What India Can Do to Prevent its Economy from Becoming a Casualty of the Coronavirus

Coronavirus is officially a pandemic. The outbreak, which originated in China, is tragic. While its impact on health and life is a major concern, its impact on the global economy could continue to be felt long after this novel virus has been curtailed.

The risk of coronavirus is already rippling through economies around the world. Airlines, hotels, cruise lines and tourism are reeling from travel bans and cancelled events. Manufacturing companies have suspended activity at their factories. Construction companies are unable to operate with workers staying at home. Big sporting events have been cancelled and theaters are empty. 

The coronavirus has already shaken the financial markets. European stocks recorded their worst single-day decline in history on March 12. Later that day, the US stock market triggered ‘circuit breaker’ to prevent shares from falling through the floor. The next day saw the BSE and NSE halting trading for the first time in 12 years. 

What the Government Must Do

How does a country like India cope with the economic repercussions of the coronavirus outbreak? Let’s see this as an opportunity to course correct. This begins with acknowledging that something was going wrong. Let’s take the example of a baby learning to walk. It’s understandable that parents want to use walkers to protect them. The prolonged use of the walker, however, slows the baby’s muscle development and delays walking. 

The protectionist policies that India had put in place to protect the economy have rendered markets more fragile and vulnerable. Every policy or law that is still cocooning the Indian economy needs to be scrutinized and phased out. Yes, the markets may stutter and stumble in the beginning. But doesn’t a baby fall a few times before he/he can walk and run?

So, here are a few things the government can do to course correct and stimulate the Indian economy faced with the coronavirus threat.

Slash Direct Taxes: US President Donald Trump has indicated payroll tax cuts to stimulate consumer spending. This may not have the expected impact. The Indian government can consider lowering / eliminating income tax for people earning less than ₹15 lakhs a year. But reducing taxes for higher income individuals will not really increase spending. The most beneficial move would be to lower GST. This will reduce costs for companies, giving them a better chance of surviving a global economic slowdown. Some of the benefit will be passed onto customers and lower prices will encourage more customer spending.

While India has levied GST from 18% to a whopping 42% on certain sectors, leading economies have much lower rates. For instance, Singapore’s GST rate is 7%, Dubai has 5% and US levies 3%-4%. It’s time India slashed its GST to around 10%. This will not downsize the government’s coffers. Tax collections have historically risen with a reduction in tax rates. On the other hand, high taxes hit businesses hard. And, if businesses fail, jobs will be lost, and the economy will spiral into a recession. 

Lift Trade Barriers: Countries often impose trade barriers in the form of tariffs, technical regulations and customs formalities. However, coronavirus has disrupted the global supply chain. Lifting all controls on imports and exports and lowering or eliminating tariffs will provide the much-needed relief. Governments need to recognize that trade can be an engine of economic growth. Opening up the market and allowing free trade will lower prices and offer customers a greater choice of goods. 

Faced by stiffer competition, domestic firms will have a greater incentive to reduce costs and increase efficiency. Lower prices of raw materials will help domestic industries. Increased export opportunities will allow companies to benefit from economies of scale. All these factors will create more jobs and boost consumer spending.

Pass on the Oil Price Decline: With lower demand from China, the world’s largest consumer of oil, prices have tumbled. Global crude oil price, which was around $65 per barrel, has come crashing down to $32 per barrel. This is not the time for the government to get greedy. Rather, the government must pass on the lower prices to industries and consumers. 

Lower petrol prices may trigger sales of automobiles, a sector that is so critical that it’s considered the barometer of the health of the Indian economy. Lifting controls on petroleum products will be an incentive not only for the auto sector, but also petrochemical and plastic companies to increase production.

The Indian economy is fragile. The global economy has been on the brink of a recession for a few years. And now coronavirus spreading rapidly in the developed nations poses a major threat. The Indian government needs to come up with strategies that will help the country tide through this time and come out stronger.