The way forward | The Indian express

Context: Due to COVID-19, the government has initially announced lockdown for fifteen days. But, the government has extended lockdown till 3 May and removed restrictions on certain activities after April 20.

Economic implications of lockdown and its partial removal:

• Economic implications of lock down: The lockdown will lead to economic contraction as 33-days long lockdown from 23 April to 3 May will cause loss of 23 working days. The economy will not immediately return to the normal state even after complete removal of lockdown. The revival of economy from negative results of lockdown will take long time as lockdown has damaged jobs and income in informal sector of economy. The loss of jobs and income may negatively impact spending and expenditure by public.
• Economic implications of partial removal of lockdown: Partial removal of lockdown by government after April 20 may not lead to positive consequences as lockdown has caused disruption in production and supply of goods and services. Lockdown has also caused shortages of labour. At the same time, consumer demand has also declined due to the loss of jobs and income.

Neither partial removal nor complete removal of lockdown will have positive implications for economy. The state of economy will depend on taking of risk by businesses and banks, existence of social distancing norms in future and policy response of government.

Criticism of government’s policy response:  RBI has taken many steps to help economy in overcoming negative economic implications of lockdown. But, the government’s emphasis has been on strict enforcement of lockdown. It has taken only limited steps to provide social security to the public. It has announced Pradhan Mantri Garib Kalyan Yojana package 2020 to distribute food grains and cash to vulnerable people.  However, these steps are not sufficient. Due to lockdown, economic activity, investment and exports will remain low. This will keep economy dependent on government expenditure and household consumption. But, household consumption will itself decline due to loss of jobs and income. Hence, government needs to support economy through fiscal policy.

Read Opportunity in the Crisis- The Indian Express Editorial Analysis

Fiscal concerns and strategy during COVID-19 lockdown: It is clear that government needs to support economy through fiscal policy. However, government also needs to deal with fiscal concerns as lockdown has caused decline in growth and tax revenues of the government. Decline in growth and tax revenues means that if the government further increases expenditure, fiscal deficit will increase. Since the economy seriously needs government support and government faces fiscal concerns, government needs to increase its expenditure strategically. Government spending and support should be focussed on sectors like MSMEs, exports and services such as airlines and hotels as they are most affected by COVID-19 lockdown and economic slowdown.

Way forward:

If government fails to provide fiscal support to economy, more jobs will be lost and businesses will fail. This will further hurt the economic and financial system of India and the economic recovery after lockdown will be more difficult. So, government should frame a strategy for supporting economy during and after the lockdown. Along with fiscal strategy, the government’s policy response should be based on coordinated action at the level of centre and states. This will help India in successfully dealing with public health crisis caused by COVID-19 and coronavirus.