The Covid-19 pandemic has been one of the biggest economic disruptions the global economy has ever seen. The pandemic’s effect, however, is very different from
past recessionary phases. There is a simple reason for this. The source of economic disruption is not some crisis in the financial sector or the real economy. Economic activity suffered because the threat of infections has prevented the free movement of goods and services within and outside nations. This also means that while fiscal stimulus is important to prevent a humanitarian crisis and destruction of productive capital in the economy, it can only do so much in the restoration of status-quo-ante. This is exactly why a lot of commentators have linked the prospects of an economic recovery to the roll-out of an effective vaccine.
Given this exogenous link between the economy and virus curves, speculation in financial markets has been at very high levels. Equity markets across the globe reached all-time highs last month when reports of a successful roll-out of vaccines came. They have tanked collectively after a new and more infectious strain of the Covid-19 virus has been found. Such speculation in financial markets is not a benign phenomenon. When huge sums of hot money move across international borders at a rapid pace, they bring significant challenges for economic policy on all fronts. India is no exception. To give an example, the Reserve Bank of India (RBI) will have to guard against sudden appreciation in the value of the rupee, lest exports lose their competitiveness.
In a world where both commodities and finance are free to move, domestic policy-making cannot wish away these problems. While most private and institutional forecasters, including RBI, expect the Indian economy to do better than expected this fiscal year, they have also underlined the seriousness of the challenge of putting the economy back in a sustainable high growth path. There are also valid concerns about the inequality-enhancing impact of the pandemic.
Prudence in policy-making requires striking a fine balance between short-term volatilities, especially on the external front and the long-term goals of the domestic economy. India’s own experience, as well as that of other countries, has shown that pursuing one and neglecting another never yields desired results. Economic policy, especially the forthcoming Union budget, must keep this in mind.