The coronavirus pandemic is a perfect storm for the Indian economy, but India has an exemplary record in handling such storms. In the past three decades, we have managed the 1997 Asian financial crisis, the post-Pokhran nuclear sanctions, the dot-com bubble and 9/11, and the 2007-08 global financial crisis. India maintained both its macroeconomic stability and growth trajectory through these difficult circumstances.
The pandemic will accelerate some of the disruptive economic trends that were already underway, such as stagnant global growth and massive job losses as well as the US-China trade war. However, India will once again prove that it can tide over any global crisis. Prime Minister Narendra Modi’s steady and resilient leadership will surely guide us through this storm to calmer waters.
Global economic growth has been slowing for the past three years, coming down from 3.2 per cent in 2017 to 3 per cent in 2018 to 2.3 per cent in 2019. However, the coronavirus pandemic has resulted in the “worst economic downturn since the Great Depression” of the 1930s. The International Monetary Fund (IMF) has predicted that the global economy will decline by 3 per cent in 2020 with over $9 trillion in lost economic output due to what the IMF calls the ‘Great Lockdown’. Developing countries might be hit even harder in the economic downturn since they are likely to incur more damage to both lives and livelihoods.
The spectre of secular stagnation
Job losses from the ‘Great Lockdown’ might aggravate economic declines. There is considerable research that indicates that job losses can result in permanent economic damage if workers stay unemployed for too long. Their skills atrophy, their motivation levels come down, and they drop out of the workforce altogether.
Job losses across the world have been at staggering levels. The US has lost 40 million jobs with unemployment rate close to 20 per cent already; in the UK, unemployment rate is likely to reach about 10 per cent; in the European Union countries, there is less unemployment due to job support programmes – but the result is that more than 30 million workers are currently being paid through government salary support programmes.
The rise of new computer technologies, such as artificial intelligence and machine learning (AI/ML) and robotics, was already resulting in job losses. The coronavirus pandemic only accelerated these trends because companies had to run their operations without their full workforce during the lockdown.
AI chatbots are being used instead of human agents for many customer service applications. New AI techniques have been applied to screen drugs for efficacy against the coronavirus. Server farms are being monitored by AI/ML tracking systems.
Robots are now being routinely used to clean and sanitise airports and hospitals, and are set to arrive soon in India as well. They are also being used to bill groceries, welcome patients in hospitals, and provide care to the elderly. Businesses around the world will have to deal with these disruptive technology trends, and those unable to adapt quickly will probably fade away.
These global job losses will likely depress demand for years, leading to a savings glut, lower investments, and slower global growth – in short, to secular stagnation.
A new cold war between the US and China, which began even before the pandemic struck, seems to be getting bigger by the day. The impact on international trade is likely to be severe with globalisation going into retreat. Supply chains are beginning to fragment as companies start to shift production out of China. The US has already rendered the World Trade Organization (WTO) largely defunct and there is little possibility that President Donald Trump will revive it.
Investment barriers are also being thrown up by the US while Beijing is asserting its control over Hong Kong and diminishing its role as an investment gateway to China. The rhetoric from both Washington and Beijing continues to be inflammatory.
Climate change is wreaking havoc on global trade too. Climate change has triggered a shift away from fossil fuels; and the pandemic is further aggravating the drop in its demand, resulting in massive revenue losses for oil-producing countries. Solar power, coupled with battery storage, has become cheaper than coal-based plants since the cost of capital has declined so much.
Similarly, electric vehicles with lower life cycle costs are starting to replace fossil fuel vehicles even faster. The transition away from fossil fuels is sure to generate significant turmoil in Gulf countries and other major oil suppliers such as Mexico, Russia, and Venezuela.
Another storm for India
India enters this gathering global storm relatively well-positioned. Our coronavirus disease burden will likely be lower due to a younger, more robust population. The macroeconomic situation is much more stable than those of our middle income competitors such as Mexico, Indonesia, and Brazil. We are well-positioned in terms of our technological prowess and advanced IT skills.
Nonetheless, the global storm will create fierce headwinds for our growth. First, we are likely to see significant declines in merchandise exports, which totalled about $320 billion in 2018. Already in March, India’s merchandise trade reported a year-on-year fall of 34.6 per cent, the steepest since 2015. We are large exporters of petroleum products, gems, textiles, and automotive goods – each of these is facing demand slowdowns around the world. Our services exports are led by IT/BPO services and they are already beginning to experience significant price and volume pressures.
Second, capital flows including both portfolio and direct investments will diminish as investors start to face redemption pressure and risk aversion from their clients.
Finally, our massive remittance flows, which totals $83 billion annually will certainly decline as Indians abroad return home.
But if past crises have taught us anything, it’s how to tackle them without letting the impacts linger for long. PM Modi’s government and ‘atmanirbhar’ Indians will prove just why India remains an outlier every time an economic crisis strikes the world.
The author is the Chairman of the Standing Committee on Finance in Parliament and a Lok Sabha MP from Hazaribagh, Jharkhand. Views are personal.
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