Expert Speak India Matters
Published on Apr 01, 2020
A case for a COVID19 economic response task force The Covid 19 situation in India is still emerging and it is difficult to predict the peak. What is clear though is that the impact on the already slowing India economy would be significant. As per Dun & Bradstreet's latest Economy Forecast, the probability of countries entering into recession and companies going bankrupt has increased and India is not likely to "remain decoupled" from the global meltdown. British brokerage Barclays has pegged the cost of the lockdown at $120 billion (approximately INR 9 lakh crore) or 4 percent of the GDP. International rating agency, Moody has sharply cut India’s growth forecast for the 2020 calendar to 2.5% from 5.3% estimated less than a fortnight ago. Business across sectors have already taken a big hit and it has been particularly distressing for MSME’s. Given the situation, financial support to severely disrupted sectors and infusing liquidity in the system to prevent a meltdown and contagion in the financial markets is the immediate priority of the government. The Finance Minister has already announced a INR 1.7 lakh crore relief for those hit the hardest by Covid 19. The package is expected to support approximately 800 million people with free pulses and cooking gas apart from cash through direct transfers for three months. The RBI has also introduced a slew of measures from boosting bank liquidity to providing relief to borrowers by slashing interest rates and giving moratorium on loans and EMIs. However, beyond the immediate stabilization measures to deal with the economic upheaval, in the long haul the government will also have to look long term solutions to build greater resilience in the economy. Accordingly, Prime Minister Narendra Modi in his address to the nation on 20 March talked about an Economic Response Task Force. Once constituted, the key challenge of the task force will be to develop a new growth paradigm: one that delivers an economy that is more resilient to shocks. This will help in regaining investor confidence and put the economy back on the growth path. Currently the two most formidable challenges to sustainable growth are climate change, which is already hurting the economy, and the inadequacy of our health infrastructure. By placing health and climate at the center of any long-term stimulus response to Covid 19, India can present a new growth model to the world. As an immediate response to the Covid 19 crisis, the Government of India has allocated INR 15,000 crore ($2 billion) for setting up testing facilities, isolation beds, procure personal protection equipment and ventilators. But once the situation stabilizes, India will need to spend much more to build a robust primary health infrastructure to deliver quality emergency response. According to OECD, India has just 1 bed for 1,000 people compared to 4 in China and 12 in Japan and South Korea.  As per the World Bank, China has 1.8 doctors for a population of 1000 against India’s 0.8 whereas the ratio in Japan and South Korea is 2.4. It is a foregone conclusion that massive investments to ramp up our health infrastructure including hospital, testing facilities, medical colleges and training facilities for health workers is the need of the hour. But beyond the infrastructure, another area that needs incremental amounts is medical health research spending. Studies have estimated the economic multiplier effects of R&D in general and found positive effects. Martin Grueber and Tim Studt, for example, estimate that scientific R&D has a multiplier impact of 2.8 on economic output and 3.4 on employment. Although increasing, India’s National Gross Expenditure on Research and Development (GERD) which is around 0.7% of GDP is abysmally low when compared to China (2.1) and South Korea (4.2). The Department of Health Research within the Ministry of Health and Family Welfare received only INR 7 crore this year for development tools to prevent outbreak of pandemics. Given investments required, it is unlikely that public sector investments in health research will be sufficient and private sector investments need to be maximized. The key challenges to sustained private sector investments in India is limited markets and lack of systematic data on investment returns. On the other hand, lower cost than the west in drug development presents an opportunity. A report by Brookings points out that innovative financing models such as Public Private Partnerships and blended finance from governmental, philanthropic sources and venture capital can catalyze private investment by creating a risk-return profile that is acceptable for the private sector. Of late the importance of mainstreaming climate in stimulus packages being announced by world economies has received much ink from the international press. Fatih Birol of the International Energy Agency has termed it as a “a historic opportunity to usher in a new era for global climate action with economic stimulus packages to confront the coronavirus pandemic”. Reports have shown that lockdown measures to contain Covid 19 in China have cut industrial output as much as 40% and carbon emissions could be down by a quarter since February. While official figures are not available, the same may be witnessed in India. The drop in carbon emissions is temporary but the downward spiral in industrial activity will have an adverse impact on livelihoods as employment numbers are expected to dwindle. Investments in climate action including clean energy and green construction can deliver the much needed jobs and a low emissions future. As the economic response task force is constituted, it will be vital to have representation from the Ministry of Environment, Forest and Climate Change to ensure more investments are directed towards meeting India’s climate pledge under the Paris Agreement. As the emergency response task force sits down to hammer out the stimulus package, an important question would the modality through which the support to the private sector will be delivered. The NPA problem has already stretched bank balance sheets and expansion of liabilities is likely to strain it further. Further sectors such as renewable energy and may require long term funds which might not be ideal for bank finance due to asset-liability mismatch issues. One possible model is a special fund housed in Indian Renewable Energy Development Authority (IREDA).  The fund could invest in corporate bond (with adjustable coupons) of high investment grade companies or pick up equity stakes. In the aftermath of the crisis, economies that demonstrate greater resilience to natural calamities and health emergencies will be preferred by global investors. A stimulus package that puts climate and health at its core, will demonstrate India’s commitment to build a more sustainable future, deliver the much needed jobs and better prepare the economy for external shocks.
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Shreyans Jain

Shreyans Jain

Shreyans Jain has expertise in the financial sector and in a career spanning 15 years he has worked with Ernst &amp: Young Merrill Lynch and ...

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