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Mainstream, VOL LIX No 11, New Delhi, February 27, 2021

Covid-19 Pandemic Drove the Indian Economy on the Brink | Dipak Prakash

Saturday 27 February 2021

Book Review by Dipak Prakash *

Indian economy’s greatest crisis:
Impact of the Coronavirus and the road ahead
by Arun Kumar

Penguin Random House India Private Limited,
264 pages - Dec 31, 2020

The author Prof. Arun Kumar (well known for his magnum opus Black Economy in India) has attempted to explain how the widow’s cruse is likely to go empty. He succinctly explained why the insane and ill-conceived policy of the government be held responsible, and more so the Modinomics. Voodoo economics of the present government based on spurious assumption is likely to make the recovery a staggered U shape than swift V shape unlike the towering claim of the chief economic advisor of the Government. Prof. Kumar has many feathers in his hat. He has already debunked the demonetisation as a farce and sham (in his book Demonetization and Black Economy’). Moreover, poor implementation of GST has killed the golden goose- the unorganised sector (in his book ‘Scorching Ground of Tax’). The present book is aptly proved why the economy is going through a greatest crisis never before.

The Indian economy has undergone a slew of crisis in post-independence. To name a few- stagnation of the economy after independence, industrial deceleration of mid-sixties, export pessimism, oil shock of 1970s etc. Payment crisis of 1990s was the most illustrated one, which manoeuvre the course of the economy from dirigiste and autarkic to pro-market and liberal economy.

The present pandemic crisis is even severe, more precisely a numero uno crisis. It has jolted the economy of not just one country but it has a pan world impact. Perhaps, it may have even far-reaching impact than the great depression of 1929-30. During 1920s and 30s, only a small part of the world has tasted the higher level of development

The present crisis is different from previous crisis. It came suddenly with a blitzkrieg speed and loomed large over the humankind of the world. Though, it came to India detoured via other countries, a precious time our administration has got to response in planned manner. However, our media savvy PM Modi has recklessly and unilaterally declared lockdown. Lockdown was needed but not in the way it was fanned out. It has further exacerbated the problems and hardships of the common people. The plight of migrant labour was grim reminder of the tragic 1947 partition. The influx of workers from urban to rural India was unprecedented.

Declaration and prorogation of Lockdown

Book gives a detailed treatise on every nuts and bolts of COVID19 pandemic in the introductory chapter. The prefatory statement about the pandemic gives the reader a glimpse of the gravity of the problem and its fall out on the already limping economy. The double whammy of demonetization and poor implementation of GST has already retarded the growth of the economy. The author has pointed out the good and bad part of the policy adopted by the government in dealing with the unprecedented trying times caused by spectre of COVID19. It also comparison with other countries. He emphasised on dilapidated condition of health infrastructure in India.

The juggernaut of the mammoth Indian economy is set to a screeching halt with the unilateral and undemocratic declaration of lockdown. It was a signature Modi-style manifesto, and made a towering claim to raze down in 21 days. Lockdown was implemented unplanned manner. No lesson was learnt from China and US. It was the poor execution of lockdown which made India the among the top three nations in terms of cases per day were reported in just short span of 3-4 months. We have seen nearly no synchronisation of policy related to lockdown across the country. Lack of testing, lack of PPE kits, no uniform standard operating procedures (SOP), poor contact tracing etc. were reported from every nook and cranny in the country. It raised serious question on the much-touted slogan of ‘co-operative federalism’. The book has given a very astute bird’s eye view on these aspects, and ask serious question to the administration. Later, the lockdown was lifted in staggered manner without having due deliberation with other stakeholders. The decision was taken at the behest of the business class. Unlocking of the economy has started a bit early, following other countries- a typical case of copycat, though the cases were rising at a whooping rate. Author has succinctly described how the State has failed in cautioned trade-off between tackling the disease and the stalling economy in subsequent chapters.

Macroeconomics of lockdown

The production of the economy has come to the halt in a jiffy. A few economic activities were allowed during the lockdown, according to the author, as low as one fourth of the economy. Agriculture harvesting has gone unfettered more or less. However, the farmers had faced double down as the harvesting was done, but could not access the market. A mass rotting of perishable products was a new normal in rural India. On the contrary, the urban India has faced paucity of essential goods. i.e- milk, vegetables etc. A glut and rot in rural India and scarcity in urban area was an epitome of the adage ‘scarcity amidst plenty’. This could have been avoided through better co-ordination of policy as we saw later.

Modern day economy is based on following ground- division of labour, specialisation, complex supply chain, greater dependency, large scale concentrated production etc. These characters have changed the functioning of invisible hands. It causes more inequality, weakening of the labour’s stake in production.

Among the three sectors, service sector was the worst hit. Service activities need physical proximity between demanders and suppliers. Services are perishable and immaterial, therefore cannot be stored. The sector which carries the whole economy on its shoulder, in the pandemic, proved Achilles’ heel. Agriculture sector was considered to be Achilles’s heel in normal times, becomes the saviour of the economy. Industry was median in terms of production is considered. Essential goods and pharm industry were allowed to continue production with caution, the demand was quite high, sector has responded with geared up supply of essentials for pandemic. Majority of the other production units remained closed, which affects the overall production of the sector.
On the saving and investment front, saving was receding fast, and investment was declining too in this pessimistic and uncertain situation. In fact, dissaving was growing high. Income has declined due to unemployment or salary cut. Consumption of essential goods continued unfettered. The rich also were experiencing negative ‘wealth effect’. Their conspicuous consumption has declined remarkably. Author has given substantial space to analyse the fate of unorganised sector, to which many experts turn blind eyes. It really adds a new taste to his writings.

In the context of Indian economy, IMF has predicted a negative growth in April 2020. RBI governor has also indicated towards negative growth. many rating agencies have also concurrent opinion. Author has estimated as many as 232 million lost employment, assuming the agriculture sector does not shed any worker. On the contrary, CMIE has given a quite low figure of employment loss, only 122 million. He raised a serious question on the methods of survey and data reliability as the old methods have failed to capture the virulent nature of the unorganised sector, therefore official figures about GVA (Gross Value Added), growth and other macroeconomic indicators are fallacious.

War Economy vs Pandemic Economy vs Global Financial Crisis

The author has attempted to compare and differentiate pandemic economy from war economy. In war economy economic activities does not come to a sudden halt. Rather a shift from non-war goods to war goods takes place, and in the post-war period economy experiences economic hardships i.e- high inflation, unemployment etc. Pandemic economy is quite different. We have seen roughly 25% of the economy was producing. Rest was shut down completely.

Global financial crisis disrupts the financial system, causing substantial decline in the prices of financial products. It takes place when there is sharp increase in adverse selection and moral hazard arising from asymmetric information, and the market is unable to channelise the resources efficiently. In the case of pandemic situation, financial system had experienced some financial strain, but the resilient system has managed to tide over the situation. In the long term, prudent policy and financial support may be required.

Migrant Labour and Unorganised Sector, and Data related issues: Killing of Golden Goose

The book is the poignant and tell tale story of migrant labour. They were moving from big cities to their native land on barefoot in long bee-line along the road. It might have created the longest human chain in the history of humankind. They are the marginalised in the society, and seldom policy caters their issues. Prof. Kumar has scathingly criticised the government for turning blind eyes to them. Majority of them are working in unorganised sector, which was already bleeding owing to demonetization and GST. The lockdown came as a strong smack on the face of unorganised sector, which accounts for as many as 45 % of output and employ as high as 95% of work force. A large section of the book is dedicated to unorganised sector and unorganised sector labour. According to Kumar, the official data is not able to capture the actual picture of this sector. The government is shy away to take this sector seriously. He called for more attention be given to the sector.

Hard Lessons Learnt

The impact of pandemic is quite uncertain. It’s a new experience for the whole world. Though in the past pandemic has taken place. But in present setting of modern economy, where, interdependency of economies is quite extensive, the final impact can be only assessed in long run.

  • The pandemic has underlined the importance of public sector and role of government. The logic of efficiency for market does not seems valid always. The human face of the market need to be promoted, and therefore, need to reshape economy in this line is much needed.
  • Division of developed and developing economy may further widen as the K-type recovery may increase the inequality among the countries.
  • The world economic order is likely to change. The main thrust would be on reducing excessive dependency on any one country. China’s role as world manufacturing hub will subside and new hub may come into being. India has a fair chance, given the support of the State. Manufacturing hub will also be more de-centralised to reduce dependency. India needs to engage in world trade though various trade blocs. It is the need of the hour.
  • State repression in the name of pandemic has been noticed across the world. To illustrate, US has debunked the pandemic initially which resulted into huge death toll. Same was the case in Brazil. In India, the winter session was stalled, though state election in Bihar was conducted. Various civic protests were gaged in the name of pandemic.

Way out: Role of State Vs Role of Market

The author in the book has pleaded the case of government’s role very successfully through various appropriate examples and theory. He called for government intervention on many fronts. Immediate help through relief package be given to poor as market has failed to do so. Government must follow expansionary fiscal policy and spend more on various productive avenues. Higher the government expenditure, higher the likely demand in the economy (as Keynes advocates in his magnum opus, General Theory of Employment, Interest and Money). Tax concessions to business community to boost their profits. Cash transfer to the poorest of the poor who lost job and languishing in penury. MGNREGS must be started with a fresh gear to supplement the poor family, and budgetary allocation need to be done it.

In the end, I can say that the book is well researched and informative. Book may help in future research on pandemic as a reference book. Data sources are well extensive and up-to-date. I recommend it to not only economics students but laymen can also find it interesting. Book is written in a very lucid language that a layman can understand. The author has deliberately shunned the standardised jargon of economics. The book is a memoir on COVID19. However, without fail the book gives the message very loud and clear to government- spend..spend....and spend...The Magnus’ Apple cart is going berserk, if it reaches the destination, the Magnus would take the credit. If it falls in gorge, it would be term as vis major.....

* (Author: Dipak Prakash is Assistant Professor, ARSD College, University of Delhi)

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