What Happens To An Economy When A Nation Shuts Down? Rathin Roy Explains

India is shut. Mostly. For 21 days.

All businesses, except essential services, have come to a halt. Citizens can’t go about their day like they did. The most vulnerable can’t earn the daily wage that sustained them.

Amid such stringent restrictions, how does a $3-trillion economy move along? What needs to be done to keep basic supply chains functioning for essential goods? How do you compensate daily wage earners? And where does the government find the resources for it?

Rathin Roy, director of the National Institute of Public Finance and Policy, says there are two key issues that the administrative machinery needs to address.

Maintaining Supply Chain Of Essential Commodities

The first of them is managing the supply chain for essential commodities in a manner that is consistent with the restrictions placed on movements. “That’s an economic question because in business-as-usual, supply chains are maintained within a credit-demand-revenue cycle,” said Roy.

Roy gives the example of a potato farmer. A farmer grows potatoes, he stores those, sells them and gets a certain revenue and uses that for storage of potatoes and to grow new potatoes. “When the supply chain is broken, the farmer has no means of getting the produce into the city to sell. If the certainty or periodicity of purchase of those potatoes changes, then I have to make volume adjustments and these may not be possible.”

The primary issue for every state, every district is to ensure the supply chain for essential commodities is functioning within the restrictions. How difficult is this? Roy believes the capacity exists both within the government machinery at the centre, state and local level. It also exists within the private sector, where corporations in sectors like fast moving consumer goods have expertise in supply-chain management.

A decision must also be made on where the logistics and the supplies need to be focused.

“There is considerable idle supply chain capacity sitting in the economy,” said Roy. “There are supply chains of companies like HUL and Coca-Cola across the country. Mobilise them. The private sector should step in and suggest how idle supply chains can be used for maintaining the supply of essential commodities.”

Also Read: A Covid-19 Supply Chain Shock Born in China Is Going Global

Compensating For Lost Wage Income

The second key immediate concern is livelihoods. People are able to purchase goods and services by offering their services as factors of production or possessors of savings to earn wage income or interest income.

Since India is an informal economy, a large number of people live on wage income by offering their services. In many cases, this income is earned daily. “Working capital cushions are very low. A lock-down exacerbates this because there are issues of availability, prices and access,” Roy said.

The question here is twofold. It is not just about putting money in the hands of people but is also about keeping the costs of goods and services in check amid restrictions.

While you can devise schemes to put money in the accounts of the banked, the government would still need to find a way to provide relief to the unbanked. The government can put money into Jan Dhan accounts but there are still issues such as the ability of people to access those accounts under the current restrictions.

“You need to deploy all networks ... you can mobilise Jan Dhan accounts, you can mobilise microfinance accounts, you can do all that. But you still need to worry about the unbanked, else it will be grossly inadequate,” Roy said. The postal system, in the old days, could have been one network that could have been put to use. “It’s solvable. But you need someone to come up with this architecture across the country.”

Finding The Resources

Finding the resources to fund all this will not be difficult, Roy says.

He believes that almost Rs 1 lakh crore sitting in unspent balances across governments of India, including panchayats. “It will take a massive effort on the part of Finance Ministry to gouge it out, then I can immediately frontload that spending by using the ways and means advances provided by the Reserve Bank of India.”

Ways and Mean Advances (WMA) are temporary loan facilities provided to the government to enable it to meet temporary mismatches between revenue and expenditure.

The government should also go out and borrow but this should be done via non-typical borrowing instruments, Roy said. There is ample liquidity in the market but you must distinguish the borrowing instrument. For instance, the government could borrow through instruments carrying a fixed interest in perpetuity. These instruments can be paid back within a specified time frame after the end of the emergency. This was done by England during the second world war, Roy said.

“There is enough liquidity to borrow an incremental 3 percent of GDP,” Roy added. He also said that retained earnings of corporations, including public sector firms, can be sequestered and parked in the specialised bonds issues.

Finally, Roy said that the central bank would need to increase money supply to fund the increased fiscal deficit. This could, if needed, come in the form of the central bank directly buying specialised bonds from the government.