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A coronavirus-led recession is coming. Brace yourselves: View

This won’t be a stop and start cycle, because the real economy is so interwoven and interdependent.

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Last Updated: Mar 23, 2020, 02.06 PM IST
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Hunker down for tough times. Governments have a long road ahead.
Coronavirus
By Uma Shashikant

What will recovery look like? Covid-19 has not crashed asset prices and stock markets, but real lives and real activity. There have been times when stock markets have crashed because speculators were gaming the system; someone accessed easy money fraudulently; someone borrowed too much, placed too many bets on some positions and misled the crowds; or there was just an overextension of a cycle. This time, there is no such manipulation or speculation. The problem is in the underlying real economy. This is different.

There is little doubt we are staring into a recession, likely to manifest fully next year. The projections for world GDP 2021 have fallen below 2.5%. When production comes to a halt, this is the expected outcome. Businesses have been forced to stop operations, there is loss of production across the board. This won’t be a stop and start cycle, because the real economy is so interwoven and interdependent.

Imagine this. A restaurant shuts down. Its green grocery stocks go waste. Employees stop turning up for work. Some risk losing their income. They, therefore, cannot buy anything but the essentials. The business still must pay rent, power bills, and there is money locked into stocks of dry grocery, which have not been converted into goods and sold. There is no revenue, but expenses and losses mount, books become weaker. The business needs working capital from banks, which in turn face difficulties with slow movement of money due to drop in supply and demand for money and credit. The employees who don’t have income need personal credit to tide over. Since incomes are low for both people and businesses, governments earn less as taxes. There is less money in the system, from lack of economic activity and that hits everyone. This story plays across sectors, across the economy, across the world. That is why the worry.

The outbreak of the virus has placed tremendous power and responsibility in the hands of governments. This is not a problem that can be dealt with bottom up, but need specific guidance, orders, and regulation from the government. There is evidence that authoritarian regimes have done better with compliance and control. Dependence on government action has meant responses have varied depending on efficiencies of the machinery. Recovery will be centrally driven. Governments have a long road ahead.

First, there is no choice but to bring interest rates down. Lower interest is expected to trigger demand for goods and services and revive economies. In a scenario where there are no goods and services to supply, or capacities to create and expand, monetary policy loses its power. But keeping interest rates high is counterproductive. It would impede the flow of money, and hurt recovery. We will see a concerted effort across the globe to keep interest rates down till economic activity revives.

Second, when the government asks people to stay indoors and not turn up for work, the responsibility of providing for those who lose their income is high and real. We may worry about the consequences of a dole. But there might be no choice but to hand out money to the weaker sections who will face financial ruin without income. There are millions of daily wage earners who have been put out of work due to shut-downs. There would be widespread layoffs, cutbacks, leading to eventual unemployment. Governments must find the resources for handouts and borrow heavily, since tax collections will have dropped.

Third, fiscal stimulus is the only hope for early economic revival. Governments must bear the burden of debt and spend to revive economies. The other drivers of the economy — private consumption, investment demand, export growth—will all slow down and take time to revive. Without government spending, the recessionary impact will be deeper. Lowering tax to stimulate demand and place more money in the hands of people and businesses is imperative. A poor economic environment means the scope to earn income from privatisation, asset sales, and such is low. Governments must act to restore confidence, by standing up to borrow and spend and remain the source of demand for money until the economy revives.

Fourth, the lending environment must ease. Coming at the top of a credit crisis in India, and the near failure of a large bank, it is tough to imagine the loosening of lending norms. But we may not have a choice. Even if the RBI brings interest rates down, banks will be able to lend to businesses only if there are extraordinary steps to enhance liquidity in the system. This means lowering CRR and SLR and revisiting provisioning norms. Without the stimulus for lending, we will suffer a poor monetary policy transmission where a low interest rate does not translate into expanding credit to businesses. Retail credit will take much longer to pick up, but loss of incomes does offer the scope for liberal personal loans and loans against securities and assets. Without financial accommodation for businesses and households, the situation can snowball into a bankruptcy crisis.

Fifth, the co-operation between economies will have to be reworked to facilitate global recovery. Economies that depend on world trade for growth, will take longer to bounce back. The uneven stages of economic activity will mean that as China and South Korea are ready to return to production, UK and US are falling into a low consumption and shut down mode. India might be fortunate in comparison, given the high level of domestic consumption and relatively lower dependence on external sector. But recent rhetoric across nations about closed borders, local interest over global interest, and restrictions on movement of labour and capital, will have to go.

There is a lot that has been lost, and a lot to rebuild and that won’t happen in the next quarter. Let’s brace for a down cycle.


(The writer is Chairperson, Centre for Investment Education and Learning)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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