Time to think big

Any emergency package must be carefully targeted

Across the world, governments have begun to prepare for the economic fallout of the disruption and lockdown that will come in the wake of the fight against COVID-19. In the United States, which has in recent days become the major source of concern because of the continued exponential growth of infections and a health care system with more holes than Europe’s, the scale of the proposed package is extraordinary. The director of President Donald Trump’s National Economic Council, Larry Kudlow, has said that “phase III” of the package, which is still under discussion, might exceed the original $1 trillion bill and approach $2 trillion — it may come in at 10 per cent of the US’ gross domestic product, in fact.

Other countries have responded in varying ways. The European Central Bank has moved to support bank lending in the euro zone, including by loosening capital requirements and opening up its own long-term lending to banks. Various individual European governments have also stepped in; Germany, where Chancellor Angela Merkel has gone into self-quarantine after being exposed to the coronavirus through her doctor, has authorised its main state-controlled bank to lend more than $600 billion to companies. A package just over half that size for small businesses is being planned in France. Other countries have seen success with a more modest but targeted approach. South Korea’s has received special attention, in that it costs under $10 billion but is aimed at the most vulnerable: Small businesses, and workers laid off. 

India has moved late, in spite of the fact that the likely fallout of coronavirus was plainly obvious weeks ago. Nor is it thinking big enough, given the scale of the economic damage that needs to be tackled, primarily to address household and corporate cash flow disruption. Former finance minister P Chidambaram has suggested a Rs 5 trillion package, which is about 2.5 per cent of GDP. But that should be the minimum. The package, of course, has to be carefully designed in such a way that it does not turn into subsidies for those who do not need them as much — which appears to be the error that the US is making, and why its large stimulus is having trouble passing through Congress. India, which has had the demonetisation experience to show what the most vulnerable sections of the economy are, must move to ensure that it is the informal sector, wage labourers, and so on who are not excluded from the design of any counter-cyclical package.

The government of China has not announced any huge fiscal stimulus of the sort it did in 2008, but has protected some formal businesses by getting banks to extend tenures of loans, and by managing the suspension of other required payments such as rents. The government must look into these mechanisms for protecting the formal sector, while ensuring that the informal sector and the vulnerable classes are the target for the majority of spending. The government not only needs to think big but its plan should be flexible as the nature and scale of intervention can change rapidly.