“If lockdown is extended, economic consequence could be worse than health consequence”

INTERVIEW: IMPACT OF LOCKDOWN ON INDIAN ECONOMY

Shekhar Tomar, Assistant Professor of Business and Public Policy, Indian School of Business, Hyderabad

As the coronavirus outbreak shows no signs of abating any time soon, the economy of every nation, first world and third world, is in virtual free fall. For India too, COVID-19 is not only a public health challenge, but also an economic challenge that needs to be tackled on a war footing by the Central and state governments. Restricted cargo movement, weak supply chains, lack of liquidity in the markets, heavy cross-border movement by migrant workers and many other factors have added to the pressure on the economy. With relief packages aimed at the middle class and the poor being announced by the RBI and the finance ministry, economic planners and decision makers need to chalk out a clear blueprint on how to respond to the economic crisis which is likely to linger for long after the 21-day lockdown ends in mid-April.

Citizen Matters interviewed Shekhar Tomar, Assistant Professor of Business and Public Policy at the Indian School of Business, Hyderabad, to get an idea of the impact of what has been announced and to assess what the future is likely to hold for the Indian economy. Professor Tomar talks about issues like work from home, how to put more cash in the hands of the middle class, how to ensure that benefits reach marginalised sections of society, how the relief packages will work in boosting the economy, and more.

Professor Shekhar completed his PhD from Toulouse School of Economics in 2017 and worked as a Research Economist at RBI during 2017-2019. His research lies at the intersection of macroeconomics, trade and finance and he extensively uses micro-data to answer macro questions. During his stint at the RBI, he contributed regularly to the formulation on monetary policy and trade issues.

What are your views on the RBI’s and Finance Ministry’s economic relief package for the poor and middle class?

One has to be clear on what RBI can do and what the finance ministry can do. The finance ministry is coming from the fiscal side and providing direct relief to workers. Whereas, RBI is more concerned with maintaining liquidity in the banking system.

The finance ministry has ramped up the Jan Dhan-Aadhaar combo in the last five years for direct cash transfer. And also providing free ration to the marginalised. Now, there will be concern that some people will be left out. Well, that’s the problem with almost all government schemes. But they have tried to do the best, given our current infrastructure levels. They are also providing indirect relief to small firms by allowing them to file their tax returns three months later. So, as such there is no direct relief, as the decision will be applicable to firms having aggregate turnover of up to Rs 5 crores. How much the government can do depends on the current fiscal situation which, unfortunately, is not so great!

The options before the government are limited. The 21-day lockdown will be an expensive lockdown for the economy. The government will lose a lot of revenue. So not only are they are going to release 1% of the GDP as relief to the needy, they will also have to take a hit on their budget. In terms of the current rollout, it is okay. But if the problem persists beyond 21 days, the economic consequences for India could be worse than the health consequences.

The RBI, in turn, is planning to inject 2% of GDP as liquidity. Liquidity is important as without it, firms will not be able to make regular payments—to their workers or repay their loans and will be unable to get new loans.

So RBI is going to put money out there in the system so that needy firms can borrow. But how much of it will the firms be able to access? How are the banks going to lend it? All of that has been left for the banks to decide. Even before the crisis, bank managers were a little scared in lending money. So, RBI has done the best it could have. It has decreased the rates. New borrowers can borrow at lower rates. We will have to wait and see how these things pan out.

RBI has proposed a moratorium on EMIs… how do you see that?

I guess it’s a good thing. For a 21-day lockdown, it should be fine. But if lockdown extends beyond that period, as it did in Europe, we will have to think carefully. As I said before, RBI has left it to the banks. Now some banks are healthier than others, so it will depend on how the banks respond. Whether households and businesses will be able to defer their EMI payments will also depend on the banks. There should be some kind of targeting mechanism here. As some households are better positioned than others, why should they be allowed to delay their EMI payments? I don’t think they should be.

Daily wagers and retail businesses are the worst sufferers due to lockdown. Also, brick and mortar retail is losing out to e-com. What, in your view, is the best way to help such sections and businesses? 

It will again depend on the duration of the lockdown. If we are able to pull it off in 21 days, the current measures should be sufficient. Also, I think this is not the time to get into the debate of e-retailers versus brick and mortar retailers. The big e-retailers are not able to sell as much as they want. For example, food delivery apps are now being allowed to resume their operations in big cities, but with lots of conditions. I think these e-retailing companies should be allowed to expand their business right now as they are going to support lots of lower middle-income people. That will be the best way to cover the most marginalised sections. In US and Europe, Amazon has ramped up hiring. So actually, e-retailers are helping the economy to tide over the crisis.

How do we make sure the relief measures of the economic package reach the right person and on time?

Jan Dhan accounts have bridged a lot of the gap in relief delivery infrastructure. They would really help in last mile delivery. Again, we see a big north-south divide. The south has a much better delivery system as compared to the north. States have to make sure that ration shops are functioning. More important, these shops should not get overcrowded and should adopt the social distancing norms. Having said that, some people might still be left out. Hence, the focus has been both through direct transfers and through PDS. I think we should be able to tide over the next 15 days or so.

A brief summary of your analysis on ‘Work From Home’…What should government strategy on WFH look like? 

Most of the data on WFH available till now is from self-selected firms. Only top companies like Google and others had policies to allow for work from home. As a result, there is very little evidence on how it would look like in the future. Both government and firms are clueless about work from home strategy in terms of productivity as well from the workers’ perspective.

It is learning time. For the government, it is important to know which jobs are more amenable to work from home and if possible, the government can base their policy targeting on that. For example: In Delhi, Northeast Delhi is heavily dependent on manufacturing process or low value-added manufacturing. In fact, the migrant exodus which we are witnessing right now is from such regions. For government, from the perspective of giving out benefits, this will give them a sense of which districts are more amenable to work from home and which are not.

For firms, its necessary to benchmark themselves against their competitors. At the same time, they should also look at how their workers react to such a situation because it will have an impact on their productivity and psychology. A lot of new work will emerge now because we don’t have a choice. We are undertaking a survey to understand how these things matter in the economy.

Another important aspect that firms might need to look at is to improve their technological frontier for work from home. This is one of the major points that have come out of our survey. As a manager, you might think that the job is not amenable to work from home but actually when you talk to your employees, based on certain characteristics, you feel that the work can in fact be done from home.

Southern India will be able to build a more adequate response to work from home because of its distribution of sectors and services which are more amenable to work from home, as compared to northern India. For example, the north depends a lot on wholesale trading. The South is more diversified in terms of valued-added sectors or services. It is one reason why the south seems to be more amenable to work from home, due to which we might see a lesser impact of this lockdown in the south relative to north India.

Apart from DBTs, how can more cash be put in people’s hands? 

It’s time to think about the jobs we should allow to continue or return to in order to keep the economy alive. Some countries are already working on this model. Something like delivery of goods or services, like food apps and e-tailers, should be allowed as it does not involve much human proximity. On supply chain side, I am a little more worried. We have to think on the logistics and jobs to decide what to allow. This should be done keeping in mind the time period beyond these 21 days. What kind of people should be allowed to return to the workforce must also be considered? Youth should be allowed to go out and work.

It all ties up to what the government can do. But the fiscal situation is not good. So we need to have this flexibility, and some kind of ranking system and priority wise categorisation of sectors. For example, pharmaceuticals or agro-based industry. We need to come out of ‘one size fits all’ mindset. The government should talk to more experts and design a differential response for post lockdown times. We already have e-way bill infrastructure so it can give some centralised way of marking essential or non-essential goods for transport. If we can do some minor tweaks and changes involving the back end of our IT system, we can return to normality soon.

Your final comments on the crisis and its impact on economy…

So far, the response has been a ‘one size fits all’ approach. We really need to sit down and think carefully and evaluate not just the medical response, but also the economic response. One thing we can really plan is what’s going to happen after these 21 days. We can study the districts and allow a partial lockdown. For example, a few districts in Telangana and Andhra Pradesh are completely safe as they operate on low human proximity. Such businesses should be allowed and a state of normalcy should return as soon as possible. We can start ranking sectors. Those with high human proximity can be allowed to shutdown and those with low human proximity should be allowed to operate.


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About Rishabh Shrivastava 14 Articles
Rishabh Shrivastava is an independent journalist.