Dr. Falendra K. Sudan
COVID 19 has a much bigger footprint than any virus spread in recent times, which has been declared as a pandemic by the World Health Organization. Advanced and developing countries are exposed to COVID 19 alike. The fatalities and the number of people likely to be affected by the spread of COVID 19 are difficult to predict, which hamper effective preparation to combat the crisis. Advance medical preparedness and emergency responses can save precious lives by testing victims for health treatment and quarantine in safer isolation. The psychological impacts are severe in the minds of infected young people due to fear of casualty associated with the pandemic. In principle, spread of COVID 19 is almost fully preventable by medical awareness, health treatment, hand hygiene and the practice of isolation and quarantine. Therefore, understanding of and adhering to the health directives and social distancing are viable options.
COVID 19 and consequent nation-wide lockdown is likely to impact the most vulnerable poor population over a period of days, weeks, or even months. Lockdown will impact smooth functioning of the economic activities directly and indirectly. Direct economic impacts include loss of inventories and raw materials, and deaths due to the virus infection. Indirect economic impacts are loss of economic activities due to decline in production of new goods and services following outbreak of COVID 19. These economic losses can be short-term spanning over a few months and long-term up to complete economic recovery.
Economic effects of COVID 19 and consequent nation-wide lockdown can spread across time because of permanent shifts in market forces, thereby causing lasting distortions through market concentration and likely collusive price hikes. It will affect households and businesses severely and may influence prices of essential commodities badly due to lack of liquidity. COVID 19 and consequent nation-wide lockdown will disproportionately hit poorer households and the more vulnerable members of society due to the absence of robust social protection mechanisms. The poor workers in informal sector may use their past savings, if any, to smooth their consumption or borrow at high interest rates from informal lenders, thereby pushing them further into indebtedness and poverty.
Poor households will be affected disproportionately more by lockdown than wealthier households due to greater losses relative to their income. Their vulnerabilities will be compounded due to difficulty in accessing the mechanisms to cope with income shocks due to lockdown. Poorer households will bear higher intensity of lockdown impacts and their income losses will be more substantial and will be more unlikely to cover losses out of their own pockets. In the absence of adequate support mechanisms such as social protection from the Government, lockdown has the potential to push poor families into debt traps and chronic poverty.
COVID 19 and consequent nation-wide lockdown can disrupt businesses by increasing costs for their inputs. Smaller firms in informal sector will struggle to cope with direct damage from lockdown due to interruptions to their operations. Small and medium-sized enterprises will be worst affected due to unprecedented prolonged lockdown in different parts of the country. Smaller informal businesses had low profit margins and limited credit. Losses to such businesses will be more by their lack of access to emergency funds. With production shut down, many firms will suffer significant financial distress. Many small firms could not repay their loans and were forced to shut down and sell their assets. There are no insurance mechanisms for small firms facing such emergencies. Lockdown has also immense potential to damage market mechanisms, such as disruption to production networks or supply chains of multinational companies.
In this context, fiscal adjustments will be required at the national level as well as at the state/union territory (UT) levels to meet the needs of economic recovery from the pandemic and consequent nation-wide lockdown. Economic and social costs of this pandemic and consequent lockdown could be very large for a highly populated economy of India, which is already suffering from ongoing economic slowdown. This will significantly intensify the fiscal pressure on the Government of India and the state/UT for emergency relief efforts.
The fiscal expenditure for meeting the challenges of lockdown and economic recovery will be severe in India, which is reflected in severe fall in financial markets in recent days as the economy has already been trapped in competing fiscal challenges due to other spending priorities. The government has to meet these huge gaps through special allocations in the annual budget for economic response as lockdown risk mitigation and financing.
As the COVID 19 has global spread, therefore, the likely influx of large external grants and loans are dim for COVID 19 economic response, operations and recovery. The trade deficit in goods and services is expected to be huge due to lesser exports and higher imports to compensate for domestic shortages and to supply economic operations. The robust national development finance is essential to meet fiscal expenditure for emergency economic support to the affected sectors and people due to nation-wide lockdown.
Insuring economic resilience should be top priority for economic recovery plan specifically without any international support, failing which extensive lockdown risk will worsen inequality and poverty. Strong governance including planned and managed lockdown is sine qua non for economic recovery and avoiding risk generation. Different economic response strategies are called for, for instance, financing economic recovering through fiscal measures and immediate food and cash relief to lockdown affected poor people at their doorsteps.
If the lockdown persists, some workers may lose their jobs because they could not report to work for longer, therefore, they may lose workdays or their jobs altogether. Newly migrant families may be denied relief by government officials if they lack voter or ration cards to establish their identity as residents. The children of families who lose their earning members due to deaths caused by COVID 19 may face inter-generational transmission of adverse impacts in the form of lower educational attainment than their peers whose families had not been similarly exposed. Thus, COVID 19 and consequent lockdown may usually appear to deliver transient economic shocks at the macroeconomic scale. At the micro scale, effects may persist over the long term, with potential to disrupt markets, push poorer households into debt and poverty, and diminish educational attainment, and future earning potential.
It is pertinent to note that delays in providing essential services to affected households can considerably exacerbate the economic and social consequences of direct damage from lockdown. It is essential to build greater economic resilience and to revitalize poor people’s livelihoods in lockdown. Emergency government spending on relief will result in severe adverse consequences for long-term development. Therefore, the government must enhance financial planning for COVID 19 and consequent lockdown to ensure that sufficient financing is available to support timely relief and early economic recovery efforts.
There is need to promote enhanced financial preparedness in the private sector to ensure uninterrupted wages and salaries to workers. Government should use an array of instruments to enhance financial preparedness. Lockdown risk financing should be based on the magnitude of associated losses to identify the most appropriate fiscal instruments.
There is urgent need for contingency budget allocations and contingent financing arrangements to smoothen the livelihood effects of lockdown. Government can reallocate budget or increase their borrowing to provide additional resources to mitigate lockdown sufferings. Risk transfer solutions such as catastrophe and resilience bonds should be considered if lockdown persists. Effective solutions must be accompanied by strong and effective economic recovery planning and post-lockdown budget execution to ensure that available financial resources can be mobilized quickly and effectively.
In post-lockdown period, risk financing strategies should be designed for economic resilience to mitigate lockdown losses. The cost of post-lockdown economic response will place mounting pressure on government budgets as the lockdown risk could ultimately become neither insurable nor transferable. Therefore, there is need to design robust fiscal instruments to encourage investments for slowdown reduction. The type of fiscal instruments to be used will depend on the scale of resources required to mitigate the lockdown losses, relief disbursement, social protection programme, and recovery support to businesses and long term economic and fiscal goals.
Contingent emergency economic response funds can be allocated to finance urgent needs of lockdown. Generous concessional fiscal assistance for economic response to lockdown should be available to state/UT governments from the union government. This can be realized via legislative and regulatory measures, close monitoring and supervision as well as direct grants and subsidies. Contingent lockdown financing can be disbursed during lockdown period and also in the immediate aftermath of lockdown to provide timely budget support to enhance long-term economic resilience and to address lockdown risks.
(The author is Professor, Department of Economics, University of Jammu)
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