Bear Hug: How to overcome the ‘Recession’?

F undamental questions of life do not change, but answers do, depending on circumstances, experience, advancement in knowledge and technology. In the post-pandemic era a question, periodically asked in the past, will again be asked. How to overcome the recession? But will answers be different?

There can hardly be any doubt now that a recession is coming, a severe and pro- longed one. And the economic climate preceding the pandemic makes it extremely unlikely that responses to a recession currently on the offer will be very different or more effective than in the past.

Traditionally, over the last century, economists and governments have dealt with recessionary trends in three ways. They have increased public expenditure to ensure more money reaches the people. Or they have tried to increase money supply by lowering taxes and interest rates.

The third option of doing nothing and allowing the market to correct itself over time is seldom tried because of political risks and the uncertainty over how long it would take. Not surprisingly, for dealing with the Recession which is round the corner, economists and financial institutions are going back to Great Depression and Roosevelt’s New Deal.

It is possibly because a large part of the world has mortgaged their intellect to the United States. In the US itself, a large part of American intellect is mortgaged to Big Business. For a long time now, Americans have believed that what is good for General Motors or Google and facebook, is good for America.

Such belief now dominates most parts of the world and this unbridled enthusiasm for big business has spawned a vastly unequal world. In equality has political, social and human costs. It has economic costs too. well. A more equitable distribution of wealth, for example, will bring a larger number of people into the market and hence help it grow. Low cost of capital, which the present system entails, encourages automation. It also entails careless and ultimately wasteful use of capital. Emergence of big corporate houses also discourages competition.

Thus, in the long run even the concept of free market suffers. Free Market theorists should ponder whether it is better to have a system that produces fewer number of the poor and more millionaires, or one which produces an army of the poor but just one or two trillionaires in the next 20 years. The likely response to post-COVID recession is now becoming increasingly clear.

On TV recently the Chief Economist of the IMF was fielding questions online. Someone, if I remember rightly from The Times London, asked her how the enormous funds to combat the forthcoming recession could be raised and whether raising tax rates was a possibility. The Chief Economist replied that interest rates were already so low that raising loans should not be a problem. In any case, she added confidently, in 2021 the global economy would bounce back by 9% and therefore things should be fine thereafter. If global economy does bounce back by 9% in 2021, it will be nothing short of a miracle.

But it is hard to imagine Travel, Trade and Tourism reviving so soon. Retail Trade in the absence of tourists will also suffer in many places. Hopes of a recovery in 2021 look like a pipe dream. Business cycles, which include a period of recession, are an integral part of the market economy. All that can be done there- fore is to make the recession more bearable and reduce the human cost. But while we wait for new answers to deal with it, it is worth speculating what can be done in the short run in India.

Since the problem is fundamentally one of raising resources and utilising it in the best possible manner, the reduction in corporate taxes announced last July should be immediately rolled back. Because the reduction did not in any way accelerate investment between July and March this year as was the expectation behind that decision. Secondly Inheritance Tax should immediately be reintroduced on estates above say, Rs. 100 Crore.

Wealth Tax laws should be revised with a view to ensure that the effective rate is at least 1% for properties above Rs. 100 Crore. The strengthening of Grameen Rojgar Yojana and revival of MGNREGA would be welcomed. But a similar scheme needs to be formulated for urban areas as well. Urban poverty is no less painful and post-lock- down needs to be addressed urgently.

All interest payments due in the next six months from April to September should be waived and the Government should directly compensate the banks and lending institutions. Banks in fact should also be made to bear a part of the cost. When everybody suffers, banks cannot be an exception. As regards wages, on proof of wages having actually been paid, the Government may reimburse the cost, up to Rs. 10,000 per worker per month from April till the establishment resumes full operation.

Finally, whatever measures the Government may finally adopt, the measures should be comprehensive and adequate, unambiguous, implemented quickly and should be announced before the lock- down is lifted, partially or fully. Finally, a word on games that governments play. When Governments lower interest rates, the announcement is accompanied by projections that it would help revive the economy. But a major motivation is always for the Governments to serve their own interest.

All governments borrow. Lower interest rates help keep their cost of borrowing low. When the RBI and the Government cut bank interest rates, the Government is helping itself. A lower interest on PF, PPF or small savings proportionately reduces the Government’s own liability. It is of course unfair because lower interest rates penalise the poor and the middle class, who postpone their consumption and save for the rainy day. The poor and the middle class are ‘natural savers’ but have been let down by successive governments. Lower interest rates will affect pensioners and elder citizens who will find their savings and interest income dwindle.

Keeping tax rates or interest rates low on a quasi-permanent basis also defeats the very purpose of lowering them in the first place. What pioneers of the Chicago school had argued was that lower rates would create an expectation of inflation and thereby induce consumers to spend rather than save, and the producers to produce more. But keeping the rates low for a long time only enables those who are already invested to earn more but does nothing to encourage higher investment.

Moreover, keeping them low on a quasi-permanent basis robs the Government the chance of further lowering them and hence deprives it of a powerful tool of economic incentive. Keeping the interest rates lower than the inflation rate not only punishes the savers but also tempts borrowers to live beyond their means and keep them permanently impoverished.

This does expand the market but arguably adversely affects both savers and borrowers, diminishing their ability to cope with financial emergencies. It also drives a sizeable population away from investment markets. One can thus argue that the world can actually live with higher taxes and higher interest rates. The taxes are low only because politically, equality is no longer an ideal which is pursued, and because of the stranglehold that the rich have over the establishment.