Emerging Markets’ Crisis:
Contrary to popular opinion, 70% of participants in a poll believe that emerging economies are experiencing a worse crisis than advanced economies. Reasons for this perception may include a younger population more accustomed to dealing with crises and a history of facing similar crises before.

India’s Growth Rate:
India’s growth rate has averaged around 7% over the last 25 years, significantly higher than the U.S. A majority (51%) of participants in a poll believe that India’s growth rate will remain higher than the U.S. in 2020. However, a significant minority (31%) expects India’s growth rate to be lower than the U.S.

Four Phases of Economic Response:

* Phase 1: Containing the Virus and Providing Relief:
* Ensure the reproduction rate of the virus is below one through testing, tracking, and isolating exposed individuals.
* Provide financial relief to affected households and small and medium enterprises.
* Industrial countries initially succeeded in this phase but face ongoing challenges due to resurgences of the virus.

Phase 2: Recovery and Support:
* Once outbreaks are under control, focus on recovery while preventing fresh outbreaks.
* Support entities, especially those severely impacted, through capital structure repair, bankruptcy courts, debt restructuring, and equity infusions.
* Reallocate resources from non-viable businesses to viable ones, considering the long-term effects of the pandemic on certain industries.

Phase 3: Reform:
* Address the problems highlighted and exacerbated by the crisis, including inequality, once the bulk of the recovery work is complete.

Emerging Markets:
* Emerging markets may need to implement reforms during the crisis rather than waiting for the post-crisis phase due to their unique challenges.

Lockdown Measures:
Italy implemented stringent containment measures in late February, leading to a peak in cases in March. India imposed a total national lockdown in the third week of March, resulting in one of the most stringent lockdowns globally.

Confirmed Cases:
Italy experienced a decline in confirmed cases following the implementation of strict measures. India’s cases continued to climb steadily despite the lockdown, with no visible impact on the exponential growth of infections.

Lockdown’s Effect:
In Italy, the lockdown appeared to be effective in curbing the spread of the virus, with cases declining after the implementation of strict measures. In India, the lockdown did not seem to have a significant impact on the number of cases, raising questions about the effectiveness of the stringent restrictions.

Lives Versus Lives:
The lockdown in India proved relatively stringent without a commensurate effect on cases, highlighting the complex trade-off between lives lost due to the virus and lives lost due to the economic and social consequences of the lockdown.

Comparison of Restrictions:
The restrictions in India were significantly more strict compared to Italy, with India imposing a total national lockdown with little notice.

What Went Wrong in India?:
Despite restrictions and a severe lockdown, COVID-19 infections continued to grow rapidly in India. Unlike the textbook Italy restrictions, India’s lockdown was shorter in duration and relaxed even as infections grew.

Attitudes and Social Distancing:
Attitudes towards social distancing may have played a role in the ineffectiveness of containment measures in India. The “chalta hai” attitude and “jugad” approach to regulations may have contributed to lax adherence to social distancing guidelines. Pictures of social distancing circles being used to mark places in line, rather than for actual distancing, illustrate the challenges in promoting social distancing.

Early Misinformation and Lack of Incentive:
The authorities’ proclamations of control over the situation and low infection rates led the public to believe the situation was not serious, reducing the incentive for social distancing. A more severe lockdown was needed to convey the seriousness of the situation and ensure adequate enforcement.

Lessons from Quantitative Restrictions:
The need for a complete zero-one move from zero to one, rather than allowing exceptions, was highlighted by Glaser and Schleifer’s work on quantitative restrictions. In India, this approach was adopted to prevent everyone from claiming essential service status and circumventing the lockdown.

Effectiveness of the Lockdown:
The lockdown in India had a significant impact on mobility, causing a sharp downturn that lasted until relaxations began. Despite the stringent lockdown, the infection curve continued to rise, raising questions about its effectiveness.

Duration of Lockdowns:
A short, severe lockdown may be as effective as a less severe but longer-lasting one in signaling the seriousness of the threat. However, creating exceptions and allowing essential services to run can be challenging, especially in less organized administrations, leading to extremely severe lockdowns.

Challenges in Emerging Markets:
Social distancing is more difficult in emerging markets due to cramped living conditions, as seen in slums like Dharavi in Mumbai. The informal economy and daily wage labor make it difficult for people to comply with lockdown measures without financial support. Inadequate testing and contact tracing infrastructure further complicate containment efforts.

India’s Contested Control of the Virus:
India’s Dharavi district successfully reduced cases through effective management, demonstrating the potential for successful containment. India’s initial testing capacity was limited, but it has since ramped up significantly, surpassing the testing rates of countries with stronger medical facilities like the UK and the US.

Household Buffers and Migrant Safety Nets:
India’s households have limited financial buffers and rely on daily wages, making it difficult for them to comply with prolonged lockdowns. Migrants, who often lack safety nets, were forced to leave cities and return to their villages due to the lack of support during the lockdown, potentially contributing to the spread of the virus.

Government Mismanagement:
The Indian government’s lack of policy transparency and predictability during the lockdown led to confusion and uncertainty among migrants, prompting them to leave cities en masse. Bureaucratic hurdles prevented private hospitals from fully engaging in the fight against the virus, limiting healthcare resources. The government’s centralized approach to pandemic management initially limited state-level flexibility and resources.

Kerala’s Success and the Importance of Decentralization:
Kerala’s early success in tracking, testing, and tracing the virus demonstrates that effective containment is possible in India. Decentralized governance models, such as those in Germany and South Korea, allow for regional experimentation and learning from best practices. India’s federal structure could be harnessed more effectively by coordinating and learning from successful state-level approaches.

Lessons from the India-China Comparison:
India’s stringent lockdown, while initially necessary, was economically unsustainable and contributed to its ineffectiveness in controlling the pandemic. Better preparation, including support for households, businesses, and state governments, could have enhanced the lockdown’s effectiveness and reduced its negative economic impact.

Shorter Lockdown in India:
Unlike developed countries, fewer jobs in India can be done at home, making a longer lockdown unsustainable. A study by Brent Nieman and Jonathan Dingell shows a correlation between GDP per capita and the percentage of jobs that can be done remotely. Countries like Great Britain, the United States, and Canada have a higher percentage of jobs that can be done at home compared to countries like Mozambique.

Essential Services and Livelihoods:
A stringent lockdown can lead to disruptions in essential services, resulting in deaths from non-COVID-19 causes, such as dialysis and cancer. Surveys indicate that people were skipping meals due to the loss of income during the lockdown.

Conclusion:
India’s shorter lockdown duration compared to countries like Italy can be attributed to the higher percentage of jobs that require physical presence, the need for effective essential services, and the impact on livelihoods.

The Fragility of Households in Developing Countries:
Households in developing countries often have thin financial buffers, making them vulnerable to significant interruptions in work. When faced with a prolonged lockdown, people’s health and livelihoods suffer.

The Insufficient Government Response:
Governments in many countries failed to provide adequate resources to households during the lockdown, leading to its premature easing. Despite some localized successes, the overall infection rate in India continues to grow.

The Spread of Infections in Latin America:
Similar concerns are emerging in countries like Brazil and Mexico, where deaths are climbing. The United States, Brazil, and India are now among the countries with the highest daily cases.

The Lower Death Rates in Low-Income Countries:
Death rates in low-income countries have been relatively low, possibly due to factors like lower obesity and age-related vulnerabilities. However, death rates per million are increasing in these countries.

India’s Worrisome Situation:
While India’s death rates are still relatively low, the rate of growth of deaths is the highest among a group of countries studied. This indicates a worsening situation in India.

Emerging Markets and the COVID-19 Pandemic:
Raghuram Rajan discusses the economic impact of the COVID-19 pandemic on emerging markets (EMs). Despite lower death rates compared to developed countries, EMs have faced significant economic consequences due to lockdowns and fear of infection. Industrialists like Rajiv Bajaj argue that India’s lockdowns have bent the economic curve rather than the virus curve.

External Challenges Faced by EMs:
EMs have experienced a collapse in trade, especially commodity trade, and a decline in tourism. Remittances from developed countries have also decreased due to high unemployment levels. Capital outflows from EMs were significant in the early stages of the pandemic, particularly in Brazil and India.

The Need for Relief during Containment:
Relief measures are essential during containment efforts to prevent permanent damage to capital stock and human capital. Relief differs from ordinary Keynesian stimulus as it aims to preserve the functioning of enterprises and households. Providing relief helps families and firms stay intact, contributing more than traditional Keynesian multipliers.

Central Bank Actions in EMs:
Many central banks in EMs, including the Reserve Bank of India (RBI), have expanded their balance sheets to provide relief. This expansion is not necessarily quantitative easing (QE) as it aims to encourage risk-taking in the banking sector rather than financing the government. India’s inflation targeting framework and credibility allow the RBI to expand its balance sheet without triggering inflation concerns.

Inflation and Government Bond Rates in India:
India’s inflation has been within the targeted band of 2-6% for several years, providing room for the RBI to take action. Despite temporary supply-related inflation, government bond rates have remained low, indicating market confidence in the RBI’s credibility. The RBI has expanded its balance sheet to finance government paper while also cutting interest rates.

Precautionary Savings in India:
The extent of precautionary savings in India is a topic of discussion. The government argues that the majority of the population spends most of their income, leaving limited savings. The Jandan accounts, created for financial inclusion, can provide insights into saving patterns among the poor.

Precautionary Saving and Limited Spending:
Precautionary saving may contribute to higher account balances during uncertain times, but limited spending opportunities also play a role.

Vaccine Distribution and Economic Recovery:
Vaccine distribution will be gradual, and the economy will not immediately recover to pre-pandemic levels.

Low Relief Support in Emerging Markets:
Emerging markets, including India, have provided less relief support compared to advanced economies.

India’s Fiscal Constraints:
India entered the crisis with a slowing economy and a high fiscal deficit, limiting its ability to provide significant relief.

Fixation on Credit Rating:
India’s focus on maintaining its credit rating may hinder its ability to provide necessary relief.

Alternatives to Austerity:
Alternative options for emerging markets include issuing long-term bonds and communicating effectively to build credibility.

Debt Target and Independent Fiscal Commission:
Implementing a debt target and establishing an independent fiscal commission can enhance fiscal transparency and credibility.

Narrative Control and Limited Relief:
The government’s emphasis on controlling the narrative may hinder the provision of adequate relief.

Impaired Growth and Potential Downgrades:
Insufficient relief can lead to impaired growth, potentially resulting in downgrades despite fiscal rectitude.

Demand Slowdown and Corporate Distress:
Prolonged demand slowdown can lead to corporate distress in emerging markets, requiring relief or restructuring measures.

Problems Faced by India’s Economy:
High levels of bad debts in the corporate sector, leading to a weakened financial system. Public sector banks, which dominate India’s banking sector, have significant loan repayment moratoria, resulting in uncertainty about the true extent of damage to the economy. Growing concerns about rising NPAs (non-performing assets) and unemployment rates. Pressure on the regulator to forbear, potentially hiding bad loan problems and exacerbating the situation. A reluctance to address the need for a new kind of restructuring process for distressed firms, leading to the suspension of cases being referred to the bankruptcy tribunal. Limited capacity in terms of bankruptcy lawyers to handle a potential surge in bankruptcy cases.

Reforms Needed:
Recapitalizing the financial system to address the bad debts of the corporate sector. Implementing an effective restructuring process for distressed firms, considering the limitations of the current bankruptcy structure. Exploring ways to renegotiate debts without removing management, especially in cases where firms are viable. Improving the Chapter 11 bankruptcy structure to make it more effective in resolving distressed cases, while also protecting the interests of stakeholders.

Importance of External Demand:
For EMs (emerging markets) to achieve growth, external demand is crucial as domestic demand may be constrained due to limited fiscal space and other challenges.

Economic Recovery:
Stimulus may be limited due to perceived fiscal constraints. External demand is critical for growth. Global trade recovery and cross-border investment are essential. India needs to keep borders open to attract investment.

Stock Market:
High stock markets may be driven by central bank actions, low interest rates, and irrational exuberance. In the short run, this benefits corporations and countries by providing time to recover. In the longer run, it may create distortions and supports, leading to potential risk aversion. Companies and countries should prepare for a potential second wave of financial market risk.

India’s Economic Challenges:
India’s growth has been declining for several years, even before the crisis. Policy mistakes, demonetization, poor fiscal situation, and legacy NPAs have contributed to India’s economic woes. The Modi government’s initial focus on majoritarian objectives rather than economic repair has exacerbated the situation. Excessive centralization of decision-making during the pandemic led to inadequate preparation and misguided prioritization.

Conclusion:
India’s economic challenges require a shift in focus towards repairing the impaired economy and addressing the legacy issues that have hindered growth.

Current Economic Challenges in India:
India faces significant economic challenges, including high unemployment, limited fiscal space, and a high debt burden. The government’s response to the COVID-19 pandemic has further strained the economy, leading to a sharp contraction in economic activity.

Reforms as the Only Way Out:
Rajan emphasizes that transformative reforms are the only way out of India’s economic困境。 The ruling BJP government has the political power to enact these reforms due to its strong majority.

The Need for a Broader Vision:
The key question for India is whether the government has the vision and inclination to implement comprehensive reforms. Some actions by the government have been seen as liberalizing, while others have revisited the statist, mercantilist past. Prime Minister Modi’s leadership style, which involves working through the bureaucracy rather than trusting the private sector, raises questions about his commitment to market-oriented reforms.

Reform by Stealth:
In the past, India has often pursued reforms through a “stealth” approach, avoiding organized opposition. However, Rajan argues that this approach is no longer sufficient, as the various pieces of reforms need to fit together coherently.

The Importance of Coherent Communication:
Prime Minister Modi’s effective communication skills could be harnessed to articulate a broader vision for India’s economic reforms. The lack of such a vision and communication has hindered the implementation of comprehensive reforms.

Technology and India’s Potential:
India has the potential to become a leader in information technology and online learning. Rajan believes that removing policy barriers and impediments can unleash India’s potential in these areas. The COVID-19 pandemic could provide an opportunity for India to leapfrog in terms of technology adoption.

India’s Growth Potential:
India has the potential to achieve significant economic growth, lifting millions out of poverty. Young people in India possess enthusiasm and strength, which needs to be activated. Mass education is crucial for fostering talent and improving skills.

Geopolitical Alignments:
India’s recent border conflict with China has strained relations and prompted exploration of other alliances. India recognizes its compatibility with other democracies and seeks to build on those relationships. Isolating China is not a desirable solution; a change in policies through dialogue is needed.

Positive Aspects of the COVID Crisis:
India’s production capabilities are evident in its rapid increase in testing capacity. India has tremendous capabilities in technology, as seen in the success of Indian-origin CEOs. Focusing on these trends and rebuilding the economy accordingly will position India as a major player in the global arena.