It is clear that there will be a negative impact of Corona Pandemic on our economy. The numbers of foreign tourists has already declined and is likely to remain near zero. Our exports are under pressure. Domestic industries like automobiles and pharmaceuticals are unable to get auto parts and raw materials from China and their production is likely to soon come under pressure. Yet, former Assistant Secretary General of the United Nations Ajay Chibber has said that India will be less effected by the Corona Pandemic because its economy is less integrated with the global economy. This indicates that there are benefits of less integration with the global economy as well.
The traders and exporters are seeking subsidies so that they may be able to continue to export despite the declining prices and global demand. This strategy is unlikely to succeed because to try to continue to export in this situation is like breaking one’s head against the wall. Another suggestion is that the Reserve Bank of India (RBI) may reduce the interest rates to enable households to borrow and consume; and to enable businesses to borrow and invest in these times of crisis. The RBI has made a number of reductions in the interest rates in the last two years. However, our GDP growth rate continue to be in free fall. Reason is that households are unwilling to borrow and consume in absence of jobs; and businesses are unwilling to borrow and invest in absence of market demand. Underlying both these disincentives to borrow is the absence of purchasing power with large numbers of our population. No wonder, the United Nations Conference on Trade and Development (UNCTAD) has said there is a stagnation in demand across the world due to increasing inequality. Demonetization and GST have contributed majorly to this in our country by pushing the Medium, Small and Micro Enterprises (MSMEs) into a corner. A reduction of interest rates will not be effective in this situation. The solution will come from securing an increase the incomes and purchasing power of the common man.
Another suggestion is that the Union Government should increase its expenditures—especially on public health—and create demand in the economy. This suggestion is in the right direction. However, the scope of increase public health expenditures is limited. These constitute barely 1.5 percent of the total expenditures of the Union Government. We need a stronger increase in expenditures. Further, any fiscal stimulus is effective only if it can quickly generate the revenue to repay the borrowings. Investment in public health will be more like firefighting. It will not generate revenue for the Union Government with which it could repay the debt. That said, the basic approach of increasing Government expenditures is in the correct direction. The task is to make these increases in sectors that lead to quick generation of demand in the market and revenues of the Union Government.
The way forward is to make investments in import substitution in a mission mode. The Government must encourage investments in the domestic manufacture of auto parts and raw chemicals that we are not able to import from China due to the Corona Pandemic. We must convert this crisis into an opportunity by delinking our economy from the global economy. We must prepare for recurrence of such crisis’ in future—not only such pandemics but also wars and tsunamis. At the same time we must use this opportunity to support our small industries against domestic- and foreign large companies. This will simultaneously have two impacts. One, it will delink our economy from global supply chains and insulate us against any such future destabilizing events. Two, it will generate employment and demand from the MSME sector. We would then be able to institute a self-contained model of economic development.
Indeed an effort to import-substitute goods will lead to some increase in the cost of production. The electric bulb available in the global economy at Rs 100 will be produced by our MSMEs, say, at a cost of Rs 125. However, our supplies will not get disrupted in future due to global disturbances. Secondly, the generation of employment in the domestic manufacture of these high-priced bulbs will place incomes in the hands of our people and create demand in the market. Therefore, the Government should impose high import duties on all imports and provide impetus to domestic production. Simultaneously, the Government must enable the domestic industries to buy frontline technologies so that we do not get stuck in obsolete technologies. We must consider withdrawing from the World Trade Organization to enable our industries to copy advanced technologies without facing the ire of the WTO. The Government must ask our Universities and laboratories of Council of Scientific and Industrial Research, Indian Council of Agricultural Research and Indian Council of Medical Research to develop indigenous import-substitution technologies. An increase in Government expenditures in this direction will help us both face the corona pandemic and also lay the foundation of our future economic progress.
I am not arguing for a complete break from the global economy but only for a lower level of engagement. We will still continue to export—our services such as software—and import the necessary goods—phosphate fertilizers and fuel oil, for example. But we can reduce foreign trade in items like bulbs that can be manufactured in our country albeit at a higher cost. The cost of production of bulbs, for example, will increase in this dispensation and price out our manufacturers from the global markets. We can give appropriate amount of export subsidies to our exporters to overcome this problem. Part of the revenues earned from the higher import duties can be used to pay the required export subsidies. In other words we can close our doors but leave open specific windows.
The Sensex has lost about one-third of its value in the last month and continues to be in free fall. There is no need to fear this. The last few years have seen a decline in the GDP growth rates while the Sensex has been buoyant. Reason is that the total economy has been getting constricted but the share of large businesses has been increasing. The former is leading to lower growth rate while the latter is leading to a buoyant Sensex. Now we can reverse the process—we can implement policies that lead to higher GDP growth rate with a lower Sensex. This can be done by providing encouragement to MSMEs. The Corona Pandemic provides a golden opportunity for us to undo the wrong policies of unnecessary global integration that we have followed in the last two decades.
(The author is formerly Professor of
Economics at IIM Bengaluru)