Tough times never last, only tough people and tough institutions do, Reserve Bank governor Shaktikanta Das said last month. This phrase could well be expanded to include tough countries too. India is a tough, survivalist country and we will surely beat back the coronavirus pandemic. We have many extreme challenges to overcome in the next few weeks and months. Nonetheless, we are well-poised to take advantage of the post-corona world in the next few years.
India comes into the post-corona world with massive advantages. Suddenly, it is OK to drive up the fiscal deficit and spend money. Our fiscal constraints are not binding. In addition, interest rates, oil prices, and commodity (such as coal and iron ore) prices have all come down dramatically. Our young population will likely not be sickened as much as the older populations in high-income countries. We have a strong, stable government with the most popular leader in the world. All countries are looking to diversify their supply chains away from China. In sum, it’s a golden opportunity to build New India.
We are all Keynesians now. The coronavirus pandemic requires abandoning fiscal rectitude since we are facing a textbook Keynesian aggregate demand slump. Across the world, countries have thrown away the fiscal rulebook and are spending money to prevent their economies from stalling.
Fiscal deficits across the world are rising rapidly as governments fire the “big bazooka” of unlimited state support. The US is spending close to 10 per cent of its GDP; the UK and Germany have unveiled grants and loans amounting to close to 20 per cent of their respective GDPs; France, Spain, and Japan are promising grants and loan support between 10-15 per cent of their respective GDPs. Under these circumstances, India’s difficult debt dynamics need not constrain us.
Need higher spending
Moreover, the cost of capital is also going down rapidly, which enables us to borrow and invest at far cheaper rates. The US 30 Year Treasury rate is at 1.27 per cent, half of what it was just a year ago and at historical lows. With the world’s global benchmark rate so low, India can borrow long-term money to build its infrastructure and factories very cheaply.
Even as we contemplate how best to spend these additional fiscal resources, we are likely to benefit from an oil price decline. Oil prices have declined in the past few weeks from $50-60 per barrel to about $25-30 per barrel. India’s oil import bill was close to $112 billion in FY19, so it is likely that we could easily save $50 billion on oil import bill this year, if the current rates persist for another year. This is well over Rs 3.5 lakh crore. We are seeing 20-30 per cent price reductions in iron ore, natural gas, coal, and other commodities as well. These massive price declines will likely endure for at least 1-2 years till the global economy recovers. If we lock in long-term supply arrangements, our economy will be able to save on many important inputs.
India’s demographic dividend
Our young and healthy population is eager to get back to work. Young people with stronger immune systems are much better at handling the coronavirus. Older populations sicken much more, require more hospitalisation to fight respiratory distress, and sadly suffer higher mortality rates. Therefore, the disease burden for our younger population is far lower.
In addition, while the science is still somewhat unsettled, it appears that both our hot climate as well as our immunity levels might enable us to fight back the coronavirus better than more temperate countries. Our young workforce, if it practices appropriate social-distancing, will thus enable India to get back to work much faster than other countries.
India is the world’s option
India’s global credibility is getting higher. Our pre-emptive and courageous national lockdown has decisively suppressed the pandemic, and the world acknowledges Prime Minister Narendra Modi’s inspirational leadership.
India is therefore becoming the natural destination for global corporations that are looking to build more resilient supply chains and diversify away from being too China-centric. Many global players – in industries ranging from pharma to auto parts to apparel – are now actively scouting locations in India such as Ikea, Cisco, and Apple. From the US alone, there are reports of over 200 firms looking to move manufacturing operations from China to India. The post-corona world will require global companies to be able to swiftly source vital inputs from around the world. India is thus ideally suited to become a global manufacturing and services hub.
This is the time to accelerate our efforts to build New India. Of course, we must get through the extraordinary near-term challenges that we are facing right now. We have to control and treat Covid-19 patients successfully. Our lockdown strategies have to be carefully planned. We have to provide food and income support to vulnerable populations.
MSMEs and large enterprises require massive financial and regulatory help. Our financial system has to have sufficient equity capital to finance growth going forward. These are extreme challenges, for sure. Still, hopefully in a few months we will have drugs that will effectively treat the disease. And, in a year or two, we will have vaccines that will end the pandemic. We must, therefore start to examine those game-changing ideas that will enable us to fully capitalise on our natural advantages in the post-corona world.
Jayant Sinha is the Chairman of the Standing Committee on Finance in Parliament and a Lok Sabha MP from Hazaribagh, Jharkhand. Views are personal.