Coronavirus Could Knock 1% Off India's GDP: Economist Rathin Roy

NEW DELHI—Likening the health crisis caused by coronavirus to a situation which is prevalent during the time of war, economist Rathin Roy, who was earlier part of Prime Minister Narendra Modi ’s Economic Advisory Council, said, “money cannot be allowed to be a shortcoming” in tiding over the crisis.

In an interview, Roy told HuffPost India, “I think the fiscal response to this crisis has to be similar to fiscal response in war time. It’s a crisis that needs to be tided over and money cannot be allowed to be a shortcoming there. By which I mean if people have to be paid even to stay at home, then we have to find the money to do it.” 

The economist said that this will require “a conversation between the private sector and government and all stakeholders”, and sought to assure that “there are ways of dealing with this” which do not involve “long term imprudence or damage”. 

Roy’s remark, especially about paying people even if they are staying at home, is significant as it speaks to the World Health Organisation’s advice to people who recently visited areas where the virus is spreading and are unwell even with mild symptoms such as headache and slight runny nose, to stay at home.  Importantly, an advisory issued by the Modi government ’s health ministry has suggested mass gatherings be avoided till spread of the virus is checked.

Recently, many private corporations have announced that they are undertaking several measures to help contain the spread of coronavirus, including permitting some employees from their overall workforce to work from home. But as this report points out, India Inc. is far from ready to switch to the ‘work from home’ option for multiple reasons. 

To be sure, Roy, who is also the Director of the National Institute Of Public Finance and Policy, clarified that he was not pushing a particular idea or initiative that the private sector and government could undertake together. “Now what these initiatives will be I cannot comment on because I am not an expert on them. What I would like to say is that I do not see—for a crisis of this nature which has a specific timeframe— financing should or will be a constraint,” he said. 

Significantly, he estimated that, with the world economy seemingly sliding into a recession, more than 1% of India’s Gross Domestic Product may be lost over the next one year.  “Obviously the major issue will be with services. So at the moment you see, what is affected? Trade, hotels and restaurants, travel, transportation and ancillary services. If you look at their contribution to the GDP, I would say, I am only talking in income terms now, I will come to wealth in a minute, that you are looking at an impact of more than 1% on GDP,” he said.  

While appreciating the Modi government ’s “excellent job” thus far in handling the crisis, Roy also flagged the need to expand our “disease control system” by increasing spending on health infrastructure.

Health experts have repeatedly warned that India’s “overburdened” health infrastructure is ill-equipped to handle epidemics like coronavirus . 

Making a case for at least temporarily increasing spending on health infrastructure to address the current crisis, Roy said, “What we need to expand is our disease control system in a specific way. I am not competent to decide, health experts are, whether that should be done by creating that capacity in the public sector or creating that capacity in the private sector or a combination of both. But clearly a response to this will involve increased spending on health infrastructure and that may be temporary in nature.”

Edited excerpts from the interview:

What do you make of the volatility in the stock markets due to the coronavirus?

I am not a stock market expert, I do not know. 

What do you make of the impact of the coronavirus on the Indian economy, broadly speaking?

The impact has already started. A lot of our intermediate inputs are imported from China. Obviously, our production process has been affected very negatively by that. As the focus has shifted to Europe, it has meant that other things are affected. For instance, Jaguar Land Rover, which is an Indian multinational, has been reduced to shipping spare parts in suitcases from China. 

So obviously, what has happened is that there is a huge negative impact on the GDP. Quite apart from the human development impact. The economic impact is going to be non-trivial.  

The fact that the focus has shifted from China to Europe is not going to alleviate the impact much, because Europe is also a major   trading partner and we are, anyways, connected to the supply chain in Europe. 

In a global context, do you feel that the fears about coronavirus accelerating the economy’s slide towards recession are well-founded? 

I think it is already happening. Today, I understand that the Fed has announced almost a trillion dollars of support to the markets. Even Britain has abandoned its fiscal prudence and has committed something like 30 billion pounds worth of spending.  

So the fact that people are opening the tap...obviously people are going to fall sick, that is common sense stuff...if you are going to ask them to isolate, then, since much economic activity involves working cooperatively or in pairs and exchanging goods and services, the global impact is going to be fairly severe. 

It is also going to be severe because this time the virus has affected not just China, but almost the entire OECD countries disproportionately. And obviously, the OECD is the leading edge of the global economy. As economic activity falls there, there’s bound to be a fairly significant global recession over the next one year which can be counteracted by public spending but not entirely; in a very limited way. 

Could you elaborate about what that means for India if the global economy is sliding so much? 

The fact that we have not been successful in becoming a major exporter, so paradoxically to that extent, what you are seeing is that our share of world trade anyway has been declining and therefore that acts as a...not declining, our share of world trade has remained static. And in recent times as you know, both export growth has slowed and import growth has slowed further. 

So other than specific industries where there are tangible supply chain impacts such as, you can see my article for the details, but pharmaceuticals and, let’s say, transformers...few industries like that where we are tied to China and Europe in the supply chain; other than those specific industries, the impact is going to be relatively low on the trade front. Simply because we are not a major trading player. So that has paradoxically saved us. 

Obviously the major issue will be with services. So at the moment you see, what is affected? Trade, hotels and restaurants, travel, transportation and ancillary services. If you look at their contribution to the GDP, I would say, I am only talking in income terms now, I will come to wealth in a minute, that you are looking at an impact of more than 1% on GDP. 

However, paradoxically remember, the activities that we undertake now in combating this pandemic will contribute to GDP also. 

How so?

Well, if you are going to spend more on healthcare, then that is a contribution to GDP. If you are going to ramp up the production of pharmaceuticals, retrovirals, research in vaccines...that sort of thing...that adds to economic activity. So you have to take the net and the net is going to be obviously negative. We just have to take that hit. Whether it will be on top of the already undergoing slowdown or not, I don’t know. 

But it is almost certain, I think, at this stage that I will have to revise my expectation that there will be a growth uptick of any significance, which I was expecting in the second or third quarter of this year. 

Okay. That’s a significant thing to say. Now for the prescription part about what you think the government can do. In your piece you have made the case for reconsidering the overall growth strategy itself. 

Well, that’s a larger point. I was saying what this signals to us is that...export-led growth under globalisation has meant pushing the theory of comparative advantage to its limit such that we have come up now with essentially, you know, highly centralised supply chains, contrary to popular opinion; in the sense that the supply chains, you will have a lot of local competition in China to supply pharmaceutical inputs to India but the location is unipolar.

Similarly, Germany makes very niche products and there is competition in Germany for these niche intermediate products but the location is unipolar. So comparative advantage does not mean that you have competition. Comparative advantage means particular locations develop a permanent advantage over everyone else. That business model we have exploited by creating these highly diversified supply chains. 

So, for example, India exports generic pharmaceuticals to Europe. But imports intermediate products for these generics from China and this model relies on low inventories for everyone to make money. I think that entire model is now going to be upended in the face of such pandemics. I think the risks associated with this model are becoming very apparent. And therefore this adds, in fact, to what I have been saying a long time. That what we need to do in India is not obsess about more logistics. Not just more logistics but actually frugal logistics.  How can we be more efficient while being frugal with logistics? Not how do we increase efficiency by rapidly ramping up our logistics? We have followed that sort of aspiration of ramping up our logistics by following other countries. But the business model is changing. And therefore, there is great opportunity for us to go local and try and see what we can consume in the geographies where they are going to be consumed. Thereby using logistics more frugally. That’s the broader point. 

But I must also say that in terms of reacting to the crisis, the government of India so far has done an excellent job. I think they have been on the ball in terms of the threat appraisal. The restrictions that have been put in place as well as the information that has been given out, and the way we have dealt with border management issues, really has been exemplary. 

We have to understand this is very important for India because, on average, we have one hospital bed for every 1000 population as opposed to 12 in Japan. Even a ramshackle system like the USA, they have three and a half. So we cannot afford to rely on an outbreak of this kind increasing in virulence with a public health system which is very strained. Within that, of course, I am sure that everyone will agree that both the central and state governments will need to ramp up their health spending; and their spending to counteract both economic and social impacts of this virus without regard to issues that normally happen...increase in financing can happen. 

Do you think this then creates an additional reason for expanding the public health system in a significant way because thus far there has been an emphasis on the Aayushman scheme and generally an insurance-driven model. 

What we need to expand is our disease control system in a specific way. I am not competent to decide, health experts are, whether that should be done by creating that capacity in the public sector or creating that capacity in the private sector or a combination of both. But clearly a response to this will involve increased spending on health infrastructure and that may be temporary in nature. 

But it obviously also flags the need to have significant increases in health spending. I am referring to the response to this specific crisis.

I think the fiscal response to this crisis has to be similar to fiscal response in war time. It’s a crisis that needs to be tided over and money cannot be allowed to be a shortcoming there. By which I mean if people have to be paid even to stay at home, then we have to find the money to do it. That involves a conversation between the private sector and government and all stakeholders, and I really hope this conversation starts now. Because there are ways of dealing with this—I can assure you professionally as a fiscal economist—which will not involve long term imprudence or damage. And we should be therefore easily able to find the financing for these initiatives. Now what these initiatives will be I cannot comment on because I am not an expert on them. What I would like to say is that I do not see—for a crisis of this nature which has a specific timeframe— financing should or will be a constraint. 

What do you make of the argument that decline in crude prices could offset the negative hit to external trade and tourism? 

There are some synergies there, for instance with the crude prices declining, if we are able to pass that to our airlines by cutting our taxes on airline fuel without detriment to the exchequer or anybody else, then that would be the situation where we would be able to counteract the negative pressure on profitability that airlines are facing. However, there are limited ways in which the two synergise. Because if I cut the prices of hotel rooms, let’s say by cutting the GST to zero, that is not going to cause an uptick in travel because we are telling people not to travel. 

So the measures to alleviate these industries and sectors that have been hit will need to come later when we have managed to deal with the crisis, if the crisis is in abatement and we actually sort of want people to be travelling and flying again. 

In the interim what we have to do is make sure that these companies get sufficient bridge financing, and attention is paid that they don’t go under. What we don’t want to have now is, because of laissez faire, any wealth destruction. I would not normally say this because these tend to be luxury industries. But even I, who have not been greatly in favour of having growth with luxury industries...when such a black swan event happens, I think we have to put that to one side and deal with this in the context of...these sectors are important employment generators; they add value to the economy; they contribute to GDP growth; and therefore we have to keep them alive and fit for purpose to revive when, you know, the circumstances that are blocking demand to these sectors change. And that is the time when we need to bring in fiscal and other measures to stimulate demand in these sectors. But at this time, we just need to keep them alive, you see, because they are not going to be able to stimulate demand—because that will run counter to the very crisis we are trying to address.  

Yes, it is a health crisis that we are trying to address here. 

Absolutely.