The economic activities in India and most of the world have come to a grinding halt because of coronavirus. Most of the major economies are in a state of complete shutdown to break the chain of the viral infection, which has infected over 1.5 million people across the world. Prime Minister Narendra Modi last month announced a nationwide lockdown to check the spread of the virus. He, at an all-party meeting recently, said the lockdown may be extended. The big question is: How will the virus affect India economically? Dr Prannoy Roy discusses with former RBI chief Raghuram Rajan.
Here are the highlights of Raghuram Rajan’s interview:
- If the virus spreads, as it has spread in Italy and the United States, we have to take it very seriously. What you see in these countries is a tremendous effect on public health, the over burdening of many hospitals and many deaths and of course, when that is happening economic activity is hard to carry on. So, if we want to avoid that we have to bring the curb of infection down in India.
- Good news at least from the numbers that we see is that we’ve had early warnings. What we have to do is make full use of the warning we’ve had.
- Almost surely a deep recession, this year we’re already seeing evidence of it from the shutting of the plants. As we see the lockdown China in the first quarter experienced a fall of something like 35% of the GDP annualized. They’re bringing their plants on back, core consumption is now 95% of normal. But still there are many sectors that are not back to normal.
- Growth will move from a what was moderate 2-2.5% growth rate in the US, 1.5% in Europe, to probably negative 4-5 in both areas, despite a huge stimulus between 10 and 20% points of GDP.
- Well I mean it (India’s GDP) goes somewhat negative. I think a lot depends on the measures we take and the extent of lockdown we impose. I would like to think being entering positive territory would be on the optimistic side.
It (economic recovery) will vary industry by industry. So, you can imagine, for example, if the auto industry can reform the workplace, somehow it could get a lot of people back to work and produce cars. But the question is, do people want more cars now that they know that going in public transport runs the risk of infection, or has their attitude towards life changed as a result, they want to consume less? We don’t know, a lot may change as a result of this.
A lot of us have ramped up our knowledge of technology, of all the fancy devices one can use, so it is possible for industries to change their work practices.
The first sign of difficulties in India is often difficulty in foreign exchange. So far compared to other emerging markets our exchange rate has stayed quite stable, presumably from some support of Reserve Bank of India, relatively stable. I should say we have depreciated some against dollar, but you know countries like Brazil have gone down 25%.
- I think we have to be careful that whatever we do we explain carefully and explain we’re not throwing fiscal deficit out of the window. We are going back to reasonable fiscal numbers. You simple can’t spent 12%, 13%, 14% of GDP with any sizeable fiscal stimulus. We will have to spend this year without people starting to wonder what the end game is.
- One of the concerns is in an abrupt lockdown business get very little time to tell their partners across the world. For example, our call centres, as you point out, are intermittently linked to business activities in the US and elsewhere. So, when a US bank calls in the call centre in India where its operational, it has to slow down business and this is the time with all these applications from both retail and wholesale.
- So, it’s really important we think about all the consequences of shutting down, including which is the most important public health, but we also need to try and find ways, as some of these entities, which are part of global supply chain, can in fact operate during such times.
So the, I think on the individual side it is obvious in terms of need, the poorest, jobless and the elderly, as well as the people who don’t have salaried jobs and all who have very, very, modest living, they are the ones we need to help to be together, to be able to survive. I think the government has announced the package, the question is that enough to keep people in reasonably good health and reasonably access to good food and shelter?