Covid-19: Economies under unprecedented disruptions
The June 2020 report of IMF has slashed the global GDP growth forecast by an additional 1.9 per cent over its April forecast and now it shows a -4.9 per cent decline over 2019 and the recovery is now projected as more gradual and on this declining base the 2021 forecast stands at 5.4 per cent, which leaves the condition down by 6.4 per cent over pre-Covid-19 situation on the overall economic output. But what is striking in the June report is the acknowledgement of the degree of uncertainty around forecasting.
Think of it that if the death rate changes by only 1 per cent every day, in a year this is 38 times! The data around us is severely pointing to a linkage with power law distribution of data, where the search for central tendency is meaningless; forecasters are therefore wrong both ways.
On recovery as well, the forecasters could be wrong; it could be faster than we think or it could be a long road to nowhere for a long time. The crucial issue is to look at some evidence from the jobs lost and the ILO Report released on April 29, 2020 shows that in the first quarter the working hours lost was equivalent to 300 million full-time jobs, at this rate we will be reaching an all time highest level of unemployment than ever seen in history. Why this is so is evident in the IMF report is that the biggest casualty has been consumption and the service sector that drives all the developed economies of the world have suffered the biggest losses. The manufacturing jobs on the other hand have suffered from squeeze in global trade by -12 per cent already.
The Central banks on the other hand have done more than what usually they do, almost taking over the full responsibility of the entire financial system and the governments being the insurers of everything they do. But BIS endorses such actions in the wake of complete collapse of financial intermediation as the number of safe assets and collaterals go through an unprecedented collapse. The IMF report goes on to portray a grim situation with total global government debt to balloon to 18.5 per cent of the global GDP in 2020 compared to 10.5 per cent at the peak of the financial crisis.
What does this look like for India in particular? IMF June report puts the 2020 GDP drop at -4.5 per cent and 2021 at 6 per cent, compare this with China at +1 per cent for 2020 and 8 per cent for 2021.
I would like to draw attention to the section "Policy Priorities" in the IMF report, it appears that the entire section is dedicated to India; effective policy can not only ensure a speedier recovery across a range of income segments and skills distribution but also aid in re-allocating resources, which is where the governments make a difference. India is still in the accelerating phase of the Covid-19 spread, so the priorities must be on containing the health shock and minimising the income losses through alternate programs and implicit and explicit guarantees, including on credit.
But the biggest impact will come from ensuring that small and medium businesses do not completely stop or get mothballed due to lack of financial support; helping these businesses to run is fundamental to recovery as the whole problem of migration of workers could be reversed.
Reversing the skills inventory problem where migration has already taken place and ensuring that supply chains do not go through the cost over-runs due to disruptions of all kinds would require more than just policies; a number of actors and constituencies have to work in close coordination to ensure that the micro markets where supply can meet demand can grow into larger markets coalescing into meaningful centers of distribution of goods that can clear the market price.
Whether India will have a faster recovery will also depend on how effectively it is able to deal with the health supply-systems from basic testing kits, information systems, isolation infrastructure to the actual providing of healthcare to the real needy ones.
Procyon Mukherjee works as Chief Procurement Officer at LafargeHolcim India. The ideas presented are his personal and have no connection to the beliefs of the company where he works.