The post “Convexity of Recovery” discussed the increasing costs that accompany the recovery in a post disaster package. This is perhaps due to the convexity nature of the recovery curve. The post “Macroeconomics of Pandemics” discussed the peculiar nature of the dynamic interactions of Aggregate Demand and Aggregate Supply in the uncertain context of pandemic spread and its externalities. These serve as a backdrop to a discussion on the packages announced in two parts first with a fiscal component by the Finance Minister and second the monetary component announced by the Governor of RBI.
Indubitably, there is uncertainty over the future direction. There is all around ambiguity about the directions of the pandemic and the accompanying severity of the same. The governments are preparing on the worst case scenario and the medical infrastructure that is being created at a sort of war-footing. Yet the severity of the strike might make the challenges overwhelming. There is no guarantee at what point the Wuhan virus will stop. To add will be the impact in treatment of other disease and disorders. There might be emergencies which might not get preference or priorities since the focus would be on the Wuhan virus treatment. Certain surgeries might be postponed but many might not be. Secondly with the healthcare workers likely getting affected, their support will no longer be available for the other medical services. The objective everywhere seems to be flattening the curve which itself might not be possible in the mid to long run.
The prospective spread of Chinese virus might affect productivity since employees are likely to be sick and thus not in full productive strength. Similarly, the loss of work and sickness might result in decline in consumption of non-essential goods. Therefore there is uncertainty over the fiscal and monetary policy makers as they confront the economic challenges of the pandemic.
The government package was addressing the immediate. The package for recovery can wait till the Wuhan virus subsides. Therefore government was targeting the bottom of the pyramid citizens. From providing free cylinders to free cereals and pulses and other essentials besides providing additional essentials at highly subsidized prices is essentially to take care of their immediate needs. They are likely to be out of work and thus not in position to generate income to consume. Therefore the package was designed for alleviation of the same. A product of the same would be thus a need to engage in cash transfers through direct benefit transfer mechanism. For the agricultural sector, the transfer of Rs. 2000/- as part of PM Kisan Yojana will be expedited. Besides, Jan Dhan accounts for women will be paid Rs. 500/- for three months. Loan facilities have been extended to Self Help Groups. In a similar vein, there is an increase in MNREGA wages. The purpose of these objectives is to ensure some cash in the hands of the people irrespective of the quantum besides taking care of their essentials.
The monetary package again in uncertainty has to factor in multiple factors. The bank liquidity has to be expanded to accommodate fiscal measures. Thus the repo rate is reduced along with reverse repo. The reduction might impact inflationary calculations but in uncertain times and not lead indicator for future directions or turbulence, conventional inflation-interest linkages might turn obsolete and hence a welcome move to detach the policy for time being from inflation targeting considerations. The cash crunch both with firms and households have to be factored in the RBI calculations. It is evident in their decisions. Firstly, there is moratorium in business loans on working capital etc. The firms especially the smaller and medium ones will face severe cash crunch and will not be in a position to pay their loans. They need a relief from the same. The Basel classification of loans etc. if implemented might turn disastrous for these firms. Hence RBI talks about offering the relief.
To the households, the possibility of unemployment staring at them will change their purchase behaviour. The focus will be on essentials and not on the non-essential or luxury items. Further their cash crunch will constrain them in meeting their liability obligations. Therefore it is without doubt that it is needed to give them some relief till such time they revive their fortunes.
Moreover, the objective is to ensure survival for which no price paid is sufficient. The government and the RBI have to disregard the fiscal discipline at the moment. The priority must be on spending on health care and ensuring the pandemic is arrested and the spread halted. By many accounts, the current measures on the shutdown are about buying time.
There is serious economic disruption and thus a challenge is to ensure the business runs smoothly at the stage. With the country shutting down barring the essentials, the need for succour becomes all the more pressing. There is no precedent on what fiscal or monetary policy would work in these circumstances. The impact on GDP and growth and the severity of the impact is still untested. Remedies are unknown. Therefore good number of policy measures will aim at subsistence and in some cases blind experiments hoping something would hit.
There are uncertain times and thus any policy before being examined must factor in the same. In hindsight the post-mortem might reveal many good or bad things. Yet irrespective of right or wrong, it is the speed that counts. The learning curve would be lead the policy makers and the general public alike into the future. No one is sure of the shutdown will conquer the pandemic but there seems to be little choice. The outcomes of policies in uncertain times will remain uncertain in their outcomes.
Thoughts on Theory and Practice 