Coronomics - Economics during the times of Coronovirus

As I sit down to write this blog, Ms. Nirmala Sitaraman is on the TV channels. She is supposed to unveil a package to counter the challenge the Coronovirus has mounted on an already tepid economy. I am not listening to it. This is the gravest challenge the world economy faced in recent times-- we in India  with some 1000 million very poor people- sometimes my mind goes numb, just like the nervous system shuts down when the pain increases beyond the threshold.

Already the internet is awash with dire predictions for the world economy. There are estimates about what percentage this Coronovirus can shave off  the GDPs of various economies, for India it is half a percentage point. The western world along with Australia is expected to take the maximum hit. China, might strangely benefit from all this in a way, unless there is clarity and political unit in the free world to counter China’s evil influences. More about it later.  The four major areas of concern for any govt under these circumstances ought to be :

             

        A. Financial Markets, their liquidity and solvency 

       B. Keeping up supply of essential goods and services

       C. Handling the large scale loss of jobs thru some kind of minimum income guarantee

       D. Quickly building capacity in our hospitals and labs to handle this epidemic.

The only saving grace is that we have a comfortable balance of Forex reserves. In spite of foreign investors selling off and repatriating Rs 1 Trillion from our markets in March, we have not had a serious depreciation in currency.

Large scale closure of business and factories as a result of insolvencies would make the Financial Markets freeze ( This has been already reported). The debt market will be the first casualty. Even Triple AAA ( AAA) bonds like those of HDFC Bank will have no takers and if the crisis persists for months, their tradability will be totally impaired. Any  failure to pay the interest as per their coupons along with their inability to handle redemption pressures will render the corporate bond market  defunct.  I do not envy the guys in RBI and Finance Ministry. Passing comments and providing suggestions is easy. Imagine a scenario where the country is at war in two fronts, with Pakistan and China at the same time— it is even worse than this,  for  a war does not necessarily lead to closure of businesses unless cities are bombed out and devastated. History has seen limited wars boost the economies, albeit  in a perverse way. There will be relaxation across the board for all NPA recognition norms. For housing loans to Individuals, MSME loans , liquidity to NBFCs-- there will be relaxation on all norms which were once considered prudential. From first generation entrepreneurs to big tycoons like Adanis all have pledged their personal holdings of shares in their own companies as collateral to raise loans. With a crashing stock market, the banks will be snapping at their heels to pay back at least part of their loans. Govt will have to bail out all players in the financial markets with tax payers money and if tax money is insufficient, as it is bound to be with the economy in a downward spiral, resort to Deficit Financing as in times of war, to hell with FRBM. This gives rise what is known as the moral hazard, Govt forbearance of financial improprieties and delinquencies. Worse, this will lead to Inflation for sure but  just like any doctor would say low blood pressure is in many ways more dangerous than high blood pressure, inflation is still better than deflation in economics too. Some experts are even suggesting tha1t we can resort to a increase in fiscal deficit of 10 lakh crores or 3% points of the GDP to counter the imminent contraction of the economy.

Keeping up supply of essentially goods for a large population of 1.5 billion is no joke even under normal circumstances. Supply chains will be under severe stress with both physical and financial lockdowns in place. We have to see the emergence of community based organised organisations to help ease the main on poor households. We cannot sit idle expecting Govt and Private businesses to deliver and then blaming all and sundry. Pure play capitalism will lead to political resentments and bring about public disorder. Raghuram Rajan’s latest book ’The Third Pillar’  explains the role of these third pillar organisations  in the economy, , the first and second being the Govt and Private Sector, and their beneficial effect on the society. This is the most opportune moment in Indian economic history for a million community organisations to bloom as the third pillar of our economy.

We will not be able to forgive ourselves if we allow our poor to bear the full brunt of this economic meltdown.

It is now useful to think of a NYAY like scheme , as proposed by Rahul Gandhi ( do not for a minute think that I give any credit to this moron) , to ensure that our poor people do not go into mass starvation. This along with public distribution of essentials will mitigate major social upheaval that could otherwise be in the offing. Baring states like Kerala and Tamil Nadu most states do not have a working public distribution system, unfortunately, but capacities have to be built now-no excuses.  This apart ,  there has to be austerities in Govt expenditure, especially in hand outs to loss making public sector like Air India, which should be closed down forthwith, and also a  reduction in defence expenditure - especially the outgoes towards the  disastrous OROP which is already an unreasonable burden on our exchequer.  There has to be cuts on the DA components of Govt employees’ salaries across the board. The fiscal loosening is bound to push up inflation and Govt staff’s DA increase more than proportionately to the inflation. If this were to continue, we will be worse off than before.

Hospitals and diagnostic centres need to be built on war footing. China showed how they could build a hospital in Wuhan in 7 days. It is possible to build such hospitals right across the country in each state if the political executive takes it up as a challenge. There is enough project management and technical expertise for the job. Meanwhile, there is a news flashing  on the TV screen that in Sao Paulo, Brazil, they are converting a foot ball stadium into hospitals with beds. If Brazilians could do such ultimate acts of blasphemy, why not we resolve to convert our cricket stadiums into hospitals forthwith. Just this morning, a Pune based company has come up with a Corona deduction kit that has been approved by ICMR.  The indigenous kit is expected to cost just a third of the cost of the imported equipment.  It is also heartening to note that Mukesh Ambani is also getting into the actin a big way. A man with execution capabilities that can match the best in the world, this is most welcome.

Finally, the lyrics of Thedore Tilton:

Once in Persia reigned a king
Who upon his regal ring
Etched a caption true and wise,
Which, if held before his eyes,
Gave him counsel at a glance
Fit for every change and chance.
Solemn words, and these are they,
"Even this shall pass away."

Trains of camels through the sand
Brought him gems from Samarcand,
Fleets of galleys through the seas
Brought him pearls to rival these,
But he counted not his gain
Treasures of the mine or main,
"What is wealth?" the king would say,
"Even this shall pass away."

In the revels of his court,
At the zenith of his sport,
When the palms of all his guests
Burned with clapping at his jests,
Amid his figs and wine,
He cried, "O loving friends of mine,
Pleasures come, but not to stay,
Even this shall pass away."

Towering up above the square,
Way up high into the air,
Rose his statue, carved in stone.
All disguised, all unknown,
Gazing at his sculptured name,
Asked to himself, "What is fame?
Fame is but a slow decay,
And even this shall pass away."

Sick and tired and fading,
Thinish, beat and old,
Stood a mile outside the Gates of Gold,
Speaking with his dying breath,
"Life is done, so what is Death?"
Then, in answer to the king,
Fell a sunbeam on his ring,
Blinding light through fading grey
"'Cause even this shall pass away.
Even this shall pass away.
Even this shall pass. 
Even this shall pass away."
Away
Away

Away