COVID-19: Fighting the Economic Battle

Sanchita Chatterjee
April 12, 2020


The battle against COVID-19 is an open fight. Global financial markets have been on the edge ever since the magnitude of the virus became clear. The corona virus was limited to China on the 12th of January-less than three months ago. Initially, most deaths continued to occur in Italy, Spain, and China, now the virus has spread to more than 190 countries and has been declared a pandemic by the WHO. China may seem to give the impression that the fight against the epidemic is yielding results, but the fight is far from won. 

In reducing the outbreak, Hong Kong, Taiwan, Singapore, and Japan have chalked up notable victories, no doubt, due to their experiences in coping with the 2003 SARS epidemic. By comparison, Europe and the US are just waking up from their delusions of invulnerability. The US now becomes the most affected country, and the UK is perhaps only weeks away from an Italy like situation, experts warn. Consequently, the epidemic now rages through the West. Italy, which has especially close economic links to China, is the hardest-hit European country so far. The new Wuhan (the Chinese megacities where the corona virus first emerged) is Northern Italy. 

Weak cash flows, rising debt, and strained corporate valuations had concerned analysts since last year about an imminent global recession, yet nobody conjectured that a micro-organism could cause a global financial shock of this proportion.

Impact on Western countries

After China, Italy was the epicenter of the COVID-19 outbreak. On March 26, 2020, the corona virus epidemic hit a grim landmark in the US. The nation now has more cases of corona virus than any other country in the world. The Italian government has jammed on the brakes with its overloaded health care system, shutting down the retail economy and virtually quarantining the entire country. All the shops are closed in the country except for pharmacies and grocery stores. People have been told to stay at home and are only permitted to visit public areas for shopping or for commuting to work. Many public and private debt commitments have been suspended (such as house rentals and interest payments). Italy is trying to slow down the economic doomsday clock until the corona virus dies out. Meanwhile, Germany has had so far very few deaths from the corona virus, but the number of infections is now rising steeply as elsewhere. Germany’s leader, Angela Merkel, imposed on herself a self-quarantine, after possibly coming in contact with a corona-positive person. The German government has implemented a short-term job allowance in response to the crisis and has granted generous credit aid, incentives, or tax suspensions to struggling businesses. Public activities have been postponed around the country, and school children have been told to stay home.

For its part, Austria has long since closed its Italian frontier. Austrian schools, colleges, and most shops have been closed too. France followed a more relaxed approach, but now, like Spain, it has shuttered its schools, restaurants, and shops. Denmark, the Czech Republic, and Poland have closed their borders with Germany. US President Donald Trump has declared a state of emergency nationwide. The US Congress has passed an emergency package worth $8.3 billion (£ 6.7 billion) in an attempt to combat the epidemic. Far greater sums await the passage through the Senate. Also, the federal government of the United States has banned international tourists, first from China and Iran, and later Europe. Globally, not every response to the crisis was well-tailored, and some were not powerful enough. Perhaps worryingly, some governments have persuaded themselves that they can only delay the spread of the virus, rather than taking the necessary measures to stop it altogether. In many heavily affected areas, the inevitable overcrowding of hospitals has already revealed the folly of such satisfaction. A severe economic recession seems inevitable, and some analysts are already calling on governments to enact steps to shore up aggregated demand. However, that advice is insufficient, considering that an on-going supply shock is impacting the global economy. Employees aren’t available because they’re either sick or quarantined.

In such a scenario, demand stimulus would merely fuel inflation, possibly resulting in stagflation (weak or dropping GDP growth alongside rising prices), as occurred during the oil crisis of the 1970s. The economy is now awash in liquidity, with nominal interest rates almost anywhere close to or below zero. Further interest-rate cuts to deep-red territory could benefit financial markets, but could also cause cash panic. The epidemiologists argued that the brutal downturn in economic activities makes crashing stock markets inevitable, provided that the policy of excessively cheap money and shared liabilities by central banks have created an unsustainable bubble. What is desperately required is fiscal policies to save businesses and banks from collapse, so that they can quickly recover once the pandemic is over. Policymakers should consider various types of tax relief and public guarantees to help businesses borrow when needed. A short-time job allowance is the most promising alternative. This strategy, which was tried and tested in Germany, compensates for the workforce’s underemployment in the same channels that are currently being used for unemployment insurance. This part of Germany’s strategy should be replicated by all countries to avoid job losses

Case of India

The epidemic poses twin challenges for India as it does for most other countries: restricting the spread of the disease even while reducing the economic effect in an already slowing economy. India’s economic growth could take up to a half-percentage-point hit in FY21 due to the disruptions caused by the Covid-19 outbreak, early government estimates indicate. Yet independent economists see a deeper one percentage point break. The next fiscal year will see a 0.3-0.5 per cent impact on GDP, “said one of the officials aware of the forecast .With India, even amid a recession, it could not have come at a worse moment. India will be the 10th most impacted economy due to disruptions in the supply chain in China, UNCTAD estimates. Tentative recovery in Asia’s third-largest economy is expected to lose momentum as travel curbs and the closure of malls, theatres and educational institutions, among other measures aimed at stemming the Covid-19 outbreak in India, have resulted in a major decline in economic activity. Loss of trust among buyers and investors are the most obvious indicators of contamination, analysts said. “Covid-19 introduced a supply-side element to the demand issue which is already battled by the Indian economy. That can have a very toxic economic effect. The real question is how long it’ll last,” said Pronab Sen, India’s former chief statistician.

According to industry estimates, the immediate target of the curbs imposed to control COVID-19’s spread was the aviation sector, with up to 75% drop in international bookings and a 20 % drop in domestic bookings. India’s largest domestic carrier IndiGo said last week that the COVID-19’s threat has started to affect bookings that could influence its earnings for the March period. A decrease in corporate earnings could result in lower government corporate tax collections at a time when it set an ambitious target of 11.5 percent growth in corporate tax receipts for 2020-21. For the majority of small and medium-sized businesses shut down during this period, the current situation will affect their employees severely as well as businessmen, self-employed citizens, and so on. Sectors like consumer durables, cars, and pharmaceuticals are going to feel the brunt of supply constraints. Given that recent profits from low international crude oil prices have been absorbed by the exchequer rather than passed on to the citizens of India, it is only fitting that some of these tools be used to relieve the common man’s financial burden in times of crisis of this magnitude. “On top of the expected slowdown in demand, the development will also be hit,” said DK Pant, India Ratings, and Research’s chief economist. Banks would also need to be vigilant of an increase in non-performing assets (NPAs) according to Sabnavis. If the travel and mall’s shutdown lasts for a month or more, a zero-revenue situation will certainly impact loan service capacity, he said.

China, where the corona virus originated, is expected to see a GDP contraction in the first quarter of 2020, the first since 1998 contraction. It is expected that the US and Europe will fall into recession by July, dragging global growth. India may not struggle as much as it has a lower exposure to the global economy; exports of services and products are only one-fifth of the overall economy. Of India’s total imports of $507 billion in FY19, 26 percent of the basket, consisting of iron and steel and inorganic chemicals, are likely to be modestly affected. However, there are five import products that rely heavily on China. They are electrical equipment, electronic devices and equipment, organic materials, plastics, and optical and surgical instruments. Collectively, these products constitute 28 percent of India’s import collection. The sectors that are likely to be worst affected by the potential shutdown in China are housing, transport production, chemical manufacturing, and machinery production. Many restaurants, stores, cinemas, and places of entertainment are also heavily affected by the lack of demand. Unless the Indian government can rapidly, thoroughly, and comprehensively control the outbreak, India’s condition will likely worsen before it gets better.

Governments around the world have already launched $240 billion worth of stimulus packages from the UK to Malaysia, even as central banks ease bank liquidity and capital requirements. This includes $12 billion of the World Bank’s promised support. However, the International Monetary Fund (IMF) has said it will provide up to $50 billion in emergency funds to “support the initial response of developed and developing countries” to the crisis. As the cases continue to rise in India, the country can feel the burden of its insufficient healthcare system and preparedness. As of March 27, 2020, the United States announced financial aid of $174 million to 64 countries, including $2.9 million to India to help them counter the corona virus pandemic. This is in addition to the US reported assistance of $100 million in February. The recently announced aid is part of a more extensive national American response program spanning various departments and agencies, including the Disease Control and Prevention Centre (CDC). The US State Department said it is providing $2.9 million to assist the Indian government in planning laboratory systems, enabling case finding and event-based monitoring, and supporting technical experts for response and preparedness, and more.

On April 1, 2020, India declared that it has set aside the decision not to receive international assistance in the event of calamities and disasters, and will now welcome donations from abroad to the Citizen Assistance and Relief in Emergency Situations Fund (PM CARES) to counter the covid-19 pandemic. In terms of aid, India approved financial donations from the Jack Ma Foundation and the Alibaba Foundation from China. The donation involves protective clothes, masks, respirators and ventilators. On April 3, 2020, the Executive Board of the World Bank approved a fast-track $1 billion India COVID-19 Emergency Response and Health Systems Preparedness Project to help India avoid, identify and respond to the COVID-19 pandemic and improve its preparedness for public health. This is the World Bank’s most significant contribution to India for the health sector ever.

As of now, India accounts globally for a small proportion of COVID-19 incidents. Nevertheless, despite inequalities in India’s healthcare systems and low testing rates, these figures cannot be taken for granted. Both the count of the case and the count of death could rapidly change.

*** The author is currently pursuing Ph.D. as a Junior Research Fellow (JRF) in the Centre for Inner Asian Studies, School of International Studies in Jawaharlal Nehru University (New Delhi). She completed her B.A. (hons) and M.A. in Political Science, Jadavpur University (Kolkata) and her M.Phil. from Centre for Inner Asian Studies, SIS, JNU (New Delhi). ***