A Macroeconomic Perspective on the impact of coronavirus in India

By: Anusil Das (St. Xavier’s University, Kolkata)

Epidemics, in general, have both direct and indirect costs associated with direct and indirect measures adopted to counter (control) the epidemic which generally have both short-run and long-run economic and social consequences. The 2019 Coronavirus (COVID-19) outbreak globally lead a significant setback to the entire globe. The first case was detected on 26th December 2019 in China.  The World Health Organization (WHO) prepared the first diagnostic kit on 14th January 2020. 

Several experiments were carried out by different governments across the globe to restrict the spread of this pandemic. Boris Johnson introduced the herd immunity plan in the United Kingdom which was a failure followed by a mitigate model which India also tried initially to stop the spread of the Covid-19 virus. The last and the ultimate model that most of the countries are applying is the Hammer and the Dance Model i.e. the Lockdown Model which is estimated to bring down the caseload by 25%-30%. The Lockdown Model basically means buying time to prepare the vaccine to kill the virus.  A study conducted by Imperial College, London shows us that after the Lockdown period one person has ability to spread virus to less than one person which was previously to four person approximately. 

However, the lockdown has certain critical economic consequences which add to the burden of global distress. This can be explained using the Standard Macroeconomic Keynesian Model. The lockdown and the spread of the disease have a direct negative shock on aggregate consumption levels and exports. This leads to a contraction in Aggregate Demand which leads to a fall in the market rate of interest and Aggregate Equilibrium output. The secondary effect on the commodity market is via investment demand function which can either increase owing to a fall in the market rate of interest, or fall owing to the contraction in aggregate demand. Clearly, the contraction of the Aggregate Demand side generates an economic slowdown. On the other hand, restriction of workers gathering in the workplace owing to lockdown hurts the production in those sectors which need the presence of physical workers. Note that software or financial service-producing sectors are exempted from such negative supply shock at least in the shortrun to medium-run since those works could be easily carried out based on “work from home” anthem. However, reverse migration of workers is an indication of a sharp cut down in production activities. This Aggregate supply shock leads to the situation of stagflation. In recent announcements by the Reserve Bank of India (RBI) to ease liquidity in the system may prove to be counterproductive provided the aggregate supply shock, since the escalation of demand specifically for non-traded products without an adequate increase in production (supply) would only result in inflation. In other words, supply-side management must go hand in hand with demand-side policies. Even if policies are undertaken at the national level by the government, however, conditions may not improve much due to shocks in the external sector through trade in commodities. Most imports are banned which will increase the economic cost of production of import substitutes within the domestic territory based on the theory of comparative advantage in a Ricardian sense. At the same time, exports are hurt due to lower demand from the developed economies. This shows that unemployment and inflation are inevitable in the near future.

The crisis due to the global pandemic is likely to be more serious for developing economies compared to the global financial crisis of 2008. This is due to the fact that the global financial crisis leads to lower demand for exports from the developing economies by the developed nations which further lead to contraction of export-based industries and other sectors in the developing nations due to inter-sectoral backward and forward linkage effect, however, the burden of retrenchments in the formal sector was absorbed in the informal sector. In the present situation, the problem of vanishing informal sector is evident since informal sector workers are more vulnerable to the spread of the disease due to the absence of non-regulatory authority and out of direct government control. Moreover, lockdown lead to massive close down of this informal units, thus the informal sector in this present set up is vanishing due to which the shock absorption capacity of developing economy like India is becoming weaker. The global economy is drowning towards deep cycles of economic depression and the aftershocks seem to be long-lasting. The only way of this global shock seems to be international policy coordination in line with the needs of the domestic economies. Fiscal Deficit should increase followed by support in the public health care sector. A well-coordinated and inclusive strategy is essential to deal with the health emergency and to prepare the ground for recovery which is almost 18 months. In order to deal with the needy in this crisis, the governments can print money and provide them through direct transfer in their bank accounts. If we consider from the backdrop of the Indian Economy our sole focus should be on the long term policies which would also help to curb out the previous crisis. The authorities concerned should also focus on direct investment so that it creates employment opportunities. The most efficient policies could be bringing down the probability of loan default in the agricultural sector or increase informal credit supply that eliminates the tradeoff between growth & exploitation and minimizes the credit market exploitation rate. An expansion of the manufacturing sector will escalate the growth of the agricultural sector through the linkage effect.

Leave a Reply

Your email address will not be published. Required fields are marked *

Skip to toolbar