The banking system is crucial to recovery: Read this FT piece on how constrained credit is at the heart of India’s economic challenges. I’ve argued before that the RBI lowering rates is not going to help very much – banks are saddled with bank loans and remain reluctant to lend. Even before C-19 or the ensuing lockdown, India’s credit crunch had put the brakes on economic growth. Also see this piece warning that the financial sector in India may be heading towards a train wreck with bad loans set to sharply rise post the pandemic, with suggestion of necessary reforms.
Grim prospects, grimmer for India: The World Bank has updated its estimates of Covid-19’s impact on global poverty. From expectation of 40-60 million in April, they now estimate that Covid-19 will push 71 – 100 million into extreme poverty. This is driven by the epicentre of the pandemic shifting from Europe and North America to the global south, the increased death toll in low and middle-income countries, longer shutdowns, and the increased economic costs of the pandemic. While earlier predictions had estimated maximum poverty impact to be in Sub Saharan Africa, the number this time are “most sobering” for India. While a highly stylised analysis, this is a solid and informative piece and I recommend you read it. If you’re baffled by ever-changing economic predictions, read this on why making economic predictions now is “useless”. See chart below on change in poverty projections – the red line is the expected worst-case scenario, for now.
Another important World Bank publication: The Bank has published its report on Global Economic Prospects here. India’s GDP is predicted to contract by 3% in FY 20-21. The South Asia chapter is here and points out export contraction, loss in business confidence, stresses on the banking system exacerbated by global financial system vulnerabilities, and trade vulnerabilities (India’s auto sector heavily relies on intermediate inputs imports) as some of the key reasons. The report predicts that the pandemic will leave “lasting scars” on emerging economies.
“Investment and innovation will be weakened. Human capital will be eroded through unemployment and lost education. Trade linkages and supply chains may be permanently unwound. Behavioural patterns, including more cautious services consumption, may persist.”
What should Development Finance Institutions (DFIs) do?: See this note from the Centre for Global Development (CGDev) on 8 principles that should guide a DFI’s response in a crisis. It highlights key lessons including the importance of identifying the right sequence of interventions , planning for damages to your own balance sheet, preparing shareholders, the need to prioritise borrowers with strategic importance (e.g. those with higher demonstration effects, higher earners of forex, those who employ many etc.) over existing clients, and the need to change instruments (e.g. lending in local currency as currency volatility adds to a firm’s risks of repayment). See also this piece arguing that if development finance is ODA, DFIs must follow DAC principles of effective aid. These include being led by priorities of recipient country governments, using country systems such as national banks, ensuring equal opportunity for access to finance and prioritising transparency in all that they do.
“Whatever it Takes”: A good piece here on how developing countries do not have enough resources to do “whatever it takes” to control the pandemic and aid recovery – including limited ability to finance this by raising taxes, printing money, or borrowing. Follow that up with an excellent CGDev note here on a piece identifying challenges in generating revenue and inefficiencies in government spending in developing countries. It argues that Low Income Countries (LICs) must undertake comprehensive tax reforms to respond to the crisis – and that policymakers will need to re-think their revenue generating strategies (For example: how do you go back to raising taxes once you’ve cut them to provide relief? The political economy of that can be very challenging.)
They don’t know who the poor are: As a neat way to demonstrate some of the issues highlighted above, read this data-backed piece on how only a handful of Indian states have delivered on GoI’s increased food grain distribution to the poor during the lockdown. The key issue is not one of procurement (most states had collected over 90% of their quota from the Food Corporation of India), but of further distribution. In addition to challenges of logistics and state-capacity, an important reason is exclusion of the poor from databases. How do you ensure distribution to the poor, when you don’t know who your poor are?
Read this by Jean Drèze and other on the problems of using 2011 data to count your poor in 2020 – over a 100 million have been left out of your food security schemes. See the chart below for state-wise exclusions.
As someone recently tweeted:
"I want someone to care about me the way Jean Drèze cares about PDS in India."
Primary Care, not Hospitals: Read this piece by Nachiket Mor (ex-BMGF) arguing that for a developing country like India, a decentralised response led by communities and primary care workers is key. Urging policymakers to leverage developing country strengths of strong communities, a highly distributed base of primary care providers, nursing homes, clinics, maternity homes; and technology - he argues for the need to bring healthcare to the sick, as opposed to bring everyone who is sick to the hospitals.
This is hardly new. India’s entire public healthcare system has relied on this approach but the piece is a good read and reminder. Once you’ve read Mor, read also here and here about the challenges faced by the primary health workers the system relies on. ASHA workers continue to struggle with low and delayed salaries, unsustainable workloads, absence of protective equipment, social ostracisation, and abuse. Read also here an investigative report on how the absence of regulation, PPE prices are exorbitant in private hospitals and public hospitals face a shortage.
Make sure you ask the important questions: Finally, while on the topic of tax reforms, the Karnataka government has ruled that parathas and rotis are two different products that must attract different GST rates. Now the whole idea behind a GST scheme was simplicity. Do we want overburdened tax officials using valuable time (and discretion) to assess an existential crisis between different Indian breads? They’ve already had to answer critical questions of whether a KitKat is a chocolate or a wafer – and whether Sachin Tendulkar a cricketer or an actor (Answer: tax authorities ruled actor, and allowed him a deduction).