Economic Impact of the Pandemic - Recession and Bust

The Covid-19 pandemic has hit the global economy badly and its impact is still unfolding. According to the WHO, as of March 18, the pandemic had spread to 164 countries and territories, with confirmed cases of over 194,000 and resulting in the death of over 7,800 people.

With respect to the global economy, it is certain that there will be a recession. Economic activities are crippled in various sectors, particularly travel, tourism, oil sector and services. Supply chains have been disrupted, breaking production chains all over the world. This will directly affect production, trade and investment.

Stock markets have plunged. The stock market boom, fuelled by cheap money provided by neoliberal monetary policy, is now bust. The precipitous fall in the financial market is going to affect the real economy and deepen the recession. Combined with huge levels of corporate debt, this situation can lead to contagion in financial markets; the threat of a collapse is likely to be greater than in 2008.

The infection rate in China, where the epidemic originated, has drastically come down and at present there are more coronavirus cases outside China and the rate of infection is increasing around the world. In India, the coronavirus pandemic exposes the inadequacies of the health systems and responsiveness built around the neoliberal economic framework. The government must learn from experiences of effective management (as well as undermanagement) in other countries to deal with the public health crisis and improve confidence among the public by means of transparent disclosures of its plans and measures.

The current response of the government is inadequate given the complex nature of the challenge and its differential economic impact on different sectors of society. The crisis requires quick and integrated responses on the health and economic fronts.

Even before the pandemic, many countries such as India were experiencing a slowdown and some even a contraction of output. So the coronavirus, which is now affecting India, will definitely have economic consequences resulting in a recession. Given the inadequacy of testing in India for Covid-19, it is likely that the spread of the infection is many times more than the number of officially confirmed cases, 151 on March 18.

With travel curbs and bans on incoming tourists, schools shut, and social distancing increasingly put in place, the effects on the economy are already being seen. Migrant workers face unemployment; workers in the informal sector are losing their livelihoods and layoffs are taking place in the travel, construction, hotel and restaurant, tourism, and other sectors.

As the shutdown of normal life proceeds with the spread of the Covid-19, there will be more industries and factories closing down, with layoffs particularly of contract workers. The rural economy will also face disruption and a spurt in rural unemployment can be anticipated.

The central government has not drawn up any comprehensive plan for meeting such a situation. So far, it has simply cleared spending from the State Disaster Relief Fund, that is anyway meant to be used by the states. There are reports that the Reserve Bank of India is contemplating the injection upto Rs One lakh crore in April in order to maintain and preserve market confidence and financial stability.

The neoliberal approach has contributed to the unpreparedness and present plight of the country in tackling the coronavirus crisis. The neoliberal nostrum of fiscal conservatism and limiting the fiscal deficit must be rejected.

First, the government has to pump in funds to strengthen the public health system and provide the wherewithal to expand testing and upgrade hospital facilities for the treatment of coronavirus patients. Following this, the government has to urgently raise public expenditure to protect jobs and livelihoods. Many sectors in the economy are in dire need of reconstruction packages and the government should consider providing them with exemptions and subsidies.

The government should not think of only bailing out financial institutions and the big corporates. The Reserve Bank of India and other banks should be asked to step in, so that loans in identified sectors are provided with moratoriums and debt relief. Easier credit should be made available to the small and medium enterprises. The interests of retail trade and street vendors must be looked after.

The central government should increase the limit of borrowing of the states in the current financial year by at least 0.5 per cent. The central government must increase the number of workdays of employment and wage rates under the MGNREGS.

The public distribution system should be strengthened and expanded. Centres should be opened to provide free rations to migrants labour and the rural poor for the period of the virus epidemic. The government should create a fund which, in conjunction with the state government, can render assistance to workers in the informal sector who have lost their livelihood. In the organised sector, the government should get corporates to pay full wages to workers who get laid off in a shutdown due to the epidemic.

The unprecedented transmission rate of Covid-19 demands speed of response from governments across the globe to contain the pandemic as well as to provide assistance to all sections of the population, particularly the working people, the poor and vulnerable.

The Covid-19 pandemic has exposed the irrationality and fragility of the neoliberal economic order itself. The efforts to tackle this crisis must result in alternative policies being put in place. Above all, there is an urgent need for the central government to initiate large scale interventions with adequate financial support to the states to rescue livelihoods and provide income support to the people.

Prakash Karat is CPI(M) Politburo Member

Cover Photograph: Robots distribute sanitisers and masks in Kerala