1. Home
  2. Is recession round the corner?

Is recession round the corner?

In a world that is ravaged by the pandemic literally and metaphorically, several people have lost jobs, nations have lost growth drifting into recession, multiple businesses have gone bankrupt and students left to the mercy of online learning. Healthy economies are floundering. It is greatly difficult to predict how this would pan in times to come. Whatever the panning might be, nothing would be the same again for a long time. This pandemic has further signalled many singularities in the lives of people, in governments, in businesses and in every supply chain that enables the world to tick. Lest we conceive differently, a singularity in mathematics generally is a point at which there exists no defined solution. Like complex analysis coming to the aid of mathematics, we need complex solutions to veer out of the pincer like hold this covid seems to have on us, in the absence of which, either civil wars or great unrest could topple governments. What should the governments do then, if they have to remain in business? For one, they must see that everyone of its citizens is gainfully employed. Let’s see the dynamics of such an idea if we were to not end between the devil and the deep sea.

 

Unemployment tends to rise quickly, and often remains high during a recession. IMF projections suggest that the severe lockdowns in several countries will trigger the most serious global economic downturns. Are we staring at a recession? Would we see rehired workers willing to take jobs that paid less? With the onset of recession, businesses face increased costs, stagnant or falling revenue. They have to service their debts which they cannot and hence lay off workers so costs can be cut. This spikes the number of unemployed workers across many industries simultaneously. Covid induced unemployed workers or those who are new to unemployment, will find it difficult to find new jobs, thereby increasing the average length of unemployment of workers.

 

Economic growth needs job growth. Studies point out that in India, 1% GDP creates about 7.5 lakh jobs. That is more than a crore of jobs for people entering the job market every year and is besides 30 lakh people who lost jobs as growth fell from nine per cent to five per cent and may be more as the GDP further falls. Probably difficult in current times, with several businesses laying off their workers. When the going is good or the growth is healthy, the government doesn’t need to do anything besides handholding. Small businesses, MSME’s and the informal economy will compete and thrive, thereby creating job opportunities, besides meeting consumer needs.

 

If the pandemic were not to push our economy to contract into a recession, the government must create solutions to unemployment. It seems to have used both expansive monetary policy and expansive fiscal policy, to stimulate job growth. Will it be successful? Most of the interventions of the government seem to rely on bank lending and doesn’t directly put money into consumers’ pockets which can be counterproductive.

 

Towards expansionary monetary policy, in March, the RBI had allowed a three-month moratorium on repayment of all term loans due between March 1, 2020 and May 31, 2020, reduced repo rate by 40 basis points from 4.4% to 4%, the reverse repo to 3.35%, generally acknowledged as capable of stimulating economy and increasing money supply. This could raise liquidity thereby allowing banks more money to lend. Ideally, this must make mortgage and other interest rates decline. If the benefits are passed on to the consumers as cheaper credits, consumers can borrow and spend more, allowing businesses to expand to meet the increased demand. This increased demand allows companies hire more workers and give them more purchasing power. However, are our banks really willing to play ball? Further, at least six months will be required to create demand. Any recessionary trend can bring down the demand and the need for loans as well. If people feel they are too poor to borrow, will interest rates matter? If the recessionary trend continues, banks will be unwilling to lend because borrowers can default on payments. Another downside is that expansive monetary policy can trigger inflation if overdone. The government may also increase money supply through mortgage-backed securities, gold bonds or any other kinds of debt or lower the reserve requirements to spur liquidity and spending.

 

The government must spend on public works, building roads and bridges as they are most cost effective and create jobs. MGNREGA if implemented in its spirit, is an effective Labour law and social security measure that guarantees the ‘right to work’. People benefit directly since the contractors hired to execute the projects in turn will hire workers.

 

Any money directly given to the poor and those who have lost jobs or to those who cannot make ends meet, will spend it for enough food, clothing and shelter. This also creates many jobs because the unemployed will spend such money on necessities such as groceries, clothing, and shelter. Retailers and manufacturers respond to the added demand by hiring more workers.

More jobs can be created if the government can implement payroll tax cuts and business tax cuts. The first will allow people to have more money, allowing them to spend more, stimulating demand whereas the second will allow businesses to hire more. Businesses could even reduce prices, increase employee wages, buy more supplies or hire more workers directly.

 

Government spending on defence can also stimulate job opportunities. But then these days wars are not fought on conventional theories. With the entire militaries running on automation and AI, the major defence spend may be on such equipment like Drones and Fighter Craft and Missiles. How many new jobs this can create, is a matter of some research?

 

The government must seriously look at the problem on the ground as well, that of finding an antidote for the Covid 19, as any delay can only hurtle the country into an abyss of recession. Covid is getting us to look over there when we should be looking here. The paradox is that the drivers of the virus are those without symptoms. We need to find them. Why don’t they get symptoms? Therein lies the clue to the vaccine just as the clue on the other side of the spectrum is to create employment opportunities for all. Surely these are not singularities of life.

(Visited 3 times, 1 visits today)