Containing The Economic Impact Of Covid

In the wake of Covid-19 there are calls for large macro-stimuli, but there are also those who continue to prioritise reforms

- Ashima Goyal

Many high frequency indicators in February, as well as a rise in IIP and export growth, point to a turnaround due to the moderate monetary-fiscal stimulus adopted in the last year. Of course, now Covid-19 has interrupted the recovery, but evidence suggests countercyclical monetary-fiscal policy works in a slowdown even without concurrent reforms. But the opposite is not true. Reforms without complementary macroeconomic stimuli have been hurting growth ever since 2011.

The Indian financial sector is said to be in a weak state, making it unable to withstand this new shock. But the system had absorbed a number of shocks showing resilience, even as reforms strengthened its fundamentals. NPAs (non-performing assets) had peaked, public sector banks had made recoveries through the bankruptcy process, been recapitalised and were in a position to lend if demand recovered. Private banks were largely healthy, while the festering problems at YES Bank had been addressed through resolution, fresh capital, and new management.

Deposits were guaranteed but equity and bonds wiped out. This approach reduces both systemic risk and moral hazard. For example, a Swedish banking crisis in the early 1990s was resolved within a couple of years and at lowest cost to the taxpayer by following a policy of saving banks but not their owners. The cost of the rescue to taxpayers amounting to about 2 per cent of GDP was recovered as asset values rose. The current volatility in markets underlines again that financial sector diversity is the safest. Overdependence on capital flows and markets is dangerous.

Responding to Covid-19

Steps to minimise impacts on the economy must follow a sequence. First, enable daily workers and casual labour to survive this period. Income transfers, food kitchens, and quarantine arrangements will be required, in which States, civil society and NGOs are also active.