. The Reserve Bank of India followed with a reduction in interest rates. These measures are primarily intended to provide relief to individuals, families and firms affected by the current lockdown.

In the weeks and months to come, more such measures will be required to cover more of those adversely affected. As Puja Mehra argues in a national daily, the fact that some of the most vulnerable segments of the country’s population are hard to reach, because they work in the informal sector, makes the challenge that much harder. Finding effective delivery channels apart, we might need a further 4% of GDP by way of state spending over 2020-21 to help people and businesses tide over the crisis.

Relief measures might help keep households running, but they won’t be sufficient. An economic stimulus package will be needed.

While some of the relief measures will boost the economy, a distinct stimulus package is also necessary to rekindle economic growth. The term “economic stimulus” is usually tagged with a multi-billion dollar figure. But in the Indian context, fiscal and monetary stimuli will need to be accompanied by a clearing out of the regulatory cholesterol that clogs the economy’s arteries.

One challenge of designing such a stimulus package at this time is that we do not yet fully know what the impact of the crisis will be, or where and how it will kick in. What we do know is that more people will be unemployed, wages will be cut, firms will face delayed payments, and there will be surplus inventory. Some of these could persist for years. Among our first steps, we must remove supply bottlenecks, ease cash flows, ensure better availability of cheap credit and galvanize business transactions. This will need more money, but deregulation and an overall commitment to the ease of doing business are just as important. If “stalled projects” were a shameful statement on India’s self-defeating bureaucracy before the pandemic, they are a moral travesty now.

Beyond relief measures and stimulus packages that help individuals and businesses get back on their feet, the bigger policy goal should be to quickly set the Indian economy on a high-growth path again. This will happen in a different world from what we have been used to over the past three decades. We should expect de-globalization to gain pace, with more barriers to the movement of people, restructuring of supply chains and political tensions that arise from these adjustments. Even if the world economy does not suffer a longish recession, we cannot expect the global environment to be as favourable to our economic growth as it has been in the past. However, if we take the right policy direction, India has the potential to emerge a winner in the post-pandemic world. For that, we must carefully examine some lessons from 20th century history: the post-Depression recovery in the US, the Marshall Plan-led reconstruction in Europe, and some aspects of the post-1979 reforms in China. While the mechanics of how each of these countries did it are different and debatable, they yield a common insight. Their growth was enabled by massive public investment in infrastructure.

No one needs to be convinced that India has a severe infrastructure deficit. In fixing this deficit lies the foundation of India’s post-pandemic reconstruction. Public infrastructure is a multi-generational good. If fiscal deficits are about borrowing from future generations, building infrastructure is giving them forward benefits.

Prime Minister Narendra Modi’s 2014 manifesto promised building 100 new smart cities. This is what India needs at this stage. New cities will create opportunities for hundreds of millions of people to secure livelihoods in the short-term, and act as engines of growth over the longer term. This must be accompanied by a mindset of “big is better”. As Arvind Panagariya argues in his new book, the government must “facilitate the emergence of large firms in India… It is not merely that large-scale firms themselves are more productive; their presence also helps small and medium firms achieve high productivity.”

How will India find the money to pay for relief, stimulus and reconstruction expenditure? Raising taxes will be counterproductive. In this crisis, relief and stimulus packages can justifiably be financed by running large fiscal deficits. To finance the post-pandemic reconstruction, raising long-term debt from international financial markets is an attractive option. If the Modi government demonstrates a political commitment to economic growth, articulates a credible plan to achieve it and backs it with concrete actions, India will find thousands of Marshalls ready to fund the programme.

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