Normative Economics and Covid -19


By Bhagirathi Panda

There is no doubt that Covid-19 has compressed life and shattered livelihoods.  As month after month passes by and the fiend does not show any signs of going away, hope is fading and despondency is creeping in.  We mortals are now deeply worried about the nature and duration of its shaking economic impacts. This small write up is to appraise the readers of the nature of the economic impact it entails, what it means to us as individuals and societies and what is the way out to overcome it or minimise some of its negative impacts.

When it comes to economic shocks, this pandemic is one of the worst in the last nine decades, after the great depression of 1929. We can analyse the impact of it with respect to some important facets of economic activities such as the GDP (Gross domestic product), employment, trade, investment, consumption demand, remittances and supply chain disruption. We start with the GDP. When we examine the world GDP scenario particularly of the G-20 countries for the second quarter (Q2: April-June) of the current year i.e. 2020 and compare it with the corresponding Quarter in the previous year i.e. 2019, we find except China, the rest of the countries have experienced negative rates of growth.

In this regard, India’s growth has been -23.9% , followed by Britain’s -21.7%  and France’s -19%. All it implies is that we as a country have become poorer when it comes to creation of wealth in the form of goods and services. This has its implications also for creation of income for the factors of production engaged in the production process like labour and capital and therefore reduction in employment of labour hours and capital. Decomposing the GDP by the standard sectors of the economic activities for our country gives us a comprehensive picture of the impact of the pandemic.

The sector that has experienced the highest fall is ‘construction’ (-50.3%), followed by Trade, Hotels, Transport Communications (-47%), Manufacturing (-39.3%),   and Public Administration, Defence and Other Services (-10.3%). The only silver lining here is Agriculture, Forestry and Fishing Sector that has experienced a positive growth of 3.4%. Let us be reminded here of the fact that during the post liberalisation period of 1990-91 to 2015-16 , it was the construction sector which had created the largest share of non-agricultural employment(35.74%) in our economy followed by the Trade sector (KLEMS India database, 2019). The sharp decline in Gross Value addition (GVA) in both the sectors has its obvious negative impact on the employment aspect of workers.

Let us examine the world macro employment (unemployment) scenario. USA’s current unemployment rate stands at 8.4% (September 5th 2020), European Union’s 7.2% and India’s 6.7% (CMIE, September 2020). India’s unemployment rose to its peak of 24 percent on May 17, 2020. This to come down to 6.7% is reassuring. World Investment is forecast to fall from 4.7% to 2.3%(OECD).World Bank explains that the economic impact of the global recession will fall most heavily on developing and emerging economies that rely on global trade, tourism, or remittances from abroad. Global trade is projected to fall in 2020 by 18.5%(WTO).

In India, tourism contributes approximately 8% of the employment. As per an estimate of the Federation of Associations in Indian Tourism & Hospitality (FAITH), about 3.8 crore people have lost their jobs due to the pandemic.  At the world level, remittances have decreased to14891.13 million USD in the first quarter of 2020 from 15185.47 million USD in the fourth quarter of 2019. When it comes to the country, income from remittances constituted about 3% of our GDP last year.  Dillip Ratha, the World Bank lead economist of migration and remittances, mentions that remittances from abroad to India may decline by at least 20% this year, compared to last year.

On the supply side, the wheels of Indian economy have been severely compromised because of disruptions in supply chain due to unavailability of raw materials, exodus of migrant workers, travel restrictions, social distancing norms, slowing down of global trade etc. The initial reaction of the central government was to strengthen the supply side and accordingly the FM had declared a Rs 20.97 lakh crore economic package. However, subsequently it is being realised that the demand side is more important to revive the distressed economy.

In the next couple of sentences let me simplify our understanding of the demand side of the economy. Total demand for goods and services or as it is called in the language of an economist ‘Aggregate Demand’ of an economy consists of Consumption Demand(C), Investment Demand(I), Government Demand(G) and External Demand (Net of Exports) (NX). Consumption demand basically comes from private individuals and households in the form of their purchase of various goods and services. Investment demand comes from the industrial and business units when they purchase raw materials, labour, capital and different services etc., for producing goods and services. Government demand manifests in different forms of its expenditures undertaken in the economy. External Demand is the net of our exports of goods and services after adjusting for imports.

With this conceptual understanding of Aggregate Demand, let us see how has the pandemic affected it and its different components.Data provided by Ministry of Statistics and Programme Implementation (MoSPI), GOI shows that Private Consumption Demand(C) and Business Investment Demand (I), in the first quarter of the financial year 2020-21 compared to 2019-20 have declined by 27% and 47% respectively on year on year basis. These are gigantic falls not witnessed in recent times.  Government spending has risen by 16% during the same period. However, this small rise by 16% in Government demand could not offset the huge fall in C+I taken together. The increase in NX although positive, in absolute figures the amount is meagre at Rs.1,92.917 crore to compensate for the massive fall of Rs1064806 crore in Consumption(C) and Investment(I) taken together.

In the current situation, private consumption is falling because the income of the majority of people (particularly the 90% ones in the unorganised sector) has fallen. In the absence of efficient health insurance for the majority of the people and in a situation of inadequate public health infrastructure, sizeable numbers of Covid-19 infected people are compelled to go for costly private sector healthcare provisions. This compromises their capability to spend more on non-health consumptions. Investment Consumption is a derived demand of private consumption. Investment Consumption, thus, has declined because private consumption has significantly fallen.

In such a scenario, how can the economy be brought back on track? The only visible and possible way out is to increase significantly Government spending both on the supply and demand fronts, but more aggressively on the demand front, so as to revive the animal spirit of high consumption in all of us.  The Government should spend more on programmes like MGNREGA and other rural and urban welfare schemes, construct more of public physical infrastructures like roads, bridges, airports, railway lines, public hospitals, warehouses, shipyards etc. It has to live now on borrowed future expenditure.

In the initial days of the pandemic, the Government gave importance to the supply side measures and was not convinced of the immediacy of measures on the demand front. However, it is good that it has now realised the imperative of immediate scaled expenditure to boost consumption demand. Few of the measures that it has announced yesterday with respect to Government employees (LTC voucher, festival advance) are based on sound economics. Apparently, it gives the impression that the Government is pampering its employees and rolling out extras. But in reality, it is all about calling off future entitlements and consumptions of employees for the sake up boosting present consumption, at no extras. That said, these are short term measures. In the medium and long term, the country needs to create a viable and enduring public health care system and emerge as a manufacturing and services hub of the world by significantly reducing its high transaction costs.

In conclusion, in the short-run therefore, along with the Government, ‘let us come You and I, when the evening of the pandemic is spread against the Sky and spend & spend & spend all the way’. That can bring some economic and social amelioration in this uncertain living present.

(The author teaches at the Department of Economics, NEHU, Shillong and can be reached at [email protected])

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