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June'20

Covid-19: One Crisis, Different Economic Responses

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Countries like India are continuously changing their tactics and response to Covid-19 and harping on taking unrealistic, unfeasible, laughable and ludicrous economic measures

While the countries across the globe are grappling with novel Coronavirus Disease 2019 (Covid-19) pandemic and its aftermath, they are also focussing on how to handle and manage their doomed economies. In this regard, the bulwark of the global economic system, i.e. countries like Germany, France and to some extent the US have already started taking remedial steps to move their countries’ economy back on trails. On the other hand, countries like India are continuously changing their tactics and response to Covid-19 and harping on taking unrealistic, unfeasible, laughable and ludicrous economic measures.

German response to Coronavirus

Countries like Germany are finalising the plans to increase government spending to provide a stimulus to the economy as a whole. They have named it ‘deficit spending’ and are working in tandem with its EU partners like France. On June 3rd, the new partnership announced a stimulus package worth at least €130bn ($148bn).

Meanwhile, Germany has agreed with France that the EU should issue €500bn in common debt to fund investments in member states hard hit by Covid-19. Financial analysts who have always been wary of the German rigidity on financial matters are besides glee on this new turnaround and solidarity by the German leadership.

During the crash of 2008 German politicians were vary of the US-led ‘crass Keynesianism’. But this time around they have taken a swift response, which is also bigger in size and better in design, according to financial analysts. To aid more consumption, the package gives more benefits to the masses and cuts down VAT. Besides, it also offers €50bn for new investment, much of it focussing on green initiatives to tackle the climate challenge and fund technologies which are in consonance with long term climate goals.

According to The Economist, the catalyst, this time is of course, the Coronavirus. Available figures indicate that Germany faces a deep recession, it’s manufacturing and exports sectors are in red, and 7.3million workers are on furlough pay, which ultimately will be a big burden for German companies and government, both. But the German financial plan may help it to come out of this successfully.

The architect of this economic package, Olaf Scholz of the Social Democratic Party (SPD) hopes to succeed Merkel’s Christian Democrats (CDU) at the next year’s elections, as results of most of his economic chivalry will be there for everyone to see.

Britain’s response

On the other hand, Britain’s economy is likely to suffer the worst damage from the Covid-19 crisis of any country in the developed world, according to a report by the Organisation for Economic Cooperation and Development (OECD).

Labour Party has severely criticised the Conservative government, as reported in The Guardian. The shadow chancellor (finance minister) Anneliese Dodds, has blamed the ‘deeply worrying’ OECD forecast on the government’s “failure to get on top of the health crisis, delay going into lockdown and chaotic mismanagement of the exit from lockdown”, which she argued made the economic impact of the crisis worse.

According to OECD, unemployment in Britain could increase to 9%. This could make its situation more difficult, if it failed to secure a lasting agreement with the EU on trade and access to the single market.

Adding to pressure on No. 10 to agree concessions with Brussels to secure a Brexit deal amid the economic damage caused by the pandemic, the credit ratings agency Moody’s warned that a no-deal Brexit would ‘significantly damage the UK’s potentially fragile recovery from its deepest recession in almost a century’, The Guardian reported.

Laurence Boone, the OECD’s chief economist has predicted a forecast for both a single and double lockdown, as per him the UK economy could contract by an unprecedented 14% if the government needed to impose a second lockdown this year.

So why is the UK set to do much worse than Germany?

One factor identified by the OECD is the importance of the service sector to the UK economy. Trade, tourism, real estate and hospitality together make up a sizeable chunk of gross domestic products and all have been hard hit by the lockdown.

Having delayed imposing restrictions, the UK needed a near-blanket ban on activity from late March to early May to control the spread of the pandemic, which it didn’t. Business and consumer confidence has been eroded, unemployment is rising coupled with the uncertainty of how quickly restrictions will be lifted.

Indian response

Now compare this with India. World Bank in its latest edition of the Global Economic Prospect report, released last week, sharply scaled down its projections for India’s economy, forecasting 3.2 per cent contraction in the fiscal year 2020-21 because of the Covid-induced lockdown.

Only the International Monetary Fund (IMF) remains one of the few institutions, which still foresee India’s economy growing. It pegged growth at 1.9 per cent in 2020-21. The OECD on Wednesday projected that India’s economy will contract 7.3 per cent in the current fiscal year if there is a second wave of the coronavirus later this year. This is so far the steepest contraction that any agency has predicted for the country.

As per OECD an inclusive growth strategy over the long run should include prioritising social investment and income support for the poor. This can be financed by reducing energy and fertiliser subsidies that mostly benefit the rich, it added.

The question, which begs an answer here, is, why do Britain and India seems travelling together on the path of doom, while countries like Germany and France have been able to devise a strategy to steer their economies back to black?

Perhaps, the answer lies in the quality of politicians in the two countries. Leaders in both the countries seem at loss to control and take early and bold steps. Besides no inkling of how the economy works, which has led to this current precarious situation. And maybe some Indian leaders are still inspired and led by their colonial masters in matters related to the grey matter.

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