The War on Fear

IT IS A MOMENT of fear. In the time since the announcement of the 21-day lockdown not a day has passed without some prognosis of doom. While there is unanimity that India’s economy will be ‘hit’ there is no consensus on the quantum of the hit. Virtually all private sector banks and ratings agencies have shaved-off close to 2 percentage points of Gross Domestic Product (GDP) from an already anaemic growth rate projection for 2020-21.

That, however, has not deterred Indian policymakers. In an impromptu press conference on March 27th, the Reserve Bank of India (RBI) cut the repo rate—the rate at which it lends money to banks—by 75 basis points. It was a large reduction in the policy rate. More importantly, the central bank lowered the reverse repo rate, a step meant to weaken the desire of commercial banks to park money with the RBI and encourage them to lend money to the market. The combination, according to some economists, will lead to much greater easing than the 75 basis point cut in the repo rate. The central bank did not stop there. Through three other measures, it injected liquidity close to Rs 3.7 trillion in the economy, a large dose of money in a system that was jamming up due to the coronavirus pandemic.

The RBI also announced a number of regulatory steps, such as a three-month moratorium in repayment of all loans that stood on March 1st. Deferment of interest to be paid on working capital loans and easing of working capital financing norms were also announced.

In its statement, the central bank said: “The need of the hour is to do whatever is necessary to shield the domestic economy from the pandemic.” The RBI has plenty more ammunition in case the economy needs more support.

The steps announced by the central bank came just a day after the Government announced a large package to meet the distress needs of the poor. More is expected from the Government once the lockdown is over.

THE DANGER TO the Indian economy stems from a sudden fall in domestic spending, leading to a huge fall in demand. It is unlikely that demand for food and necessary items will collapse. The Rs 1.7 trillion injection of money into the accounts of the poor is sufficient to prevent the floor falling away. The danger is more pronounced at the level of companies and employers where the fear of a demand collapse may lead to cutting back of investments and, in turn, loss of existing jobs and the wiping away of potential future jobs. That is the area where the Government has its work cut out. The situation requires delicate handling. For one, the Government has to ensure the availability of money for lending, with some relaxation of borrowing and repayment norms. For another, it needs deft messaging to ensure that fear does not sink in among spenders and borrowers in India. Once the cycle of borrowing and spending stops, the economy can jam up and become very difficult to re-start.

This is key to ensuring India does not get into an economic morass.

Even in this gloomy scenario there is plenty that is going right. The sudden collapse in global crude oil prices—which briefly touched an unbelievable $4 per barrel—augers well for India as it goes into a fiscal expansion to keep its economy afloat. Pandemics and global panics are the time when highly indebted countries get into trouble with external borrowers. In this respect, too, India is an exception to many emerging economies. If anything, India just opened itself to foreign investment in more types of government bonds. Pessimists—and there are many floating around—will say this is a desperate measure to attract foreign money. The reality is that it bespeaks confidence on part of the Union Government to open this market.

In the immediate future, fiscal expansion—an increase in government spending or cuts in taxes—poses little danger to India. Inflation is not a problem and has not been one during the last six years of the Narendra Modi Government. The side effects of a spending spree will only arise when the Government continues with it after the economic situation normalises.

There is much that the Government can do beyond handing out money to the poor and giving confidence to the private sector. Perhaps it is time to reconsider government’s economic role once again. The virtues of the private sector, as an efficient wealth creator are well-known. Unlike earlier ideologically charged times when the private sector was vilified and government exalted its own role as saviour, this is a different age. Maybe it is time for the Government to engage in some large economic projects where the effect of spending will not only lead to an increased demand for output produced by the private sector but also give an overall boost to the economy. Globalisation ensured that manufacturing would end up in countries like China and other export-led economies where scale benefits allowed for massive expansion. This led to manufacturing either moving away (as in the US) or discouraged (as in the case of India). A government-led initiative, based on carefully crafted industrial policies can go a long way in ensuring growth in this century. This does not have to be about ‘saving capitalism’ as much as ensuring that supply chains remain within a country’s shores. It is time for the Government to sit together with the private sector and draft a new five-year perspective plan to reinvigorate the Indian economy. This should not be seen as an ideological reorientation but as a pragmatic way to allocate resources that will help all Indians.

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