Govt is shutting down India for coronavirus, will have to rebuild economy

The effort to contain the coronavirus is big. The Janata Curfew announced by the Prime Minister brought the entire country to a standstill for 14 hours on Sunday, March 22. The Maharashtra government decided on March 20 that four large cities of the state would remain practically shut till March 31, that is, for eleven days. The cities include Mumbai Metropolitan Region which in turn includes a clutch of satellite industrial towns around the main island city.

On March 23, the list expanded to 80 cities in 19 states and three Union Territories. This includes Delhi, Kolkata, Chennai and Bengaluru. Twenty-two districts are shut for all non-essential services.

The economic cost of this is not limited to travel and tourism or hotels and restaurants, anymore. When the business capital of India shuts along with most industrial and commercial towns of Maharashtra, the impact is widespread. To place this in perspective, Wuhan has a population of about 11 million. In comparison, the four cities partially shut in Maharashtra account for a population of about 33 million —thrice the size of Wuhan. By Monday, March 23 we were talking about a much bigger shut down.

This shut down may contain the virus from spreading and save lives but, it will do so at a huge cost to the economy.

The government has so far not shown any inclination to foot this bill. The cost will be paid by enterprise and by labour.

Interest costs do not stop for enterprises that have an outstanding borrowing during such shutdowns. The same holds true for households with a borrowing. EMIs do not stop. Rents do not stop either. Banks and other lenders of capital and also landlords do not suffer during this shutdown like non-finance enterprise and labour does.

Enterprise profits will take a hit as business comes to a standstill across a large number of sectors. According to a FICCI survey conducted before the large-scale shutdowns that came into effect over the weekend, 53 per cent responding business units said that business operations have been impacted; 80 per cent said that cash flows had declined; 60 per cent said supply chains have been impacted. Forty two per cent believed that it would take three months to return to normalcy. The situation could have only gotten worse.

The Department for Promotion of Industry and Internal Trade has asked industry associations to issue advisories that industry should continue to pay salaries on time. If industry is able to do this, it would take care of workers in the organised sector. These are the relatively safe workers who even have savings to fall upon during difficult times. It does not take care of the much larger contingent of the unorganised labour force. Besides, the governments directive assumes that industry has the ability to pay workers in such times.

In normal times, 33 per cent of listed companies are loss-making. The year 2019-20 has been exceptionally bad. The share of loss-making companies has risen to 40 per cent. Further, inflation-adjusted gross value added by listed companies declined year-on-year in each of the last three quarters. The government needs to recognise that industry is not in a very good position to pay. Enterprise is weak and entrepreneurship is at its lowest.

Big companies may show generosity. The weaker ones need generosity. A sweeping directive asking companies to pay labour for no work will increase inequality through government diktat.

The state can shutdown the economy. What is important beyond that is its capacity to bring the economy back to its feet.

State capacity is important not only to deal with a crisis but also to emerge from it.

Labour will once again just exit labour markets as it did in the previous two shocks. The labour participation rate and the employment rate will fall. There are signs that it has started doing so already. Migrant workers were seen thronging railway stations and bus depots to go back home. They will not look for work till they come back. This phenomenon will show up as a fall in the labour force.

But, passenger trains were cancelled on Sunday to stop the virus from travelling. That leaves migrant labour stranded with no work and no pay in a foreign land with no rescue.

Government finances are a mess and its capacity constrained. Its diktats on enterprise paying labour for no work could mess with the finances of enterprise and its capacity to bounce back. It's better for the government to pay for this shutdown than ask enterprise to pay. Enterprise cannot do much anyway. Building state capacity, not just finances, is important for now and for a better tomorrow.

The weekly estimates of labour statistics generated from the Consumer Pyramids Household Survey are for only six days ended March 21. The rate rose to 8.4 per cent.