Pandemic Crisis 2020: Lessons and reforms
- Lockdown means shutting down part of the economy. If you shut 60% of the economy for a month/quarter/year, growth will be < -60% for month/quarter/year! it also means profits & wages will be nil in the part of the economy which is shut down. The critical problem for those who are in lockdown economy is survival and monetary & fiscal policy has to address this issue. The definition of essential goods & services was expanded to include communication & broadcasting, besides health & govt services.
- Pandemic means Contagion. Surfaces were initially thought to be the main transmission media, but we now know that stale air is the most important transmission media for the SARS corona virus 2. Therefore, "contact services", which involve presence of many strangers in closed spaces are the worst spreaders of the virus from infected people. The problem is heightened public bathrooms. Thus virus quality filters, UV-C virus killers and 100% vaccination are the only ways to revive Contact services, while the pandemic lasts.
- Transition from Lockdown to Normalcy, for other goods & services (ex Contact services), involves logistics disruptions & fragmentation of markets. Thus there can simultaneously be excess supply and excess demand in different geographies which were previously integrated. Because of massive temporary shift in demand patterns can leave supply chains unable to supply new sources of demand, while demand from traditional sources is less than supply, resulting in rise in consumer prices and decline in producer prices! Well targeted monetary, credit and fiscal policies are required during both lockdown and transition.
- Once normalcy is restored, policies for re-accelerating growth becomes central. Given lags in introducing policy & institutional reform, the process is best started during the transition, so that it's in place when most of the economy(ex contact services ) has normalized. There is another advantage to introducing reforms during the lockdown.There are no short term negative effects as lockdown economy can't get any worse. Even during transition, any additional disruption is marginal.
Pandemic Crisis and Reform
As an economist who has been professionally involved in every economic crisis since 1987, I started thinking about policy implications from the moment the Pandemic hit the World and India. The slogan that we have all become familiar with during the 1991 BOP crisis, flashed through my mind, " A, crisis would be a terrible thing to waste," Looking back at 2020, it is obviously been a tragic and debilitating year for millions of people in India and the World. But the silver lining is that, the Govt of India has used this period to undertake far reaching reforms, which merit the title of big bang reforms, which will put the economy back on the fast growth track from FY22, It is useful to list the reforms, most of which have taken place since September 2019:
Big Bang Reforms
- Natural Resource (coal, spectrum, oil, minerals) Sale Through Auctions
- India Bankruptcy Code: IBC
- Goods & Services Tax: GST (incomplete)
- Monetary Policy Committee
- DBT/Aadhar Inclusive Bank accounts
- Digital India, FinTech, E-governance eg GEM, PIT seeding & audit (Incomplete eg Bharat net)
- Investment Competition into Govt monopoly through Pvt Entry (Coal, Defence; Atomic energy, Space)
- Corporate Income tax (CIT)
- Education policy (foreign competition), including medical education
- Strategic Industry & Services Policy Framework (Privatization of CPSEs, PSUs, PSB)
- Agriculture Contracts act, APMC & ECA
- Labor Code (29 =>4)
- Electricity distribution, correction of excess fees/pricing for industry (in process)
- GST simplification (rates, exemptions, Cess)
- Direct Tax Code (SMEs) DTC => MSME, Start ups
- Direct Cash Transfer: DCT through mobile wallet (<=DBT)
- Skills: Apprenticeship Act; Rural self employed, e-skilling platform.
- External /EXIM simplification & EoDB; SEZ digitized self-filing & random post filing audit; FTAs (SCRI) with EU, USA;
- Financial Sector reform (continuing process)
- EoDB(States >60%) : Decriminalization & Reduction of regulatory compliance's, Digital filing and random post-audit of all remaining regulations. Experiment In SEZs, UTs (including land & real estate).
- States: Land(Govt monopoly of land; land use regulations; cadastral survey, transfer of title-EODB )
Despite an unfavorable external environment, these reforms if taken to logical conclusion, will put the economy back on the fast growth path of 7-8% average growth, during next decade.