By Yashvardhan Sharma
Dr. Pulapare Balakrishnan is an Indian economist and educationalist. Currently Professor of Economics at Ashoka University and Senior Fellow of IIM Kozhikode, he has, for over twenty-five years, intervened in the public discussion on India's economy through his popular writing. Professor Balakrishnan is a recipient of the Malcolm Adiseshiah Award for Distinguished Contribution to Development Studies (2014). He has served as Country Economist for Ukraine at the World Bank and as a consultant to the International Labor Organization (ILO), Reserve Bank of India (RBI), and United Nations Development Program (UNDP). For more information on Professor Balakrishnan’s works, you may refer to his website- https://www.pulaprebalakrishnan.in/
On the 26th of March 2020, I had the chance to talk with Professor Balakrishnan and discuss the economic impact of Covid-19. The following is an excerpt from the interview:
Question: What shall be the general impact of the Covid-19 on any economy?
Any country which is networked globally, i.e., integrated with the rest of the world would have an immediate impact due to the virus. Essentially imports to the production process would be held up, especially from China, and we shall witness what is known as supply-side disruption.
When production isn’t adequate, the demand seems to be affected. So, supply-demand forces in the economy interact with one another and can take the economy in a downward spiral. When it goes down in this spiral, the country’s output, wages and salaries, and employment shrink. So we can expect unemployment to increase along with hardships for the citizens.
As far as the Balance of Payments is concerned, we don’t know how it’s going to be for the rest of the countries. India has already been doing pretty badly as far as the exports are concerned, which is one reason why the Rupee has depreciated recently.
But the decline in global oil prices may help India to some extent. On top of all that, the 21-day shutdown staring 24th April will have an impact, is going to greatly impact our economy. Our economy which was already slowing will witness an increase in the rate of the economy slowing down. So, India will be substantially impacted by this virus.
Question: What would be the economic impact on the various sectors of our economy?
The non-agricultural sector (secondary and tertiary) will have an immediate impact. I’m not sure if the primary sector and agriculture, in particular, would be largely affected. Although, the Rabi crops which have their time of harvesting in April would be affected, other than that, not a very major effect on the primary sector. So, manufacturing would be severely impacted and have adverse effects due to the spread of Covid-19.
Question: Could you also briefly speak on the effect of the virus on the informal sector (unorganized sector)?
Absolutely, they will be negatively affected, more than the organized sector (formal sector). Especially with the 21-day shutdown, they would have an immediate impact on their employment. The people who work for salaries and wages might face a cut in their salaries too. The labor in the economy, people who work on daily wages, would completely lose their work and face serious effects too.
Question: What do you think of the shutdown proposed by the government? How do you think the economy would function in this period?
Well, I guess whether we should have a lockdown or not is not something that I as an economist am in a great position to speak on since it was based on medical concerns. There is a shutdown happening in many parts of the world, so India is not unique in proposing a shutdown. China may have controlled the spread of the virus because of the shutdown, so shutting it down due to medical concerns was probably advisable.
If you ask me how the economy would function during this period, then the economy would come to a halt for the most part. Only the part of the economy that functions online would function in this period.
Question: Since the Government has been testing Covid-19 for free in government-run hospitals and has also set a price ceiling for the testing in private hospitals. How essential is the role of the public sector in the healthcare sector of our country?
The private sector definitely has an important part to play in the health care of the economy, but in times like these, its important for the public sector to step up. The way to deal with such a crisis is to scale up the testing for the virus, so general scaling of the public sector is exactly what we need at this point.
It does make a lot of sense to make the testing free in government-run hospitals considering the scale of the pandemic. All of this is funded by the government and included in their economic response to the crisis at hand. Since the government is laying out money and using resources, all this would be included when we assess the government’s response to this crisis at hand.
Question: As we’re witnessing, the stock markets are already plummeting. So, what would be the future of the financial markets?
I have no particular answer to that, I don’t really know. The textbook response to a plummeting stock market would be lowering the central bank rates. At the moment, the Reserve Bank of India should be lowering the rates of interest. So, the Central Bank rates would be lowered, and the individuals would be willing to tolerate lower returns to stock market assets.
So that’s what, for instance, was done in the United States during the Global Financial Crisis (2007-08).
Question: As we were witnessing, the GDP growth rate of our country was already decreasing and the overall demand was decreasing in the economy, possibly due to the demonization in 2016. So, what could the government do to keep the cashflows from being depleted in the economy amidst this crisis?
Well, that is exactly what the economic stimulus package is all about. The Government has already spent Rs. 15,000 crores on the health infrastructure including the required testing kits, but the economic stimulus package would have to be much more than this to revive the slowing Indian economy.
Question: In a post-coronavirus time, after Covid-19 has been controlled, what could be the most effective measures for the recovery of the Indian economy and the economies around the world?
Well, it’s really different for India and say, an advanced European country.
In India, it’s clear that the role of the public sector should’ve been much greater and planned out after the economic reforms in 1991. There has been a general distrust among the people concerning the public sector. There has to be much greater involvement of the public sector, not necessarily spending, but public involvement in health and education and certainly much greater creation of public capital in general in the economy.
At the same time, one must realize that the public sector is a major creator of wealth, it has to take away the regulations and taxes with which it has been terrorizing the private sector in the past 3-4 years. The tax and the economic bureaucracy, that the government’s machinery concerning economic activities seems to have run a mockery.
This has really been holding back investments of the public. This has been a major failure for the Narendra Modi government, for it has allowed this to have happened.
Now, what exact views that the ruling sections of the BJP party hold for the economic activities is something we don’t really know, though they’re majorly authoritarian. This regulatory overdrive is what you should not have in an economy.
While we do believe that the public sector is very important, there is no way that the public sector can carry the Indian economy. It just doesn’t have that kind of clout.
The tax authorities seem to have run a mock and it’s going to dampen the investments in the economy. At the same time, there is a private sector that has been malfunctioning and the Yes Bank case is an instance of that.
Thus, you need a balance of both sides between the private and public sectors. Sometimes you need smart and maybe sometimes tough regulations to deal with the Yes Bank kind of situation. You also don’t want the tax bureaucracy to run a mock to conduct itself indirectly.
Question: Is there any message that you would like to extend to the young readers, consisting of high school and college students, who are reading this article?
Well, I would like to encourage them to start reading the kind of more general writing of John Maynard Keynes. There’s a great collection of his essays in persuasion, that’s something that they could read. It features things that he has to say about the economic policies during the time of the Great Depression. So, that could be a good read for those interested in the study of economics.