The coronavirus pandemic is expected to cause both demand and supply shocks in the global economy (representational image) | Photo: Manisha Mondal | ThePrint
The coronavirus pandemic is expected to cause both demand and supply shocks in the global economy (representational image) | Photo: Manisha Mondal | ThePrint
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The global economy has entered a recession as a consequence of the coronavirus pandemic. There are lockdowns across the world, hitting economies hard. The International Monetary Fund (IMF) has said this recession will be worse than the one in 2009, caused by the global financial crisis.

With its low dependence on exports and the advantage of moving early on social distancing, the Indian economy may do better than some other developing countries.

At the outset, we must understand the limitations of any predictions about the economy that anyone makes at this juncture. Economists are losing hope of a sharp V-shaped recovery and expect the effects to last longer, but their forecasts differ, and are conditional upon what happens to the spread of the novel coronavirus.

The IMF’s prediction, for example, says it expects a recovery in 2021, provided that countries succeed in containing the coronavirus and preventing bankruptcies and layoffs.

There is hope that one of the existing vaccines like BCG can give us immunity, while about 69 drugs that have been used for other diseases may help.


Also read: Faced with COVID-19, India chose to protect lives, not livelihoods. And that’s a good thing


Building immunity without a vaccine

Even though the scientific community of the whole world is currently engaged in research on how to contain the coronavirus, it is generally agreed that a vaccine will take about 12 to 18 months.

Countries like the UK, which tried to follow the ‘containment’ approach, wherein they tried to reduce the rate of spread of the virus, and thus allow the population to develop herd immunity, found their health systems overwhelmed, and gave up.

With the present suppression strategy in place in many countries, the bulk of their populations will not be immune to the virus, as they have had no exposure to it.

In the absence of a vaccine, when the lockdown is lifted, fresh cases may emerge as it is unlikely that the virus chain is completely broken. According to simple models, every lifting of the lockdown, and no social distancing, will leave say, 80 out of 100 persons healthy and disease-resistant. Out of 20 who fall ill, about five may need hospitalisation. If we can prepare hospitals for these five, then four of them will survive.

If there is some social distancing, the spread may be slow, while if we prepare hospitals, we may be able to cope enough to be able to help the sick recover.

As the numbers of those needing hospitalisation are projected to increase, there may need to be a second wave of a shutdown. This ‘flattening of the curve’ will allow the health system not to be overwhelmed, and help patients recover.

Since the virus may stay in the system and come back seasonally, it is important in the long term that the population becomes resistant to it. It may therefore be necessary to implement a lockdown in waves. In addition, not all countries are facing the same level of spread of the virus. Global trade and travel will require such coordination.


Also read: 3 critical steps Modi govt must take to protect people and economy during Covid-19 lockdown


Impact of contraction in China & US

One of the largest engines of growth for the world economy, China, is set to see a contraction in GDP. Now, with the coronavirus spreading rapidly in the US, its economy will also see a contraction.

The initial contraction of the Chinese economy was based on estimates that accounted for the disruption of supply chains and production. These estimates will need to be revised downwards as economies like the US, UK and Europe go into lockdown mode, and consumers of Chinese exports cancel orders. Global trade is going to witness an unprecedented disruption in these times.

At present levels of the lockdown, global GDP could contract by 15 per cent. Most economists worry about the mutually reinforcing effects of demand and supply under the present conditions of high uncertainty.

A lockdown prevents businesses from selling their services — a supply shock at first. As workers and entrepreneurs lose income, they demand less, and as they demand less, more businesses lose income, and so on. Many economists feel that the impact of the demand shock on GDP may be more than the supply shock.

If there is a decline in production of goods and services in one month by 50 per cent, such as during a shutdown, and by 25 per cent for another two months, due to limited opening up, the impact on GDP is a decline by 10 per cent.

The priority today is health and lives, and social distancing is the best bet, even though it will sharpen the impact on the economy.


Also read: How the coronavirus recession is like World War II


The case of India

Though India will face serious challenges on the economic front, the economy may do better than some other developing economies, which are heavily dependent on world trade.

Lower dependence on exports means less exposure to the decline in world trade. This and the low price of crude oil, our biggest import, may mean that we don’t suffer an external shock.

In terms of policy, India imposed a lockdown at a very early stage of the spread of the epidemic. This has bought us time to prepare our health system for the coming onslaught of Covid-19 patients, and also benefit from the research that scientists across the world are doing.

If we can manage supply chains and follow a plan for maintaining social distancing to the extent possible over the next few months to put our country slowly back on track, the summer heat can bring a ray of hope.

The author is an economist and a professor at the National Institute of Public Finance and Policy. Views are personal.


Also read: RBI’s mega financial package will work only if Modi govt plans for life after lockdown


 

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15 Comments Share Your Views

15 COMMENTS

  1. India can bounce back but government should rightly balance the act of capitalism and socialism. Many organisations will use this as an opportunity to reduce the pay forever instead of short term. Reduction in pay will help to a certain extent in short term but in the long term it can badly affect the economy as these same people will slow down the demand. Governance in India is not up to the standard it lacks proper intent and action both

  2. 1% of 1.3 Billion people is 13 Million people. Are you saying even with the lockdown, 1.3 crore people will die? Is this factored in anywhere in your rosy forecasts of recovery?

  3. It is more essential to prevent the spread of corona virus before it infects more people and it’s a good thing that India chooses to save lives, not livelihoods. If the workforce is not affected badly, the economy can regain it’s earlier position.

  4. We need to mercilessly crack whip on social distance violaters , their intellectual supporters (across politicsl lines), anywhosoever goes berserk on this item be arrested and put into asylum, those insects of human society .

  5. After this pandemic passes, rebuilding India’s export competitiveness should be a priority. One engine of growth / job creation is sputtering. It also makes us over dependent on foreign money coming in to cover the huge trade deficit.

  6. Every crisis comes with an opportunity. Will the government be agile enough to grab the opportunity?

    We should not miss this chance. Let’s keep our fingers crossed.

      • Due to Modi government, India has achieved a good position economically around the globe. We have seen a drastic change in trade affairs and all. According to me, he is the one who will be able to grab a opportunity(if there is one). I may be wrong.

  7. As for BCG , it can’t give immunity even from adult TB for which it was meant in the first place. How it will give immunity from Corona?

  8. But indian software industry , tourism industry is dependent on foreigners.Engineers in software company are spenders , if software market is down due to global recession then we are hit badly.Job loss in software sector is a big shock to metros.
    Is my opinion has some sense ?

  9. Yes , it surely buck the trend. Unlike the west, Indian govt doesn’t have to pay unemployment benefit or insurance. Tthere is no concept of stimulus package and no responsibility towards daily wage labors.
    Instead government is collecting Chanda for coronavirus crisis filling its treasury and not spending it.

  10. Honorable prime minister will give freebies subsidies reservation loan waivers to save Bharat from recession. Jai karl marxa.

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