Broadly, every government has its own share of hits and misses. The current government too has had its own share of them, especially in its second tenure. The corporate tax cut is indeed a hit while CSR was a definite miss.
However, not every government has to face a crisis like the present one which requires an overly complicated public policy trade-off and can have far-reaching economic consequences.
I sympathise with the policy-makers who must decide whether to save lives or livelihoods.
They have, however, already made a choice of preserving lives, which is a noble choice that we all must appreciate. But what happens to livelihoods?
The answer to that is an economic package – and the government has indicated at its possibility sooner rather than later.
There are reports that suggest that government is going to take a ‘graded approach’ and announce a package post the lockdown.
Indeed, India does not have the luxury of wasting resources and a graded approach is the appropriate way to address the problem. Any fiscal package for growth revival will anyway be contingent on the economy opening up which will happen post the lockdown.
After all, growth can recover (or respond) to a stimulus only when the economy is up and running.
However, I disagree with the premise that we must wait for the lockdown to be lifted before we make any policy announcements. This disagreement comes from the fact that businesses are facing a lot of uncertainty regarding the future and the lack of policy guidance is resulting in a sense of nervousness.
It is difficult for any entrepreneur to plan for post lockdown as they find their cash positions eroded, risk aversion from bankers to assist with cash-flow management and financial liabilities that continue despite no business activity taking place for nearly two months.
Any entrepreneur can deal with business risks because they are a known set of possibilities and therefore, they can plan for each of the situations accordingly. However, uncertainty is a different game altogether as there is no way of knowing what can or will happen.
In the present case, while businesses face several risks, they are also subject to uncertainty related to the likely progression of the disease and with respect to future government policy response to the same.
While the government cannot do much about the uncertainty related to the disease, it can, however, provide forward guidance in the form of a policy response over the coming months.
It is precisely this reason why the government should not wait for the lockdown to be lifted but rather announce what all it is likely to do beforehand so that entrepreneurs can form expectations and plan accordingly.
To be fair, government has indicated that a fiscal package is likely. However, such indications will not be sufficient in reducing the economic uncertainty that prevails at the moment.
One of the key issues in policy, especially economic policy at times of economic stress is to provide confidence and revive sentiments of the private sector. That is, we need to rekindle the animal spirits and form positive expectations about the future.
The role played by expectations of different agents in actual economic outcomes is indeed significant and can be a major differentiating factor between the extent of response of the economy to any policy action.
For instance, consider a fiscal response of an amount 100. If people believe that the fiscal response of amount 100 is sufficient and form opinion that economic activity will pick up in the future, they will not be reluctant in their discretionary purchases and that will translate to higher consumption, eventually leading to quicker economic recovery.
In contrast, if people believe it to be insufficient and that economic activity is unlikely to recover, they will be reluctant to spend, and economic activity will take a bit longer to recover.
To sum it up briefly, economic expectations are self-fulfilling, and this is what makes expectations, sentiments and confidence a key part of any growth recovery strategy.
A good example for this is for the restaurants and hospitality industry. Consumers spend on food and travel when there is little uncertainty about the future. The same is true for discretionary spending on consumer durables such as automobiles etc.
At a time when wages have been slashed across sectors, we cannot expect discretionary consumption without a positive outlook for future economic prospects.
Without discretionary consumption, we will witness a gradual economic revival, and, in all probability, discretionary consumption will only be back by the second half of the financial year.
This thus, makes it important to view the challenge of designing a growth revival package as one that is also a challenge of reviving expectations, sentiments, consumer confidence and in making people believe that recovery will be swift just as it was in 2008.
Doing so thus requires us to reduce the economic uncertainty and provide adequate forward guidance and convince economic agents that government is indeed willing to do whatever it takes, even if it means burning the old macroeconomic playbook.
This would only be possible if there are some announcements that are made before the lockdown is lifted to ensure businesses have the necessary confidence needed before they open their shutters on 4 May.
If businesses open on 4 May with a sense of uncertainty, the gloomy business environment could do a significant damage to economic expectations.
The best way to avoid this would be to simply make the announcements before the lockdown is lifted rather than waiting until the last weekend of the lockdown.
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