Economists on How India Should Tackle the COVID-19 Challenge

Urjit Patel, Gita Gopinath and Raghuram Rajan.

Photo: Altered by The Quint

Moving to contain the COVID-19 pandemic, the Indian government under Prime Minister Narendra Modi imposed a 21-day nationwide lockdown from 24 March to 14 April.

Following the announcement, the economy suffered a blow as all commercial activity, except that related to essential commodities and services, ground to a halt. The stock indices fell to record lows, mirroring the worldwide trend.

To help businesses, the finance minister announced a slew of regulatory and compliance measures. For the poor and financially vulnerable, she later announced an economic relief package worth Rs 1.7 lakh crore.

Here’s how, prominent economists suggest, India should tackle this crisis:

Raghuram Rajan

Former RBI governor Raghuram Rajan, in a blog titled ‘Perhaps India’s Greatest Challenge in Recent Times,’ suggested the government call people with proven expertise and capabilities, including from opposition parties, to deal with perhaps the greatest emergency being faced by the country since Independence.

He also cautioned that driving everything from the Prime Minister's Office, with the same overworked people, may not be of much help.

“There is much to do. The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response.”

Raghuram Rajan

Backing his claim Rajan asserted that the financial system is not as robust as it was before tackling the 2008 economic crisis.

The former RBI governor said the immediate priority is to suppress the spread of the pandemic through widespread testing, rigorous quarantines and social distancing.

He also implored the government to be swifter in drawing on “our courageous medical personnel and looking at all possible resources – public, private, defence, retired – for the fight.”

Rajan asserted that the government needs to delay less important expenditure and focus on the essentials, including the economically vulnerable.

Many small and medium enterprises, already weakened over the last few years, may not have the resources to survive, Rajan said, adding, "Not all can, or should, be saved given our limited fiscal resources."

He concluded by floating the hope that India learns about its weaknesses from this crises and ushers in some sorely-needed reforms.

Gita Gopinath

Gita Gopinath, the chief economist of the International Monetary Fund (IMF), urged policymakers throughout the world to implement "substantial targeted policies" to tackle the crisis.

In a blog post on 9 March, Gopinath noted that the human costs of the outbreak have risen at an alarming rate and that the need of the hour is to keep people healthy and safe.

Gopinath suggested that countries need to increase their healthcare spending in order to boost their health systems.

Supply shocks have surfaced and production has gone down, while reluctance on the part of consumers and businesses to spend has resulted in lowered demand, Gopinath said.

In such a scenario, she emphasised the need to provide assistance to affected businesses and households in the form of cash transfers, wage subsidies and tax relief.

"Governments could offer temporary and targeted credit guarantees for the near-term liquidity needs of these firms," she wrote. Central banks around the world should be ready to provide ample liquidity to banks and NBFCs, she added.

Urjit Patel

Former RBI governor Urjit Patel called the government’s policy roll-out sensible, for the most part.

“The welfare support... to help the most vulnerable, as also to partially defray the cost of retaining workers in smaller enterprises, for the next few months has combined compassion and prudence,” he wrote in The Indian Express.

He said that we do need to expend more resources on preventing COVID-19’s spread because “massive prevalence testing now could help avoid another national lockdown.”

He also highlighted that the government needed to collect data swiftly and bear the entire cost for testing since “credible data will infuse confidence in both the health and economic spheres.”

Patel stressed the need for balance, however, pointing out that if the fiscal and monetary responses are overdone, it could impact macroeconomic stability.

“It is a fine line between aggressively proactive and being perceived as reckless.”

Urjit Patel

The former RBI governor said that banks may want to retain almost all profits to enhance the capital buffer and signal the will to remain strong in the face of loss in economic activity.

In closing, Patel suggested that, in the near future, investors may gauge economies by how well they dealt with the COVID-19 pandemic and how quickly they got back on their feet. India should be prepared to ride that financial wave.

Ajay Shah

Economist Ajay Shah, in his piece for Business Standard, wrote that the nation should attempt damage-control and not expect all businesses to emerge unscathed from the crisis.

Echoing Raghuram Rajan’s observations, he suggested that finance should be allocated to those firms which need it to survive, but also have a good chance of making use of it and flourishing.

“Efficiency in capital allocation means that not all firms should be saved. This drama will consume a good slice of the firms of India in 2020 and 2021.”

Ajay Shah

Shah lamented that Indian firms are incentivised to hoard liquidity during tough times, “when the policy of keeping more liquid cash has its benefits.”

He also pointed out that since banks and NBFCs are worried about their own future due to the ballooning of non-performing assets, they will not be able to infuse the required energy and capital into the economy.

“In the best of times, financial capital is a scarce resource, and the financial system rations this out between multiple claimants. At present in India, finance is more constrained than usual. This creates a greater shortage of capital,” he wrote.

(With inputs from PTI, Business Standard and The Indian Express)