Described as the most devastating human and economic crisis of our lifetimes, the Covid-19 induced pandemic has brought the global economy to a standstill while unleashing myriads of complications and threats to the overall well-being of individuals and nations at large. The pandemic’s destructive capacity is evident in terms of the enormous tolls on human life and health, issues of food insecurity, large-scale unemployment, scaling poverty, rising vulnerabilities and the consequent setback to the global economy. Grappling with disruptions in supply chains, depressing demand and the consequent unemployment upsurge, several economies across the globe have slipped into recession. The devastating economic shocks of the pandemic have raised questions about the effectiveness of the market in allocating and distributing resources. In times of crisis, one can observe increased advocacy for State intervention to resurrect the economy. Grounded in Keynesian economics, the idea of massive State spending in the form of fiscal stimulus is gaining ground and guiding the policy interventions of governments all over the world.
Considering the gravity of the crisis, several economists and scholars deem the ongoing pandemic to be the worst economic contraction since the global financial crisis of 2008, which was predominantly ‘a demand crisis’. However, the ongoing Covid-19 crisis has unfolded an exceptional scenario where both the aggregate demand and the aggregate supply in the economy stand affected. It has created a vicious ‘supply-demand doom loop’. With the closure of industries and other economic activities, curbs on transportation and large-scale reverse migration of workers, the production processes have come to a standstill, thus, impacting the supply of commodities and reducing the overall economic output. Parallelly, due to widespread unemployment and reduction in people’s disposable income, the aggregate demand (also expressed in terms of private final consumption expenditure) in the economy has seen a sharp decline. It must be noted that reduced expenditure does not necessarily translate into savings and increased savings do not necessarily encourage investment. Firstly, for many, diminished income implies that they are spending more than what they are earning, i.e., old savings are being eaten up. Secondly, as highlighted by Keynes, investment is not merely contingent upon savings and several other factors like the expected rate of return play a significant role. In turn, the rate of return is ultimately influenced by people’s purchasing power which has largely contracted during the pandemic.
In addition, the shortage of labour has shot up the labour costs and the cost of production, due to which individual firms are resorting to large-scale retrenchment by firing workers. However, Keynes’ theory of General Equilibrium argues that a particular equilibrium may be beneficial for an individual firm but it may not be profitable for the economy at large. In this backdrop, Keynes would suggest that the economy must be regulated through the demand side, i.e., by boosting the aggregate demand in the economy. While the Classicals would advocate monetary policies such as lowering the interest rate to encourage borrowings and induce investments, Keynes would recommend active State intervention in the form of massive fiscal stimulus to attain higher levels of income and employment, which in turn will spur aggregate demand. Clearly, the market has failed in maintaining equilibrium and the State must assume a potent role.
To ensure that both the demand and supply side of the economy start functioning properly, it is imperative to inject enormous fiscal stimulus into the economy. Firms will invest only when the expected rate of return is lucrative and that is possible when aggregate demand rises. Therefore, the aim should be to enhance employment and purchasing power of individuals, enabling them to turn their savings into much-needed investments. To achieve this, the government has to step in. In India, the Micro, Small and Medium Enterprises (MSMEs), primarily engaged in manufacturing and export services, are the economy’s bedrock. Large-scale unemployment and choked production in the MSME sector call for hefty relief packages by the government. Other hard-hit sectors such as aviation, tourism and hospitality, automobile, real estate also require adequate financial aid. Further, lowering corporate taxes for MSMEs and affected sectors in order to boost investment can prove helpful. Since Keynes advocated an intermix of both monetary and fiscal policies in times of crisis it would be appropriate to introduce monetary policies like bringing down interest rates on borrowings to foster investment. Since unemployment is mounting and a vast section of the workforce seems to have shifted to agriculture, initiating government investment in agricultural infrastructure can deliver the necessary support. Welfare programs such as minimum wage, generating employment, assuring free health care, granting a universal basic income and strengthening social security measures will create a multiplier effect in the economy and go a long way. Therefore, welfare measures must be introduced over and above the fiscal stimulus.
The economy has to be kickstarted through ‘countercyclical’ government interventions, which means injecting money into the economy in times of bust. During booms, higher taxes and interest rates can be levied to counter the heavy expenditure. Such unprecedented times call for bold measures instead of waiting in apprehension for the market to correct itself. After all, as stated by Keynes, “in the long run, we are all dead”.
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The views expressed in this article are the author's own.