Impact of COVID-19

Covid-19 has disrupted almost all parts of the world and has challenged the public health system greatly. A medical catastrophe, the coronavirus pandemic has infected more than 2 million people and killed over 160,000 people till now. The last pandemic of the size and scope of the current coronavirus pandemic was the 1918-19 Spanish Flu pandemic. The flu infected nearly one-third of the world population and killed 50-100 million people. Yet, from an economic standpoint, the crisis we’re facing today is unique. The Spanish Flu outbreak collided with the end of World War I. A disaster in their own right, wars imprint a heavy blow on economies. Apart from creating massive fiscal deficits, they add tremendous distress to the economy of a war-torn country. Sky-rocketing inflation and towering unemployment are often coupled with misallocation of resources, ultimately being expressed in poor health indicators for individuals. Hence, any comparison of economic disruption caused during the 1918 pandemic with that of today would be inapt.

Most of the affected nations have ordered a lockdown to contain the spread of the virus. While most countries like India, UK and France have enforced complete lockdowns nationwide, others—like South Korea, USA and Japan—have taken the path of social distancing and aggressive testing without restricting people’s movements. The magnitude and rate of collapse in economic activity that has followed is unlike anything experienced in our lifetimes. RBI sometimes tracks economic activity through a peculiar scale—luminosity. Satellites are used for measuring intensity of light (or luminosity) at night. This measure is popularly used as a strong proxy for GDP too in many studies (Prakash, Shukla, Bhowmick, & Beyer, 2019). Recently, there has been a noticeable dip in its value; most metro cities are 30% shyer in luminosity than the estimates of the previous year (Nahata, 2020). This crudely projects a dismal output in the time to come. All economic experts and banks are betting on a great recession. Some are even expecting the world economy to contract. The International Monetary Fund (IMF) predicts the world economy to shrink by 3 percent in 2020—much worse than the 2008–09 financial crisis (WEO, 2020).

Decoding the Covid-19 Impact

All economic experts are predicting a staggering decline in the total output of the world. The following figure by the IMF shows the predicted output loss of 9 trillion USD in the world (IMF Blog, 2020).

We will try to explain the impact of covid-19 on different components on our economy using the famous macroeconomic output equation (Sean, 2020).

Output = Consumption + Investment + Government Expenditure + Exports − Imports

This is a very intuitive way of understanding how and why our claim of seeing a contraction in output—or GDP—is a good guess. We shall look at each of the addends of the above equation separately.

Consumption

Most people belonging to the workforce are shut inside their homes. Only a measly fortunate segment of the service sector is being able to practice work-from-home. These people are usually salaried employees who have inflation-adjusted incomes along with substantial savings in their bank accounts. However, we are missing a most unfortunate segment of the workforce consisting of informal daily-wage labourers, independent workers, freelancers, self-employed workers, and small businessmen. Unlike formal salaried workers, these individuals don’t have stable earnings. This major demographic is one of the firsts to be affected by disturbances in the economy; the income instability of the independent worker is highly pro-cyclical. Therefore, they are fully exposed to fluctuations in their monthly earnings even in peaceful times, let alone during a dramatic crisis like this. Besides, many firms in the formal sector, along with some weaker units, have already started laying off. Hence, many workers—including salaried employees—who are suddenly unemployed—or have shortened working hours—are now earning low or zero incomes.

Since a large proportion of the population is facing a crunch in income, it is expected to drastically decline their consumption expenditure, as they would only spend on essentials such as rent, groceries, etc. Wealthy individuals, too, will limit their consumption—they won’t go for vacation, dinners, and other extravagant outings—until the impending danger of the virus is not averted. Hence, there will be a significant slump in consumption. If the pessimistic sentiment of the pandemic prevails for a prolonged time, consumers—and firms alike—will adopt a ‘wait-and-see’ attitude for all major consumptions. For example, the least useful expense for companies—advertisement—has already been cut short, particularly by firms in travel and entertainment business. As a consequence, Facebook and Google have witnessed a considerable drop in their digital ad revenues, resulting in an expected loss of over $44 billion from the crisis. All this is happening despite the relative comfort to employ WFH for their employees, and the users consuming online-content on their platforms more than ever. (Wakabayashi, Hsu & Isac, 2020; Indo-Asian News Service, 2020). On the other hand, consumer pessimism will hit real estate and other like sectors badly. If this trend persists, the abysmal consumption pattern might become sticky and thus it would take a long time and tremendous external push from the government (explained in ‘Government Expenditure’) before the market stabilises again. Factoring these points in, a demand-side shock thus seems imminent.

Investment

With decentralised production processes everywhere, where component production is outside the mother unit, any obstruction in supply of components can damage the entire value chain. Industries depend on each other for raw material, labour and capital. The ongoing lockdown has severed all interdependencies in domestic sectors. Hence, it is certain that a recession due to supply-side shock is imminent owing to disrupted supply chains. Since firms now can’t get raw materials and machineries, it translates to a downswing in investment. If such a trend of low consumption and scanty investments continues, the autonomous factors—or sentiments—could dominate and thus would become difficult to mend, even with shallow interest rates and generous stimulus from the state.

Also, the ongoing extended lockdown could lead to a stoppage of activities, particularly in small businesses. Hence, we are expecting a rise in bad loans again, but this time more widespread than the NPAs observed recently. This will have an adverse effect on the credit market. With NPAs commonplace now, this would discourage credit-givers to lend and keep interest rates high (to avert risk in a suddenly more riskier world). With little credit available—coupled with lower liquidity—naturally, investments would be crowded out. To combat this banking sector crisis, central banks worldwide have made aggressive rate cuts and infused liquidity.

Government Expenditure

We will now cover the government expenditure in little detail. In times like these, when most people—especially the independent workers—have scarce work opportunities and no income, the government should come forth to safeguard this vital and enormous population by providing them with social security. Because people form aggregate demand in the economy, keeping their incomes afloat becomes imperative for the states. Many wealthy countries provide their citizens with welfare benefits that have a spillover effect on the society—they don’t only benefit the beneficiary, but also those who are around. 

Social security comes in various forms: health coverage, unemployment benefits, paid parental leaves and childcare. Affordable health insurance allows people to avail costly medical treatments. Unemployment benefits safeguard the unemployed from depleting their assets, promote increase in productivity, stabilise economy in recession, and give time to the unemployeds to search for jobs that match their potential (Richard, 2014). Childcare support and paid parental leaves are attached to increases in female labour participation as more mothers could return to work after childbirth, yielding higher productivity along with growth (Sher, 2014). Not only this, paternity leaves have far-reaching benefits too: they remove negative bias toward hiring female candidates, especially married women (Holtzman & Hegewisch, 2019). The bias exists because married women workers could require maternity leave at some point during their term in the firm, which becomes costly for the firm. If paternity leaves are mandated too—which many countries are increasingly pushing for—this hiring bias would disappear and women would be equally likely to be hired as men.

However, some countries fail to recognize the importance of social security and so provide inadequate social benefits. For instance, the USA—despite being an OECD country—fares poorly in providing social security. Scanty retirement benefits for the old push 23% of people aged above 65 below poverty line (America’s Pensions System is Now Less of A Mess, 2020). Low healthcare coverage deters people from seeking medical treatment due to high costs. Besides, there is inadequate childcare support, paid parental leaves, and minimum guaranteed income (MGI), which can produce adverse effects in the crisis (Chapman, 2020). India fares poorer still on all these metrics. 

These shortfalls scream louder during trying times like these. Workers, particularly the independent workers in question, are rendered vulnerable. Adding to their distress, the coronavirus pandemic has arrived at a time when labour income shares have been falling globally (Paul, 2020). Various states have announced stimulus packages in the wake of this economic shock. However, self-employed workers are largely deprived of this aid as the stimulus fails to deliver help for them directly and immediately. 

Particularly in India, where all safety nets are non-existent—with the exception of NREGA—it becomes even more important to reach the poorest and the most vulnerable at the earliest. In her press conference, FM Nirmala Sitharaman announced a Rs. 1.7 lakh crore relief package, which included free LPG cylinders under Gareeb Kalyan Yojna for subscribers of the Ujjwala Yojna, 5kg free rice/wheat in addition to a kg of pulses for 3 months, moratorium on loans payments, permission to withdraw money from Provident Funds, direct cash transfer to women with Jan-Dhan accounts and anticipation (preponement) of PM Kisan payments. (PTI, 2020).

While the package seems starking at first sight, there is little more than air here. First, it's less than 0.2% of GDP, which pales in comparison to other countries whose fiscal stimulus packages are in the range of 10-20% of GDP (Merwin, 2020). Second, the numbers are prey to window-dressing. Of the total Rs. 1.7 lakh crore, Business Standard reports that over 1 lakh crore rupees were already a part of the Budget in one form or the other. The increase of MNREGA wage was a part of scheduled raise, and in any case social distancing might make it impossible to provide MNREGA work as each site must have at least 10 people. The PM Kisan payments have simply been given earlier, and had to be sent out in April-May anyways. Finally, the expenditure of 1.7 lakh crore also includes the cost of grains that have been procured from FCI, including the transport and administrative costs of the process (Sen, 2020).

India has done little to relieve its most vulnerable. The migrant labourers, who gathered in hordes to leave Delhi for their homes due to absence of work and money, have not been provided any kind of protection. These people are in a unique situation—since their ration cards are back home, they cannot procure free grain, and since their wives and Jan-Dhan accounts are also in the village, they cannot even withdraw the direct cash money (Sen, 2020).

Defending the modest size of the stimulus announced by the FM, the Chief Economic Advisor, Krishnamurthy Subramanian, however points to the fact that most countries have included some kind of off-budget expenses in their stimulus packages, which even include monetary measures. Inclusion of these elements in the fiscal stimuli have inflated their numbers. Most of the said expenditure in these countries would actually not be incurred on the Exchequer (Subramanian, 2020).

Nonetheless, we can see there will be a profuse amount of government expenditure to stir the economy in these desperate times. However, these types of government expenditure discussed—social security and stimulus—do not get added to the GDP (or output) directly. These expenses for the government are nothing but ‘transfers’—redistribution of wealth from one source to another. Taxes from wealthy people go to the government, who distributes them among the poor through such schemes. These transfers are accounted in the GDP only when people receiving these transfers actually consume them. Hence, they are added in the consumption part of the equation only when they are actually spent for consumption by the recipient. However, these expenditures are far from futile and are in fact necessary for providing people with disposable income in their hands to stimulate consumption, eventually adding to the GDP.

Exports and Imports

Exports and imports are usually studied together. Since most countries are completely locked down now, it can be easily predicted that the crisis will hurt trade. Dominant exporters such as the USA, Japan and Germany will suffer a drop in their exports. On the other hand, developing countries such as India, which are primarily importers, will see hurtling imports due to disruption in supply chain and autonomous decline in aggregate demand. This may lead to a current account surplus (exports-minus-imports) for countries like India, since they are importing less and exporting more—typically exporting essential goods like PPE (Personal Protective Equipment) and pharmaceutical raw materials. Whereas the countries importing these goods would see a current account deficit, since they have little to export. However, most of the “non-essential” imports—forgone by both types of countries—are used as raw materials for production of other goods. This will hurt output again, though indirectly. 

Surprisingly, we might also witness de-globalisation—after enjoying decades of thriving liberal democracies and open-trade (VOX, 2020). Besides seeing travel and migration restrictions, we may observe sudden de-globalisation across the world as firms, individuals and governments are experiencing major disruptions in their operations. Firms are learning slowly that distributed supply chains can be suddenly obstructed by a virus outbreak, and thus they will reshape their operations to localise their production. The prevailing tussle between the nations over PPE and pharmaceuticals (e.g. the recent scuffle for hydroxychloroquine) too has created unrest in the geopolitical arena. As a result, we could expect re-nationalisation of manufacturing. Evidently, rising nationalist sentiments have already set the stage to displace globalisation and reinstate the nationalist ideology (e.g. Make in India, MAGA, Brexit). However, these are only speculations of the authors.

Conclusion

Clearly, we are going to witness some unprecedented consequences of the crisis. Many have said that the economic crisis post-pandemic would not be a mere recession, but a Depression, which is a scary prospect as the Great Depression lasted more than a decade, and was only mitigated due to the spike in demand owing to the Second World War. Also, this crisis comes in a debt-burdened world, which is certainly going to compound the problems internationally. (Tooze, 2020)

We must bear in mind that the pandemic has been unprecedented in terms of its economic disruption. Reports from the US show that the number of jobs lost—over 22 million people having filed for unemployment in the last 3 weeks—are equal to the total job losses during the 2008-09 crisis, which occurred over a period of 2 years. This would certainly mirror the decline in output, indicating that the recovery would be more painful, slower and prolonged (Casselman & Cohen, 2020).

Nobody can predict the economic consequences of this pandemic, let alone put a precise number to the GDP contraction. The times are tough, and the future post lockdown seems grim at best. You, me or anyone can’t really do anything to keep the economic disaster from coming, especially since our economy was not exactly on a high tide pre-covid. But crisis is the time to rejuvenate and redefine yourselves. During the 2008-09 recession, many things went awfully downhill but entrepreneurship sky-rocketed, as several graduates, fresh out of college saw that the opportunity cost of pursuing their passion was lowered, and they could take up the unpaid internship in the fancy start-up that they would have otherwise foregone for a stable job (Cimaglia, 2020). Afterall, when the going gets tough, the tough get going.

Written by: Yashdeep Singh Dahiya, Rahul Midha, Vastav Ratra

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