Full Marks for Lockdown But Modi’s Economic Fallout Plans Just Don’t Make the Grade
The first set of relief measures will do nothing to avert the catastrophe that has befallen millions of migrant workers in Indian cities. And as they head home to their villages, some will carry the coronavirus with them.
Daily wage labourers, now out of work, are walking back to their villages which are at least 200 km away. Photo: Shome Basu/The Wire
COVID-19 has reminded the world of its essential interdependence and need for unity of purpose. It has done the same for India. For the first time since the Bangladesh war, the entire country has set aside its bitter and divided politics and reacted as one to the challenge it faces. The prime minister, who announced a three-week lockdown of the entire country on March 24, was not the eternally grandstanding politician we have become familiar with in the past six years, but a sober leader taking an incredibly difficult decision, announcing exemptions that would minimise the hardship being imposed on the people, and asking for their co-operation.
There is little doubt that he will receive it. But the economic cost of the lockdown will be high, and could become prohibitive if it has to be extended. Unfortunately, the first ‘relief measures’ announced by finance minister Nirmala Sitharaman show that the government has little understanding of the enormity, or even the very nature, of the task it is facing.
The key feature of the lockdown is that it has broken the vertical and horizontal transport links that are the warp and weft of the market economy. With that, unless immediate measure are taken to prevent it, first consumption, and then production, will grind to a halt. As it gets prolonged, the market economy itself will wither away.
The list of exemptions announced by the government after Modi’s speech did not go beyond the need to minimise the immediate impact of the lockdown. Access to food and medical shops, and essential services, including the home delivery of food and medicine, have been exempted. But these make up only a fraction of the total economy. And even here, the ingredients of production have to be assembled and the finished product transported to the consumer. Neither can be done, especially in India, without sustained human interaction. As for the rest of the economy – its agriculture, its industry and its vast services sector – not one of the ‘ten big announcements’ made by Sitharaman today even touch upon this challenge.
The finance minister’s package
I will not dwell on these in detail, because there are more urgent issues to raise and discuss. But suffice it to say that
- four of the 10 provide relief to the rural population when COVID-19 and its impact is centred in the cities;
- one, that is by far the most important, provides essential insurance protection to two million health workers but involves no immediate expenditure;
- two offer direct cash and food transfers to the poor but again make no distinction between the urban poor, who are under lockdown and the rural poor who are not;
- The remaining three are intended to benefit workers in the organised sector whose jobs are not threatened and who already have all the access they need to essential services through primary health centres and the kendriya bhandars and ration shops.
The common feature of all the 10 measures is a continuation of the top down handout system of distributing benefits that has been the bane of the poor since the very first years of India’s self government and is still prone to leaks and diversion.
In the urban areas, the lockdown has completed the disempowerment of the already desperately vulnerable poor. Small- and medium-sized owner-managed enterprises are not only dismissing their workers but throwing them out of the accommodation they have provided them on the pretext that their presence is a health hazard to the family. Grocery and medicine shops that do not need to close have opted not to open because the reduced sales no longer make it worth their while to keep them open. And far too many of them are laying off their staff, at least till the lockdown is over.
No modern economy can withstand such disruption for very long. When a factory, a hotel, an airline, a bus company, or a shop downs its shutters it does not cease to incur costs. Interest and amortisation payments on loans continue to accumulate; buildings and machinery have to be maintained; rents on shops have to be paid, costs incurred on electricity have to be met. And in the organised sector, few employers will be willing to lay off their key workers even temporarily, without offering them some compensation to tide them over the period of shut down.
If this is to be minimised the government must meet these costs during the period of the lockdown. But only one of the ten measures that Sitharaman announced has even touched upon this need. And what it has offered – the payment of three months of employer and employees’ provident fund payments to companies with up to 100 employees in which 90% of the staff is paid less than Rs 15,000 per month – is simply pathetic. In most enterprises, fixed costs make up 30 to 40% of the total cost. The wage bill, by contrast almost never goes beyond 30% and is usually lower. The combined EPF contributions come to a fifth, at most, of this 30%. Thus all that the government has offered is to meet one fifth to one-seventh of the fixed costs of a small fraction of the modern economy.
Since they are no longer able to earn, most of these enterprises will start cutting costs wherever possible. The only area in which they can do so is labour. And here the axe has already begun to fall most dramatically in the unorganised sector. With enterprises forced to close, work stopped, and the government not even aware of the need to keep them going if the economy is to restart smoothly after the lockdown, labour has become redundant anyway. So why not throw your workers out and let them fend for themselves? And with 94% of India’s 500 million-plus non-agricultural labour force belonging to the unorganised sector, with no contracts and no union to protect them, layoffs are easy and have already begun.
Crisis for footloose labour
A steel fabrication plant in Unnao, UP, has simply thrown its workers out of the accommodation it had given them and told them to fend for themselves. With nowhere to stay and little money, they are walking home in the blazing sun to towns and villages as far as 80 kms away. On the very morning before the lockdown, The Hindu had carried a photograph of migrant workers in Chennai waiting at the central railway station for a train to take them home. One can only wonder where they are now and how completely abandoned they must be feeling.
According to the 2011 census, 139 million, or more than a third of India’s labour force, worked in places far away from home. Of these, the Economic Survey of 2017 reported, about 9 million were working in other states, from where they can only go home by train or bus. These nine million must be the government’s first responsibility.
Keeping them safe is not an act of charity. If even one in ten of the country’s 139 million migrant workers gets home, and only one in a thousand of them is a carrier of the virus, then India’s villages will be inundated with nearly 14,000 new focal points for its spread. If that happens we will learn the true meaning of that much overused word, pandemic.
India is not China
The government’s response to the threat has so far been pathetic, but this is not because it does not care. So far, all of it has been predicated on the unspoken assumption that the pandemic can be brought under control in three weeks. But this is wishful thinking. China is the only country that has succeeded in stopping the spread of the virus through a lockdown so far. But India is not China.
India has more than 600,000 villages, and its central and state governments have little or no knowledge of what is happening in most of them. By contrast, the Chinese Communist Party is present, and has a committee, in every single village of the country. It is able to have these because it has 70 million members. This is four times the combined strength of the central and state government bureaucracies in India, and these 70 million function in a country where accountability to higher authority is close to complete.
Despite having such resources, China imposed a total lockdown only in Hubei province, where COVID-19 started. And it had to keep it going for three months – not three weeks – to bring the virus under control. In India, once the virus reaches the villages only the extreme heat of summer will be able to check its further spread and that effect, while likely, cannot be taken for granted.
The first thing that the Central and all state governments must, therefore, do is to make sure the virus remains confined as far as possible to the 80 cities which are under total lockdown today. This will require a marshalling of all the power and organisational capability of the state. The surest and fastest way will be to call out the army and put as large a part of the paramilitary forces as possible at the disposal of the state governments. Two brigades of the army are already deputed to come to the aid of civilian authority in every state. While this provision was intended to help them maintain order in a crisis that had gone beyond civilian control, it can, and should, be used to harness their organisational skills and medical capabilities to cope with the present health emergency. Indeed, why Prime Minister Modi did not invoke its aid on March 24th itself is one of the puzzling features of his address to the nation that evening.
The armed forces and Central paramilitary forces have the logistical and medical capability to set up and administer relief camps in open areas – such as parks, sports grounds, stadia, and the outskirts of the cities, provide them with food and skilled medical care, and enforce social segregation within them through the period of quarantine. But can they handle even the 9 million out-of- state migrants who face total abandonment today, let alone the 130 million in-state ones?
The solution to this longer term problem lies in the Indian state making the employers of unorganised labour responsible for its safety and security during this time of crisis. It can –indeed, must – do this by instituting an appropriate set of incentives and imposing a corresponding set of penalties to make sure that they do so.
The incentive should be that, based upon their previous year’s tax returns, or in the case of household enterprises their verified accounts, the central and state governments will meet all of their fixed and the labour portion of their variable costs provided they continue to house and feed their migrant workers, and to pay at least half of the salaries of their local employees. This will not only save the lives of the migrants and prevent the spread of COVID-19 to the villages, but prevent the economic crash that is bound to follow the sudden cessation of economic activity in the country.
The penalty for not doing so, or evading the commitments they make when receiving government support must be prison.
Loosen fiscal and monetary policies
Given India’s dismal record in the management of its economy during the past eight years, and its surging fiscal deficit today, this move is likely to be opposed by bean counters in the RBI and the Ministry of Finance. But the government must, for once, overrule them – because further bean counting will complete the ruin that was already staring the Indian economy in the face before the coronavirus arrived.
Nirmala Sitharaman has now to listen to the real macro-economists in the system – like Pranab Sen, Rathin Roy, Rajiv Kumar, and her own chief economic adviser – who can explain the vast difference between increasing the money supply in a healthy economy in normal times and doing so when there has been a sudden collapse of demand caused by an external calamity. The first increases consumption and can trigger inflation. The second sustains present consumption in order to protect future production and growth. Strictly speaking therefore, it is not consumption but an investment whose returns will come in the near future.
Economists all over the world have warned their governments that the recession which lockdowns without pump priming will trigger could prove as costly as the pandemic, even in terms of human life. In the US, they have warned against a “Rolling Recession”: first a collapse of demand as people cease to buy; then a sharp drop in production as retailers postpone new ordering; then layoffs of workers and a further shrinkage of demand.
In New Zealand, which imposed a 4-week total lockdown only a day ahead of India, they have predicted a rise in the unemployment rate from its current 4% to between 15 and 30% .
Even in Italy, the worst affected European country, Edoardo Campanella, an economist at UniCredit Bank in Milan, warned against too drastic a response as recently as last Tuesday, saying “The global health crisis is rapidly morphing into a global recession, as there is a clear tension between preventing infections and ruining the economy.”
Learn from the world
To combat this impending recession, more and more countries are returning to Keynesian pump priming to sustain demand till the COVID-19 crisis is over. Some idea of how much pump priming will be needed may be had from the bill President Trump has introduced in the US Congress. It is for contra-cyclical spending of $ 2 trillion in the next few months. This is ten percent of the GDP of the richest nation in the world. Trump has done this in a nation (and as the leader of a party) that is wedded to neo-liberal economics because both have gained the most from forcing neoliberal doctrines upon the rest of the world. He has done this not to win an election but because US unemployment benefit claimants have surged in the wake of its lockdown from 211,000 to 3.28 million. Other industrialised country governments are following suit regardless of their differing political perspectives.
Critics of the Modi government are right when they point out that it should have thought through all this, before announcing the lockdown. But we do not live in an ideal world. Decisions have to be taken under pressure, and while Prime Minister Modi can be accused of excessive haste on other occasions, this is not one of them. However, now that the decision has been taken, the government must rely upon common sense and intuition and not go through the rigmarole of setting up “multi-layered task forces” and allowing them to come up with a “consensus-based policy”. For by the time they do so, desperate migrants who have not either starved or been felled by heat as they trek hopelessly homewards, will have begun to reach their villages. After that, only the extreme heat of the summer might be able to help India avoid the pandemic that will follow. And that is not yet a given.
