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There’s no ‘How to revive economy after Covid’ playbook. But Modi’s India can have an edge

Although economists have warned against decisions like America First and Brexit, India does have the edge when it comes to boosting domestic consumption post-coronavirus.

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As weeks of coronavirus lockdown wear on, everybody is raring to kickstart the new low-touch economy.

After hinting at a difficult tradeoff between economy and lives, the Narendra Modi government allowed a partial revival of economic activity in agriculture, movement of goods, digital businesses, access-controlled industries like SEZ and warehousing from 20 April – with strong social distancing measures.

The same lives-livelihood tradeoff is being debated across world capitals now. US President Donald Trump can’t wait to reopen America. In Britain, this is descending into a predictable tussle between the Right and the Left, and even a cabinet split.

But nobody knows how consumers, industry and workers will adapt in the post-pandemic economy. Merely lifting the lid will not be enough. As globalism recedes in the near-term in the aftermaths of the pandemic, economies will look increasingly inward. Countries will have to double down and look for solutions by boosting domestic demand. And look for more regional sourcing than global. For Modi, this will be a continuation of nationalist politics if he increases public spending to create jobs and spins it as the second wave of nation-building. A sort of ‘Remaking India’ project.

Also read: Will Modi cut a New Deal? Covid-infected economy can produce an Indian Roosevelt

Receding globalism

It was war spending and the ensuing Marshall Plan that pulled the world out of the Great Depression last century. The US Fed, directly and indirectly, infused trillions of dollars into the global economy and pulled the world out of the 2008 financial crisis. But that kind of global collaboration is sorely lacking today. As Fareed Zakaria wrote recently, “This crisis is occurring at a time when global cooperation has collapsed and the traditional leader and organizer of such efforts, the United States, has abandoned that role entirely.”

Short-term solutions may just have to come from within the borders now, even though experts have, for long, railed against inward-looking economic policies such as America First, Brexit and Xi Jinping’s recent focus on local demand. After the coronavirus pandemic, this trend will deepen. For India though, it may actually work if it focuses on shoring up massive domestic demand.

Also read: Keep sipping globalisation Kool-Aid and you won’t get Trump’s globalist vs patriot UN line

Re-open and recover

Today, the leader most anxious to open shop is US President Donald Trump. He even set up an “Opening our country” council, with a likely deadline of May.

“Our people want to get back to work, and I think there’s pent-up demand,” he said.

If there is indeed a ‘pent-up demand’, it should be like flipping a switch to bring in a V-shaped recovery – one where the economy rebounds as soon as lockdown ends. But many say it will be a U-shaped recovery, and will take more than a year. There is also that L-shaped impact when it takes really really long time to recover – like after the Great Depression.

Others are saying it will depend on whether you choose to look at it as a recession or a natural calamity like hurricane.

But there is no playbook for this kind of crisis and no classical response either. Arvind Singhal of Technopak rightly said to me, “You can’t tell the difference between economists and astrologers’ prediction in this situation.”

Also read: India will have a second contagion if it doesn’t finance economic recovery

Indian domestic demand

How can India then boost domestic demand after a frightening pandemic?

Indian growth never really fully recovered from the last man-made macro-economic crisis — Modi’s demonetisation in 2016. And after several quarters of slowing growth, green shoots had just begun to appear when Covid-19 struck. Soon things began to spiral out of control with the coronavirus lockdown hitting the economy harder than anyone had anticipated. By March 2020, Indians began to hoard cash again. According to the RBI, people withdrew four times more cash from banks and ATMs in March than they had in previous months in 2019-20. This love of staying liquid indicates a basic distrust in the economic situation, especially with growing unemployment.

So, a lot of the recovery talk will depend on sentiment.

But consumer sentiment is optimistic about future spending, much more in India and China, than other countries, said a new McKinsey report. By October, the festival and wedding season will start in India, which many say will boost the consumption economy —  ‘monsoon willing’. But some sectors will take longer to reboot. The fear-factor and social distancing in the low-touch economy will continue to hurt sectors like hospitality, travel, and entertainment industry the most.

Even after some economic activity revives on 20 April in India, the industry will have to go the extra mile in alleviating workers’ fears. Protection protocols will have to be set up for different work settings and factories ring-fenced to control movement of labour.

Also read: Why Covid-19 is a 100-year chance to shake up debt and taxes

Public spending to boost consumption

India, with its massive domestic consumption, can hunker down and resolve to boost domestic demand in the coming months. India is not an export-oriented economy anyway.

Modi must put more money in people’s hands by creating more jobs through huge public investment projects that bring about new national assets.

Government spending will be key, and Modi will have to find innovative ways to raise money without fiscal bleeding. A lot will depend on Modi’s nuanced economic leadership in the coming months – something we haven’t seen in the last six years.

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  1. Dynamic political leadership of Modiji at national & international level & success is beyond question.Now post Corona – innovative fruit bearing economic leadership is essential & going will be very tough .

  2. Sorry, the name is Abhijit Banerjee, and not Sanjeev B as I wrongly mentioned in my earlier comment. My apologies

  3. Domestic consumption needs money in the pocket, which is completely absent now. Even if by some miracle the money-in-pocket returns to pre-covid levels, the consumption will NOT reach pre-covid levels. Like never before, or perhaps for the very first time, people have realized that you need to keep LOTS OF IDLE MONEY in hand, because COVID kind of crazy things CAN happen.
    As for.. “A lot will depend on Modi’s nuanced economic leadership in the coming months”, just forget it. The columnist has herself answered it in her last line… “something we haven’t seen in the last six years.”

    Modi ji does not know or want to know about economics. Once he invited the recent Economics Nobel laureate Sanjeev Banerjee. (?. Sorry if I have got the name wrong). One would have thought he would ask him something about improving India’s economic condition. The Banerjee fellow came out and said Modi ji told him in detail how he was improving India’s economic condition.

  4. The former Reserve Bank Governor, Raghuram Rajan claims he has the key to unlock the economy post Covid-19. That I’d what he said in his last TV interview.

  5. India will have to sing for its supper in a post Covid 19 world. We have got addicted to inflows of foreign capital, not necessarily a bad thing at this stage of our development, but a lot of that has been flared in consumption, not creation of world class infrastructure and manufacturing facilities. The growth premium foreigners were willing to pay for Indian stocks will become unsustainable if growth settles into a new Hindutva rate. Lower growth will also make the surge in public debt a worry, with the possibility of a sovereign ratings downgrade. India will have to reform, as it did in 1991. In the last six years, that fire in the belly has been totally absent.

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