This will be worst recession ever, farming may save the day: Devesh Kapur

The Director of Asia Programs at John Hopkins University sees Pharma as an area of strength too, and says India must aggressively develop APIs domestically, instead of sourcing from China

In this conversation with Sarah Farooqui, DeveshKapur, Starr Foundation Professor of South Asian Studies, and Director of Asia Programs at John Hopkins University explains some immediate steps needed towards recovery, the challenges going ahead, and sectors we need to worry about.

Kapur was previously a Professor of Political Science, and the Director of the Centre for the Advanced Study of India, at the University of Pennsylvania.

On the current economic situation and areas that need our attention: This economic shock is going to be the worst recession we have ever had. India has never had to grapple with a shock of this magnitude before. In all the past recessions (1958,1966, and1980), the trigger was the collapse of agriculture. If the monsoons failed, it would adversely impact agriculture, which was a much bigger part of the economy then. And if agriculture wilted, the impact on the national economy would be severe.

This time it is different. Ironically, agriculture will be the only sector with modest growth. If the monsoon is normal, the part of the grain of Indian agriculture will do well. However, perishables (apart from milk) – especially vegetables and fruits – have been affected quite negatively, because with the lockdown the movement of trucks basically ceased. You need a good supply chain for perishables to transport them to consumption centres immediately after harvest. Vegetables are also more labor-intensive and hence more affected through workers’ morbidity and containment policies but some of this might be counterbalanced by returning migrants from urban areas. Animal husbandry, especially poultry, has also been severely impacted. As the lockdowns ease up, perishables will come back, but it may take time.

A worker threshes maize cobs during ongoing Covid-19 lockdown near Vijayawada. Photo: PTI

Two areas in which India can expand its economic diplomacy are food and pharma exports. If the monsoon is normal, India should have pretty good agricultural output. If we look around the world, we can see that a number of countries are closing down their agricultural exports in an attempt to shield domestic food markets. India is likely to have a robust surplus, especially in cereals. If it can guarantee food security to key friendly countries, especially in its neighbourhood and the Indian Ocean Rim, it would be good for the economy and Indian diplomacy.

Pharma is another area of strength, and the world will need cheap and safe vaccines and drugs. India needs to aggressively develop APIs (Active Pharmaceutical Ingredients) domestically, which it currently sources from China. It needs to do this in Mission Mode, with a CEO with cabinet rank, an advisory council of 10-15 domestic firms, a clear mandate, time-delineated targets, one of which must be to double India's market share of the global chemicals business from 3 to 6 percent (of $750 billion) in five years and 10 percent in 10 years.  The ambition must be global but the means must be domestic. And targets must be based on value add and not just sales.

On the immediate steps to recovery: I think the one thing that has many puzzled is why the government has not been more aggressive about increasing demand, especially by placing more money in the hands of the bottom half of the population. We need to emphasise on the urban poor, which includes migrants. The agricultural economy has not collapsed and with enough investment in MGNREGA and PM Kisan, there will be enough buffer and purchasing power for the rural poor.

But because the collapse has been greater in the urban economy, India needs to stimulate the purchasing power of the urban poor. Placing more money in lower-income segments is a moral imperative, but equally, it’s a way to jump-start the economy by gradually increasing demand. Because they buy essentials, this in turn becomes a ratchet effect. As demand increases, supply responds, employment increases which translate into greater demand, and slowly there is recovery.

The government had initially put in a small amount (Rs 500) in Jan Dhan accounts held mainly by women. Official figures in early May stated that Rs 10,025 crore was credited to 200.5 million Jan Dhan account holders (98 percent of whom were women). I understand that less than half of even this meager amount was withdrawn. This could either be because people were very afraid of spending given the massive uncertainty about the future, or it could be that the banks were closed and they could not access the money. Some may have not even been aware of the deposit.  

A labourer piles up wheat grain at the New Grain Market as its procurement is picking up, amid ongoing Covid-19 lockdown. Photo: PTI

But the larger point is that just as the UPA created Aadhaar and then basically did very little with it. Having created the JAM trinity, the government has not been aggressive in nailing down last-mile problems, to ensure that the gap between funds deposited and received by beneficiaries is minimal. And frankly, the amounts transferred should be of magnitude larger in order to ensure a real safety net in these very difficult times but also, now that the economy is opening up, to jump-start demand.    

Overall, on the economic front, we desperately need fiscal spending for creating demand. If the government puts money in the hands of those in lower-income quartiles, they are likely to buy things that are local and thus create local demand. And this is what we want. It also serves this government's policy made in India. What you do not want to do right now is create demand for products with high import intensity, because then effectively you are creating foreign demand by your spending.

Immediate growth challenges we face and how we can manage going ahead: Fundamentally the growth challenges would come from the primary cause of the current crisis — which is dealing with the health effects of Covid-19. The country needs to be much more aggressive about testing, tracing, and quarantine, going forward. That is the only way to give people the confidence to come to work. It is not just about equipment, you need organisational capacity for doing this. Large employers that have that capacity (PSUs, organised private sector) should be given guidelines and then allowed to manage accordingly. While the organised sector is a small part of employment, it is a large part of economic output and creates demand from smaller suppliers.

The second is creating demand, which I mentioned above.

The third is that we have to recognise that exports are collapsing, and it is particularly worrying in certain labor-intensive sectors such as the gems and jewellery belt in Surat, and the industrial cluster of textiles and garments in Tirupur. That would necessarily need special attention.

An opening strategy needs a spatial focus. Industrial estates cater to MSMEs and many of the individual firms may not have the wherewithal to organise testing. In these cases, the unit for testing should be at the level of the Industrial Estate rather than at the level of the firm. For instance, the estate can organise the testing etc. at the estate entrance. It can be a common pool resource for everyone who works there, without discrimination on type of company or worker. If you work in such an estate, you have to be tested with certain frequency. There are other challenges, like transport to bring the workers to the estates. But at this point the economic costs of closure are becoming dire. There is no option but to reopen, accompanied by aggressive public health measures.  

Sectors that we need to worry about: I worry the most about labour-intensive, non-agriculture sectors like construction and service sectors such as tourism, food and restaurants, tourism and hospitality. These were the few opportunities for low skilled labour, whether the cook in the restaurant or the flower arranger for a wedding or the cleaning staff in a hotel. There are countless people dependent on these jobs. Yes they are low income and hard jobs. But they are jobs. We have to worry about them because they will not find jobs easily elsewhere.

Much of this can only revive when the curve is flattened, there are precautionary measures in place, and there is greater confidence among people. The role of leadership and the government has to be about inspiring that confidence.