EPISODE #3: THE GAP YEAR FINALLY COMES TO A CLOSE
The big lesson from the pandemic is that it is time for a new social contract.
Hi Everyone,
A very happy Monday to you and a happy 2021 in advance.
The third episode of Capital Calculus 2.0 goes online in what is also the final week of an incredible year; one we will never forget. The once in a century covid-19 pandemic, originating in Wuhan, China, has, among other things, wreaked havoc on the economies of every country causing unprecedented loss of livelihood, especially in the informal sector. It has exposed the extent of vulnerability of people to economic shocks and the inadequacy of conventional public policy. Though we still don’t have the data it is a safe bet to assume the economic meltdown has reversed two decades of gains in the fight against poverty.
This week therefore I have focused on the socio-economic fallout of the pandemic. Particularly relevant to a developing country like India where the bulk of the workforce derive their livelihood from the informal economy. To me it is one of the biggest public policy challenges which will have to be addressed by all governments, including India, even before the dust settles on the pandemic. It is my surmise that things will never ever go back to normal and that all countries, including India, will have to ink a new and radically different social compact.
Once you have read this post, please, please do drop me an email with your thoughts or ping me on twitter at @capitalcalculus. Your inputs are key to growing this newsletter. A big shout out this week to Shyam, Vandana S and Vandana B, Kapil, Krishnendu, Yugainder, Balesh, Rajit and Premasundaran who went the extra mile to share their thoughts on the vexing issue of the spike in malnutrition; and, many thanks to the growing number of readers who have started hitting the like button 😊.
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Read on.
A NEW ERA, A NEW SOCIAL CONTRACT
Later this week, the world will usher in 2021. The good news is that we would finally bid goodbye to one of the most forgettable years in human history.
The bad news is two-fold: One, given the nasty surprise this year, we don’t have a clue as to what is in store in 2021. Second, the devastation caused by the covid-19 pandemic is unprecedented, widespread and still unravelling; hence most countries are still in damage control. The International Monetary Fund (IMF) estimates that the world economy as a whole will contract by 4.4%; more worryingly though individually some countries will see a contraction in double digits. Most economies will fall back to levels they logged in 2018.
In effect 2020 is a gap year. The socio-economic fallout of this contraction is threatening to overwhelm countries. The implications which vary disproportionately across and within countries, can be measured by the metrics of vulnerability and consequence. To put it simply, the more vulnerable you are, the greater the stress test.
No prizes for guessing that the lower you go down the ladder of economic empowerment greater will be the loss and suffering. Exactly the kind of perspective you do not get if we stay focused on just the growth numbers. Yes, economic growth is important, but going forward the quality of growth will be the clincher. Worryingly the aggregate growth numbers mask the underlying social and political risks, both of which are critical to the economic stability of any country. Something particularly true for India.
The India story
For the record, economic growth will rebound next year—largely because of the base effect. But several analysts are drawing comfort from the improved financial performance of companies at the end of second quarter in September to make the case that this is a sustained recovery. What they miss is that this turnaround is not because the top line of companies improved (those in the contact economy are still plumbing devastation as covid-19 continues to spread).
Instead it is because companies undertook savage cost cuts, including letting go of large number of personnel and slashing wages; something that has not just worsened the economic pain, but probably also worsened inequality as the less well off people are worse off today—not to speak of those who have fallen back into poverty, swelling the ranks of the ‘new poor’.
What we often overlook is that the covid-19 pandemic has only amplified the existing inequalities. In fact, most Indians, particularly those in the neo-middle class, were always just one disease away from poverty. Even before covid-19 struck, they were struggling to cope with the shift in the country’s disease burden to non-communicable diseases.
The IMF has articulated this concern about inequality in the latest update of the World Economic Outlook released in October. Here is a snap shot:
An analysis published on the IMF blog based on research undertaken in low-income countries concludes, “The estimated effect from COVID-19 on the income distribution is much larger than that of past pandemics. It also provides evidence that the gains for emerging market economies and low-income developing countries achieved since the global financial crisis could be reversed.”
A new social contract
Among the solutions it offers to fend off this challenge, the research paper makes a strong case for continuing the social assistance—paid out since March this year—in the form of conditional cash transfers, food stamps and medical benefits for low-income households. Indeed fiscally the associated costs of sticking with this social safety net are daunting. But then withdrawing the benefits prematurely has even graver consequences; it could well unleash a political backlash. In short there is no option other than biting the fiscal bullet.
Indeed, if the union government does show the fiscal will and political acumen it has a great opportunity to ink a new social contract with 130 crore Indians. The covid-19 pandemic has brutally exposed the frailness of the existing public policy framework, especially in its inability to underwrite the welfare of those at the bottom of the pyramid. So it is time to hit the reset and refocus public policy to ensure quality of living.
Luckily the Bharatiya Janata Party-led National Democratic Alliance has a playbook on hand to launch this new social contract; one which recognizes the multi-dimensional nature of poverty and ensures the benefits reach the targeted beneficiaries. It has in its possession the report of a high level committee arguing for the creation of a social registry. The expert group proposed pairing the granular data of nearly 18 crore households in rural India captured in the Socio-Economic Caste Census (SECC) of 2011 with Temporary Identification Number (Aadhaar could serve the same purpose) to identify the beneficiaries.
Further, this plan can be monitored on a real time basis and be fine-tuned to ensure that the relief package is calibrated to address the disproportionate impact of the covid-19 fallout. So, it won’t be a case of one size fits all.
In the final analysis it is clear that the challenge on hand is daunting. One which demands an equally compelling response. At the least it can’t be business as usual.