The COVID Crisis and Response

In this chapter, we write about the COVID Crisis as it unfolded, without the benefit of hindsight. The data and the analysis are therefore of meaning when considered with reference to what was known by early May 2020. The situation prior to the COVID as brought out in the Chaps. 2 – 7 was problematic with major slowdown and heightened uncertainty in the financial sector in the last year before the crisis. The crisis changed everything. The now steep fall “due to the crisis” could now confound the earlier slowdown. If every country was expected to decline by around 20–30% over the immediate quarter then a decline of the nearly the same order but from a prior slow growth should not have attracted attention on the ground that there had been a slowdown. The response of the RBI, free from its conservative shackles, now followed the US into expanding liquidity and supporting the financial sector, in ways that were quite radical for the RBI. In contrast during the GFC the RBI had to be persuaded to act. There were no arguments against the need to adopt supportive and expansionary monetary measures, and the governor with no doctrinaire blinkers could address the reality. However, the government in its fiscal response was barely adequate. The “20 lakh crore” stimulus was misleading. Only about Rs. 1.72 lakh crore involved expenditures directly or indirectly by raising consumer incomes. The rest were liquidity, credit, and guarantee measures, and included a borrowing limit enhancement for the state governments. The response was in sharp contrast to the response to the GFC when the central government took the leadership role to put together a fiscal package and persuade the RBI to expand liquidity, to restore the growth to almost its original level. The administrative measures of territorial lockdowns did little to contain the spread, but imposed great hardship on the people, especially the migrant workers, besides curtailing production wantonly. We estimate the unconditional impact of the crisis (i.e., without the fiscal response) should have taken the economy down from its 2019 to 20 value to between 8.86 and 12.23%, and conditional on the stimulus to a value of −6.21 to −9.68%, most likely closer to the latter. The very early estimates were somewhat worse, but the RBI in responding swiftly and in kind ensured that there would not be a monetary constraint, and hence a simpler expenditure model could be used.