24 March 2020

While fighting COVID-19, India must reduce bankruptcies, bring cash transfers & tax reliefs


Although the number of confirmed cases of COVID-19 is relatively small in India, 137 as of 17 March, most of the cases have been detected in the last two weeks. Experience suggests that this number will rise. Much of the struggle is ahead of us. In this, the epidemiological, medical, economic, social, political and administrative issues are closely intertwined.

While the vaccine and drugs are being developed, the focus is on early detection by tracing and testing, isolation for those suspected or infected, and prevention by social distancing and personal discipline. 
Mobilise capabilities to avert crisis

The administrative response to COVID-19 includes several activities such as: spreading awareness, monitoring and tracking people at risk, conducting tests, to arranging and enforcing quarantines, sanitising spaces and objects, enforcing restrictions on gatherings, giving healthcare to patients, and so on. Indian governments are capable of this mission mode effort, albeit capability varies across states. We are seeing these capabilities being mobilised. 

At some scale, the demands would exceed these capabilities in the health system and in general administration. For India, that bar is lower than other countries that have been successful in fighting COVID-19 (eg. Taiwan, Singapore), because the Indian state is smaller (percentage of government employees in the population), and the health system is more capacity-constrained (hospital beds per capita). So, the capabilities need to be mobilised proactively to avoid capacity collapse due to high demand later. Governments need to make fiscal outlays, and also enlist the capabilities of the private sector. 

The key to addressing such a crisis is timely recognition. Alexis de Tocqueville observed long ago, democracies always appear to be in a crisis. Frenetic activity of competitive politics, popular media, and various enthusiasts gives democratic life a distracted and edgy quality, making it difficult to recognise a real crisis.

Many Western democracies remained distracted until the crisis became too big to ignore. However, India seems increasingly focused on the COVID-19 crisis. Indian governments have recognised the COVID-19 crisis early. But we need to sustain and, in some places, intensify the focus.

Coronavirus and economic slowdown 

The difficulty of sustained social distancing, especially in India, becomes apparent if we consider certain facts together: high urban population density; low levels of income; a slowing down economy; a majority of workers not having paid leaves or social security; delayed onset of symptoms of the virus; healthy, working age people suffering less debilitating effects of this virus; and so on. 

If we as a society want most people to exercise social distancing, we will have to consider ways to make this feasible. Last few years have been tough for the economy, and many firms and workers are struggling. It is expensive for them to restrict activities.

An enforcement-driven approach is unavoidable, but relying exclusively on such an approach would be inhumane, and also ineffective. People will find ways around the restrictions. One aspect of this is the timing and intensity of forced social distancing. If a city goes into lockdown later than it should have, the lockdown may last longer, because the system will struggle to cope with the outbreak. If it is too early, when there are no cases or the cases are already contained, it would be an unnecessary cost. Each city and state must choose the right time, duration and intensity of lockdown and restrictions on entry.

This crisis will create economic hardships. Both supply and demand shocks will flow from this. Supply will be constrained as firms scale down the activities to limit the spread of the virus or as a consequence of supply chains drying up. As people stay at home, consumption demand for many services and products will fall. Uncertainty will affect investment demand. Since this is a global phenomenon, export demand will also be hampered. Then there will be second and third-order effects.

The focus should be on reducing bankruptcies of firms and minimising hardships for low-income households.

A bankruptcy is a discontinuity, because organisational capital built over years is suddenly lost. Firms could not have hedged against this kind of risk, and organisational capacities must be protected during this time by providing some support equitably. Measures, such as soft loans, tax reliefs, forbearance in bankruptcy filings, longer grace periods for utility bills, may be explored to limit the damage.

The Narendra Modi government must also revisit its revenue targets to make them realistic. Economic activity has been slowing down, and COVID-19 is a huge shock. The target-driven tax system creates enormous pressures on firms. The government’s revenue interests will not be protected if many firms fail and the tax base shrinks.

Many low-income households would be severely affected. Perhaps, targeted cash transfers could limit the welfare consequences and also enable social distancing. Another option is to cut indirect taxes, especially excise, VAT, and GST. However, the recent increases in taxes suggest that the government is taking the opposite stance. This is a time when well-designed fiscal interventions can be socially beneficial. 

This is also a time for rediscovering our sense of fraternity. Since we all are in this together, those who are better off should consider helping lower-income people go through this time.

Transparency and adaptability needed for preparedness 

As the scale and complexity of this challenge increases, there are strengths of democracy that can be harnessed.

First, the relatively free flow of information makes it possible for people to know what is going on and to respond suitably. If we allow this strength to play out, we will have a better chance to do our respective parts.

Second, democracies are adaptable and experimental. They can allow different approaches in different contexts and at different times. Since challenges will vary across time and space, power and persuasion should be mostly exercised locally. States and cities can try different approaches, while being accountable to their own people. They can also help each other by supplying information, sharing good practices, providing materials, training, and so on. Unfortunately, in India, cities are not administratively and fiscally empowered to do much on their own. State governments could temporarily devolve more powers to local administrations to deal with this crisis.

Third, once democracies recognise a crisis, they are quite capable of mobilising persons and materials. Since democratic power works through popular mandate, people have some shared sense of responsibility in a crisis (think of war time). So, the power of voluntary mobilisation and community action can be harnessed. 

However, in a crisis, patience with democracy can easily run out, tempting us to nullify these strengths.

If things take a turn for the worse, governments may try to restrict information flow in the name of preventing panic or maintaining public support for tough measures. But it is better to be transparent. People will support the government if they see it is trying its best against an exogenous shock.

In a crisis, there is also a temptation to centralise power and take an excessively top-down approach. While centralisation is justified in certain crises, this is not such a crisis. The overall success in this would be a sum total of local successes aided by successful coordination. Only so much can be done at the national level. 

This is not to say that being democratic is sufficient in dealing with a crisis. Democracies can, for specific challenges and for limited times, take less democratic approaches, without losing the sense of being a democracy. For instance, we need strict implementation of testing and quarantine protocols, overriding personal choice. We can continue being a democracy while making exceptions.

If we get some early success in this struggle, it will be easy to get complacent about continued success. However, in such a crisis, successes are as dependent on contingencies as on efforts. If we avoid bad scenarios (such as large scale community transmission), it would be by the skin of our teeth. So, there is no cause for complacency. 

The situation is quite open. We do not know how things will turn out, but we should be mindful of the strengths and weaknesses of our democracy and state as we struggle against this great known unknown.

The author is a Fellow at Carnegie India. Views are personal.

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