Covid-19: Health, macroeconomics, and trade

  • Blog Post Date 30 April, 2020
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There is great uncertainty around the spread and eventual end of the Covid-19 pandemic, and the possibility of extended or intermittent lockdowns. Besides the immediate health crisis and loss of livelihoods, this uncertainty has a bearing on global and intra-national trade and investment, and regional and domestic supply chains. Anirudh Shingal discusses some policy priorities to stabilise the economy in the short run, and to bring it on a recovery path in the medium to long run.


The enormous disruption of economic activity in the wake of Covid-19 has the potential to be the most significant adverse macroeconomic shock in the last hundred years (Hevia and Neumeyer 2020). The IMF (International Monetary Fund) and WTO (World Trade Organization), amongst others, have predicted massive losses in economic growth and international trade in countries and regions across the world. The WTO has predicted a 13-32% decline in trade, but these predictions are likely to be underestimates as they are only based on merchandise trade (Shingal 2020). Meanwhile, the cost of a three-week complete shutdown of all economic activity in India is US$150 billion or 5.8% of GDP (gross domestic product) foregone (Lahiri 2020).

Lockdown and social distancing have resulted in an immediate supply shock, followed by a demand shock. Economic activity has been completely stalled except in essential services and there is great uncertainty relating to the spread of the pandemic and relaxation of lockdowns across the world and within India. This uncertainty has a bearing on both global and intra-national trade and investment besides disrupting regional and domestic supply-chains and postponing consumption. In fact, trade in services is likely to be even more badly affected as several services transactions require proximity between the buyers and sellers, which is the first casualty emanating from Covid-19-induced social distancing (Shingal 2020). Given the increasing use of services as inputs into all sectors of economic activity, the adverse impact on services will have significant knock-on effects on the rest of the economy.

In what follows, I look at some policy options that the government could exercise to address the uncertainty emanating from this pandemic, to stabilise the economy in the short run and to bring it on a path of recovery in the medium to long run.

Immediate priority

The government’s foremost responsibility is to contain the spread of the virus and check mortality rates because a workforce can only be productive as long as it is alive and healthy. At the same time, given disguised unemployment in agriculture and the large share of India’s workforce employed in informal services and the unorganised sector, an extended lockdown is likely to result in a life-threatening situation of its own for migrants, daily-wage workers, casual labourers, informal sector workers, and the many self-employed who lack substantial personal savings as a safety net.

The government should therefore coordinate across states to at least partially lift the lockdowns in sectors that contribute significantly to the country’s GDP (gross domestic product), employment and exports, besides generating positive multiplier effects on demand and supply. These sectors include agriculture and allied activities, transport and electronic equipment, machinery, pharmaceuticals, textiles, handicrafts, construction, and services such as IT, business, financial, telecoms, and distribution. At the same time, given the uncertainty around the pandemic, possibilities of the virus’ seasonal recurrence, and the time involved in developing a vaccine and getting it approved for human consumption, the government must also invest in improving the country’s Covid-19-related health infrastructure – both preventive and curative – on a war footing.

Supply-side measures

On the supply side, easier availability of finance and streamlining of regulatory bottlenecks would go a long way in expediting recovery in the aftermath of this pandemic, including via trade. Despite marked improvements in the ease of doing business, India is still ranked 77th amongst 190 countries on the World Bank Doing Business’ Trading Across Borders index. A vast majority of Indian firms continue to identify customs and trade regulations as a major constraint. Similarly, despite a largely liberal FDI (foreign direct investment) regime, the country attracts less than 2% of its GDP as inward investment, suggesting that other investment climate and regulatory issues remain a challenge for potential investors. Addressing these challenges would also facilitate commercial presence inside the territory of another country or Mode 3 trade in services, which is not only the most dominant mode for supplying services abroad, but often also a necessary precursor to cross-border or Mode 1 services trade transacted over the internet. These two modes of service delivery together accounted for nearly 90% of the US$ 13.3 trillion global trade in services in 2017 (WTO, 2019), reflecting their overwhelming importance from a policy perspective.

The Reserve Bank of India (RBI) has already announced a slew of policy measures to ease the flow of credit in the economy. These include a 25 basis-point cut in the reverse repo rate; extension of the realisation period of export proceeds from 9 to 15 months; relaxation of asset classification norms; an increase of the limit under Ways and Means Advances for states to avail short-term funds to 60% of the existing limit; and a special refinance facility of Rs. 500 billion to boost liquidity of NBFCs (non-banking financial companies) like NABARD (National Bank for Agriculture and Rural Development), SIDBI (Small Industries Development Bank of India), and the National Housing Bank. Other interventions include emergency credit lines introduced by public sector banks; a concessional SIDBI interest rate loan for MSMEs (micro, small, and medium enterprises) engaged in the production/delivery of Covid-19 goods and services; and deferment of GST (goods and services tax) payments until June 2020.

However, a recent All-India Manufacturers’ Organisation survey of 5,000 MSMEs found that 71% of these businesses could not pay their employees’ salaries in the month of March (Pandey and Pillai 2020). Another recent UNIDO (United Nations Industrial Organisation) survey highlights the problems that MSMEs have faced during the lockdown, emphasising that restarting businesses is likely to be a major challenge. While a stimulus package focused on MSMEs is in the offing, the identification of beneficiaries in the absence of a comprehensive dataset on MSME units poses an enormous challenge (Pandey and Pillai 2020).

Moreover, the announced measures pale in comparison to those provided by some of the other G20 countries, many of whom already had an elaborate safety net in place well before the onset of this pandemic. Subsequent efforts should thus “include wage support/subsidy (capped) for a period of three to six months, direct subsidies to one-person businesses and micro units, deferral of rent and utility payments, compensation for decrease in turnover during lockdown periods, etc.” (Pandey and Pillai 2020)

Given that contagion-related fears would persist till a Sars-Cov-2 vaccine is available for mass deployment, the government should also incentivise firms and their employees to work from home to prevent more damaging and long-lasting effects on health and productivity, besides further straining the country’s already stretched health infrastructure. This could be done via production subsidies and/or tax cuts and by curtailing/postponing excessive or unnecessary government expenditure on non-essential items so as not to inflate the budget deficit.

Demand-side measures

The cost of lockdowns is particularly high for the urban poor that comprise mostly informal workers in the unorganised sector lacking formal employment contracts. A disruption of their daily income flow even makes their survival a challenge given their limited/non-existent savings. But, even in the organised sector, the potential shutting down of business and job losses emanating from the lockdown will dampen demand significantly.

The government has already announced a Rs. 1.7 trillion stimulus package that includes direct cash transfers and food security measures targeted at the poor, farmers, healthcare staff, women, construction workers, as well as the organised sector. However, this allocation is less than 1% of India’s GDP and clearly not sufficient for its 1.3 billion people, about 60% of who lives on less than US$3.10 a day, which is the World Bank's median poverty line. The magnitude of the stimulus package pales in comparison to that provided by some of the other G20 countries and early assessments suggest that this should be at least 5% of India’s GDP. The government thus needs to implement more targeted stimulus packages over the course of the next 12-18 months, also designed to address falling demand as businesses shut down and people lose their jobs as a result of this crisis.

The government’s ‘Jan Dhan, Aadhaar, and Mobile’ (JAM)[1] trinity, currently being utilised to implement direct cash transfers provided under the first stimulus package, is also likely to be a good mechanism for wage support transfers to daily wage and casual workers (Pandey and Pillai 2020). However, given that demand-enhancing measures like tax cuts largely benefit big business and exclude the informal sector, appropriate mechanisms to provide relief to informal workers and tiny micro-enterprises need to be developed so that such aid reaches the beneficiaries in time to prevent catastrophes.

Trade policy measures

While Covid-19 is primarily a health crisis, trade policy also provides options to address some of the second-order effects emanating from the pandemic. First and foremost, the government must avoid the use of export restrictions on Covid-19 goods and services, from both trade policy and humanitarian perspectives. It should also use the pandemic as an opportunity to liberalise imports by reducing both tariff and non-tariff barriers and not just on medicines, medical supplies, and essential equipment. Such liberalisation may be even more necessary for services sectors like passenger transport, hospitality, health, and education, which are likely to observe imposition of regulatory restrictions on health grounds. The government, however, must ensure that such restrictions do not become prohibitive and that borders, both domestic and international, despite strict surveillance, remain open. Lowering of trade barriers on goods and services used as intermediate inputs for domestic production and exports will also reduce economy-wide costs for both consumers and firms, facilitating recovery from both the demand and supply side.

Another policy response during this crisis would be to unshackle the domestic e-commerce sector by introducing liberal provisions in the draft e-commerce policy that has not been enacted yet. The policy should also liberalise cross-border data flows and revisit proposed provisions on data localisation, etc. Such liberalisation would also have positive effects on India’s Mode 1 services trade – the one mode of service delivery likely to be least affected by Covid-19-imposed social distancing and lockdowns as these are services transacted over the internet in sectors such as finance, insurance, telecoms and other business, where economic activity is possible even in work-from-home scenarios (Shingal 2020). In fact, the demand for these services will only get accentuated in the wake of this crisis.

The disruption of regional supply chains as a result of the pandemic means that India should explore opportunities in new markets in Africa and Southeast Asia, which are also likely to be more receptive to non-Chinese trading partners now. One way of implementing this would be via preferential trade agreements. On this, India should learn from its RCEP (Regional Comprehensive Economic Partnership) negotiations experience. In fact, regional integration may be one effective response mechanism to counteract the macroeconomic shocks of the pandemic (for instance, see Shingal and Mendez-Parra 2020, Beck and Wagner 2020). This may also be a good opportunity for India to join the recent plurilateral trade liberalisation initiative of Singapore and New Zealand, which has since its ratification seen more members – Canada, Australia, Chile, Brunei-Darussalam, and Myanmar. Such pro-active engagement is also likely to enhance India’s reputation globally (even the European Union has not joined the initiative) and present it as a leader within the G20 to coordinate global policy action on both the health and trade fronts.

Global shocks like the Covid-19 pandemic require a global, coordinated response (Beck and Wagner 2020), which in turn requires leadership, which unfortunately is missing at this point in time. India should therefore galvanise support for coordinated action at the multilateral level and play a lead role in this regard. That would be the best global response to this crisis.


  1. Jan Dhan Yojana is the National Mission for Financial Inclusion to ensure access to financial services, namely banking savings and deposit accounts, remittance, credit, insurance, and pension in an affordable manner. This financial inclusion campaign was launched in August 2014. Aadhaar is a 12-digit individual identification number issued by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India. It captures the biometric identity of every resident, and is meant to serve as a proof of identity and address anywhere in the country.

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