The Pandemic Shock: Impacts and Measures

Shreyas Bharule, Ph.D.

7th May 2020. Tokyo, Japan.

Talking about the economy, stock markets around the world have been falling, and, in the US, oil prices have plunged in negative. In just a little over a month, millions have become unemployed, and companies are still laying people off. As COVID-19 spreads, the global economy is shutting down. Though we have lived through major economic shocks, the economic slowdown due to lockdowns to contain the spread of COVID-19 is an unprecedented event. Here is a pandemic that has spread swiftly, and its severity has shocked the global economy. World over, it has created a two-fold crisis: first, a health crisis and second, an economic crisis. In the past few months, one thing is clear – if we don't contain the spread of the virus, the impacts would be much severe. This article explains globally adopted measures, discusses how is COVID-19, causing a recession? And what is the Indian Government doing to overcome the economic crisis?

What do you mean by 'flatten the curve' & How is 'stay at home' helping anyway?

Under the healthcare system, each country has a certain number of hospitals with specific specialties and capacities to provide healthcare to the country's population. The aggregate of the intake capacity of all hospitals put together is termed as healthcare system capacity. However, the capacity varies with the needs of the patients and the availability of certain essential services and equipment. In the case of COVID-19, the virus causes respiratory ailments, and hospitals need special equipment such as ventilators to help infected patients.

So, what does 'flatten the curve' mean? The spread of an infectious disease such as the COVID-19 needs to halt completely. However, slowing it down is critical too. If we do not contain the spread by protective measures such as social distancing, lockdowns, and quarantine, there will be a steep surge in the number of infected cases, and this will put much pressure on the complete healthcare system. Along with the service to patients, a hospital also has its responsibility - safety of its doctors, nurses, and other staff. Protective measures delay the spread of the disease, as shown by the lower curve. Flattening the curve with protective measures allows doctors, health officials, manufacturers of vaccine and protective gear, and all others to prepare, analyze, and make suitable decisions to stop the disease spread.

Why is COVID-19 causing a recession?

Countries are trying to 'flatten the curve' by locking down and enforcing social distancing, but everything has consequences. The irony of the situation is such that- The more aggressively we mitigate the spread of the virus to save lives, the deeper the recession will be. All economies work on the principle of 'supply' and 'demand' of goods and services. Preventive measures have emerged shocked, thereby disrupting both aspects of the principle. First, the lockdown of factories, businesses are shut with staff working from home, and more importantly, borders at the town, city, and neighborhood levels are sealed, thus creating a supply shock. This, in turn, has triggered a demand shock, as industries stopped producing goods, they wouldn't need raw materials, businesses don't need additional staff. Even if people could procure goods, it is a challenge to receive them, as borders are sealed because of a lockdown.

A lockdown has severe implications on the economy. One of the first countries to enforce a lockdown was China, where the virus originated in late 2019. In today's global economy, China serves the world as a manufacturing base and, over time, has emerged as - 'the factory to the world'. Locking down the manufacturing base of the world has developed a severe shock to the global economy. Manufacturing for the world requires procurement of several raw materials and services from the world over, and to reap economic benefits. It is essential to ship the finished products too. However, with the lockdown, international borders have been shut paralyzing global trade of goods and services. Thus, creating a global recession.

India was set to emerge out of a month-long lockdown on 3rd May. However, Several states opted for an extension. The earliest date to resume 'business-as-usual' seems to be 17th May 2020. Locking down 130 billion people for over a month and a half, where over 120 million are migrant workers who earn daily wages, which means severe impacts on the country's economy. Several of the migrant workers have lost their jobs. Such a surge in unemployment rates is alarming indicators of a recession. In the past few weeks, several unemployed migrant workers were also spotted walking to their hometowns, located hundreds of kilometers away from their former workplace. Such mass migration may accelerate the spread of the disease and is a potential threat to the lives of several. 

How long is this recession going to last?

In technical terms, an economy enters recession after two consecutive quarters (six months in a financial year) of negative GDP growth. However, the data for the first quarter will be out at the end of April and the second quarter in early July. In the absence of data, usually, one of the first places that signal a recession is the job market. In recent weeks, global service industries such as hotels, airlines, the retail and commercial sector had to lay-off several employees as the businesses have stopped, and revenues are almost zero.

The COVID-19 pandemic has planted an unprecedented case in the history of global economics. The pandemic has left us with no resort but a panacea where to save the economy, the country needs to lock itself down first! A major point to be understood here is the majority of a country's economy depends on consumer spending. For instance, consumer spending amounts to almost 2/3rd of the total US economy. Moreover, we are not only shutting down factories, but we are also asking the 'consumers' to stay at home. In the state of a lockdown, a consumer is not spending on real estate property, consumer goods, and automobiles but is spending the most on 'what is essential' that too only if the essential products and commodities are available.

In any case, forecasting the length and impacts of a recession is extremely difficult. However, when lockdown ends, the course of the economy will be determined by how soon the unemployed can find jobs. Also, whether the financial aid and relief provided by the governments will be enough for a speedy recovery. The bigger question is how quickly the consumers will go back to spending and continue their 'normal' activities after the virus is contained.

How will things get back to normal? What is my government doing for me?

With its adverse economic impacts, the COVID-19 pandemic has prompted global responses from international organizations and governments. Around the world, governments are mobilizing financial relief packages and enforcing policies that are essential to reach economic normalcy and inject stability in society.

In India, on 26th March, the central government announced INR 1.85 trillion (approx. USD 25 billion) relief package aimed at ensuring that families belonging to poor and lower to middle-income groups can carry out their daily lives smoothly under the lockdown. Apart from this centrally allocated amount, states have individually allocated relief funds. The Government of India declared the COVID-19 pandemic as a 'notified disaster' under the Disaster Management Act, 2005, enabling states to spend a more substantial part of funds from the State Disaster Response Fund (SDRF) to fight the virus. To strengthen the surveillance and control measures against the COVID-19 outbreak, States have been making fund allocations as per their requirements. The central government's relief package focuses on people in low- and middle-income groups. Significant provisions in the central government relief package include:

-        Around 800 million poor people (bearing ration card) will get 5 kg wheat or rice and 1 kg of preferred pulses for free every month for the next three months,

-        Over 200 million women Jan Dhan account holders to receive INR 500 per month for the next three months,

-        Increase in wage for workers engaged in the rural public employment programme (MNREGA) to INR 202 a day from INR 182 is envisioned to benefit 136.2 million families,

-        Ex-gratia of INR 1,000 to 30 million poor senior citizens, poor widows and poor disabled,

-        Central Government has given orders to State Governments to use Building and Construction Workers Welfare Fund to provide relief to Construction Workers.

Apart from this particular focus is drawn on the relaxation of terms in taxation:

-        On 8th April, the central government announced that all pending income tax refunds up to INR 500,000 and GST/custom refunds are to be issued immediately.

-        On 24th March, the deadline for filing returns of goods and services tax for March, April, and May has been extended till 30th June. For companies with less than INR 50 million turnover, no interest, penalty, or a late fee will be charged on delayed GST return filing. For companies with turnover of over INR 50 million, no late fee and penalty will be charged on late GST return filing; interest rate was reduced to 9%.

-        On 26th March, the central government announced it will front-load INR 2,000 paid to farmers in the first week of April under existing PM Kisan Yojana to benefit 87 million farmers.

(The provisions are summarised from OECD Country Policy Tracker (Source: http://www.oecd.org/coronavirus/en/)

In summary, the COVID-19 pandemic has shown us how humanity functions as a collective ecology and how connected we really are. But as the human costs of the pandemic continues to mount, policymakers, governments, and economists say that the focus, for now, should be on providing relief to workers and to companies so that the economy can bounce back. However, we need to understand, we really cannot compare the current situation with other recessions in history. The worst of all acts would be to compare which country did better and who provided the most massive relief package. We need to respect all forms of occupation as the present situation is hitting all of humanity on so many different sides and could mutate into something else. The whole point remains is - we must survive this together and come out healthy on the other side!

References

1. OECD: https://www.oecd.org/coronavirus/en/
2. Giordano, P., How Contagion Works: ISBN 9780593342985
3. HuffPost Coronavirus: https://www.huffpost.com/feature/coronavirus