Disclaimer: This article is product of
an academic exercise and is author’s perception based on information available
in public domain. It does not have any aim to favor, oppose or discredit any
other view held by any other person, group or economic class.
From point of view of health, now Covid-19’s
effect and line of action to deal with it are more or less well decided. But what
is uncertain is its economic effect and there is more than one debatable way to
deal with it. Economy being a subject of zero sum of Money; that is to
support someone, someone else has to forgo or sacrifice. Every economic unit be
it government, bank, industry ordinary citizen and so on is ultimately an
intermediary, taking from someone and giving to someone else. Thus,
under this unprecedented situation, this role and behavior of intermediaries
has raised many ethical, political, legal etc. questions and issues to deal
with it which can be clubbed under domain of political economy.
For example, one view is, as government has prohibited economic activity it
should foot the whole bill. Counter view is, as government has saved citizen
from more adverse effect of disease and has also spent money to mange it and
has suffered loss of own income by way of lower tax collection etc, government is
entitled to increase its income by way of tax rate or otherwise. Another
question is, when enterprises earn profit under normal or favorable condition,
why they themselves should not bear losses now? Or do losses of many should be
compensated by the select enterprises (telecom, pharmacy, hygiene) that have
enriched themselves under abnormal situation? When wages/ salary are based on
work done, are workers entitled for payment for no work under lockdown. Should support
to citizen or enterprise be based on its essentiality of activity to society
(food items etc) or long term effect of situation on activity (tourism,
hospitality). Though all type of question or issues cannot be dealt in short
space, a few cases are being dealt in detail below.
Before
we discuss the type of help or sacrifice that will be required due to Covid-19
crises, it is important to understand the factors that determine the shape of
recovery and effect of type of the 
recovery
on different sectors/ citizens. Factors include the overall duration of
the pandemic, the effect on jobs and household incomes, the extent of
fiscal stimulus (Govt. support) provided by government etc. For instance, if
the economic disruption was just for a small period wherein more than people’s
incomes, it was their ability to spend that was restricted, then when the
lockdown opened, it is possible to imagine a “Z”-shaped recovery ( figure A). In this, the
GDP — and here we are talking about absolute GDP, not GDP’s growth rate —
actually overshoots the trend path because of the pent-up demand.
Imagine, deferred parties, salon visits, movies, purchase of new cars, houses
and appliances etc. — all of them get bunched up together. The way Covid-19 has extended
in India such recovery seems out of question. But what if the
economic disruption lasts longer resulting in several activities being forgone
instead of being deferred? For instance, all the summer vacations
in Europe that won’t happen this year. Or, even the monthly haircut — when you
go to the salon after 3 months, you have already lost 2 haircuts-worth of
economic activity forever! In such a scenario, and assuming incomes and jobs are
not permanently lost, the economic growth recovers sharply and
returns to the path it was following before the disruption. This is called
a “V”-shaped recovery (figure B). But what will
happen if this recovery is slower and takes more time because the economic
disruption resulted in several jobs being lost and people losing
incomes, drawing down on their savings etc.? Then the economy will follow
a “U”-shaped path. In such a scenario, after
the initial fall, the recovery is gradual before regaining its momentum. If
this process is more-long drawn than it throws up the “elongated U” shape. (Figure C). Since we are talking
about a Covid-19 induced disruption, it makes sense to also look at a “W”-shaped recovery as well. This shape
allows for the possibility of a V-shaped recovery, which is pegged back by a
second wave of infections until of course, the economy recovers for the second
time (Figure D). The last scenario is the one policymakers most dread. It is
called the “L”-shape recovery. Here,
simply put, the economy fails to regain the level of GDP even after years go
by. As the shape shows, there is a permanent loss to the economy’s ability to
produce (Figure E). Given the weakness of the economy going into the Covid-19
crisis as well as the less than adequate fiscal stimulus, India is likely to
end up with an “elongated U-shape” recovery. However, more than expected GST
collection for month of June-20 gives hope that we may get V shaped recovery. Now,
let us take a few cases to scrutinize, sacrifice and support based on above
factors.
First question arises from concept of
the government’s duty towards its people. From the onset and growth of
infection, it was understood that the severe dislocation of the economy it
would cause could not be compared to an economic recession or a
natural disaster. The first results from vagaries of the domestic
and international market and could be mitigated by countervailing policy
measures. The second could be as catastrophic as a lockdown but the government
could not be blamed for it. But the decision of lockdown, consequent to Covid-19,
is a conscious act of any government. It therefore imposed a specifically moral
obligation upon the government to make sure that the victims – employers
and employees – suffered as little from it as possible. Thus
recognizing that the lockdown would cause a crash
in sales and drying up of revenues and would make it difficult for employers to
meet their fixed costs and wage bills, and destroy income and demand ( of
employee). This had to be prevented at any cost. A view is that the government,
therefore, should spend whatever is needed to meet the production
and minimum wage and salary costs that would have to be paid to keep factories
in working condition and workers in place to resume work when the
lockdown was lifted. This is more important from technical point of view also,
because Government is the only organization which can spend more that income.
But Government
did not went by this line and in an order stated “employers shall make payment
of wages of their workers at their work places, on the due date, without any
deduction, for the period their establishments are under closure during the
lockdown." The question is when there is generally well established
practice of “No Work No Pay”, and employers are not earning anything why should
they pay ?. Matter went to SC. The petition by MSMEs said they
should be allowed to pay the employees 70% less (pay only 30 %) and argued that
the government should take care of the rest, utilizing the funds collected by
the Employees’ State Insurance Corporation or the PM Cares Fund or through any
other government fund. The petitioners argued that they have not been able to
conduct business because of the nationwide lockdown and that being forced to
pay workers in full in these compelling circumstances has put extreme financial
and mental stress on them. The top court expressing its reservations about
order said, “So the question is, do you (government) have the power to get them
(industry) to pay 100%, and on their failure to do so, prosecute them?"The
bench observed that some discussions should be held to find solutions, after
negotiations with industries, and government should play the role of
facilitator. There are many more such orders which are being challenged or
being circumvented.
One
more example of differing perception about who should bear losses or sacrifice
under present condition is from education sector (school, college and or
coaching center). Parents have paid fees (or institutes are demanding) for
which personalized attention to each student in class room was expected. But
now institutes are offering an online program that consisted of pre-recorded
lectures. Parents are questioning why they should pay hefty fees for vastly
diminished services. Online learning also came with significant costs to parents,
they have to buy separate laptops and mobile phones for student and also bear
the cost of additional stationery items like printer, paper and cartridges
to download hundreds of pages of pdfs of the course books. All cannot afford it. (This is another angel of
exclusion etc). If
students decides to drop out fees is not refunded. Institute’s version is not
having class room lecture etc is not there failure and fixed expenses (like
rent and salary) are not lowered for them. Instead, for benefit of student they
have heavily invested (extra cost) and trained their teachers and staff to
deliver online education and asking for the same (not higher) fees as earlier. Who
is right, definite answer is difficult.
Ideally, support and sacrifice in above illustrative
cases should be decided based on points stated earlier, but more or
less what trend is visible at this point of time is, can be called as Privatizing Profits And Socializing
Losses. Privatizing profit and socializing losses refers to the
practice of treating company/ enterprise earnings as the rightful
property of shareholders/owners, while losses are treated as a responsibility
that society (or government) must shoulder. In other words, the profitability
of corporations is strictly for the benefit of their shareholders. But when the
companies fail, the fallout—the losses and recovery—are the responsibility of
the general public. The basis of this concept is that profits and losses are
treated differently. The idea of privatizing profits and socializing losses
generally comes in the form of some type of intervention from governments or and
support from lending Banks (which hold the money of public). This
may be through bailouts or any number of subsidies or write off of loans. Large
corporations, their executives, and their shareholders are able to benefit from
government subsidies and rescues in large part because of their ability to
cultivate or buy influence through lobbyists. At the same time, defenders of
controversial subsidies and bailouts contend that some firms are too big
to fail. This rationale is based in the assumption that allowing them to
collapse would cause economic downturns and have much more dire effects on the
working and middle class population than rescues do. This was the
basis for the bailouts given to the big banks and automakers following
the economic crisis of 2008 and presently being done world over to minimize
economic effect of Covid-19. Let me explain by an example, industry A takes a loan
of certain amount X at certain rate of interest Y from bank B. It means
irrespective of amount of profit, Bank is entitled of Principal Amount X and fixed
interest Y there on. But if loss occurs,
Bank does not get agreed amount and interest. There is heavy hair cut (discount)
in settling the loan account. In profit Loan is treated as Loan but in
loss it is treated Equity? Loss of Bank is compensated by Govt. (public
money), or if ultimately Bank fails, saver’s whole deposit goes in flame.
Otherwise also generally to incentivize entrepreneurs to take loan, rate of
interest is reduced and then depositor suffers in the form
of lower interest on deposit (Present scenario).
What is side
effect of this theory or practice? While the pandemic ravaging economies and
destroying livelihoods across the world and have
pushed the world economy into a tailspin, the super rich, at least a select group, are getting richer.
In the US, billionaires have become richer to the
tune of $565 billion since March 18.The total wealth for billionaires stood at
$3.5 trillion, up 19 per cent from the low point near the beginning of the pandemic.
This is when nearly 43 million Americans filed for initial unemployment
benefits. The surge in wealth of the richest Americans is being driven by the
sharp bounce back of the stock market in US, primarily driven by the unprecedented
action from the US Federal Reserve (US Central Bank). In India
too, story in the form of company owners (on one extreme) and migrant labor (on
the other extreme) is not different. With the new business opportunity many a
company and their promoters have become rich. Contrast this with situation of general public in India. The lockdown has
destroyed the livelihood and economic security of millions of people and
resulting in the mass movement of nearly 10 million migrant
workers. Further economic compulsions make it impossible for
people to sustain physical-distancing measures that might otherwise have been
manageable (if there economic security is assured and no need for them to
venture out of home). This not only points to an economic and
humanitarian crisis, it has direct epidemiological implications in growth of
infection.
What are the implications of these trends? The
rising divide between haves and have-nots is already listed as a contributor to
the unrest being fuelled across the world.
Wealth inequality is likely to get even worse because of this crisis. “The
surge in billionaire wealth during a global pandemic underscores the grotesque
nature of unequal sacrifice”. All must Change. Further situation brings into
sharp focus the urgent need to shift to a new paradigm of economic development
and urbanization in which (at least) migration under economic distress or due
to the lack of amenities is brought down. This can be done if we can convert
the Covid-19 crisis into an opportunity to rethink and reimaging our
development model. One model is of Gandhi. His model of self-reliant villages
was the basis of a free democracy. His was not a model of a closed economy and
a village economy perpetuating itself at the lower levels of income, but one in
which local populations could be employed locally but with rising incomes and
higher productivity. In order to make 650,000-plus villages and 800 million
citizens self-reliant, technology will have to play a critical role. We need to
create a rural knowledge platform through active collaboration between the
public and private sector. This will provide the expertise to take cutting edge
technology deeper into villages and generate employment.
Resulting strong
social security could create a society that enables the country to withstand
economic shocks. Presently the pandemic has sharpened discrimination,
intensified exclusion, and amplified the bad in us. Insufficient though, it has
also magnified selflessness and generated heroism in the face of our systemic
ineptitude and structural moral failings. But if we care to look,
it has clarified that the morally worthy choices on the organizing principles
of our society are also the most economically wise. Sound social security,
strong labor laws, and universal access to good-quality public healthcare and
education will create an economy that could absorb almost any shock, because it
will build resilience at the level of the individual and the collective around
her. People won’t have to flee to imagined sanctuaries. Wherever they are, will
be their sanctuary. It will also be a just, humane, and good society.
WE HAVE TO
CHANGE PARADIGM: IF PRIVATE GAINS FROM PROFIT IT MUST ABSORB LOSSES TOO.
