THE LONG ROAD TO RECOVERY

TO ACCELERATE THE PROCESS, WHAT IS NEEDED IS AN AGGRESSIVE APPROACH TO VACCINE DELIVERY, A FISCAL STIMULUS, MORE CREDIT AND LARGE-SCALE PRIVATISATION OF PUBLIC SECTOR UNDERTAKINGS

- Arvind Panagariya

With the exception of a stressed financial sector, India went into the coronavirus crisis with sound economic fundamentals. The lockdown in response to the threat of the virus created unprecedented friction in transactions between buyers and sellers of goods and services as well as of inputs, including labor. The friction afflicting transactions in goods and services constituted a demand-side shock while that in inputs, a supply-side shock. The greater the degree of this friction in an economic sector or geographical region, the greater was the severity of the shock.

Influenced by the large fiscal stimuli announced by developed countries such as the United States, Japan, and Germany, the vast majority of commentators had called for a similar fiscal expansion in India immediately after the announcement of the lockdown on March 24. At the time, I had sided with the minority view that India should refrain from a large fiscal expansion and limit additional expenditure to providing the necessities of life, such as food and shelter, to all. The logic behind this was twofold. One, with buyers and sellers of goods and services unable to transact, fiscal expansion could not translate into demand. And two, even if the expansion could add to demand, with the buyers and sellers of inputs, including labor, unable to transact, a demand stimulus could not induce a supply response. In this event, the government wisely chose a limited fiscal intervention.