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Rashmin Sanghvi & Associates

Chartered Accountants

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Maharashtra, India.

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Home Articles Economics & Investment         Share :

Covid – 19 & Economics

 

SOME REFLECTIONS ON COVID-19 AND THE ECONOMY: RESET TIME

 

RASHMIN CHANDULAL SANGHVI

Chartered Accountant

 

I am presenting a few thoughts on the reasons for the pandemic, how to stop future pandemics, its impact on the economy and steps for its revival, the oil shock and its domino effect and other related issues.

 

PANDEMIC REASON – VIRUS AND STRESS IN ANIMALS

I have seen a video on the reasons for pandemics published by theNutrition Facts Organisation of the USA in 2010. Dr. Michael Greger, M.D., FACLM, explains that (i) this is a zoonotic disease and the virus which is present in animals infects mankind, (ii) most viruses are completely neutralised within 30 minutes under direct sunlight;however, in dark, damp and shaded conditions they can survive for weeks, (iii) viruses which have existed for thousands of years innocuously have now become deadly.

 

Why is this so? Clearly, the stress and the pain suffered by animals results in even an innocent virus turning into a deadly one. When these stressed animals/ birds are eaten by men, they get infected. If we don’t stop industrial animal farming for food, then weshould be prepared for a pandemicof deadly proportions equivalent to the Indonesian tsunami of 2004 simultaneously hitting all the major cities around the world. In case a pandemic hits the USA, it may be necessary to lockdown the whole country for 90 days.

This prediction was made in the year 2010. (See the video: https://nutritionfacts.org/video/pandemics-history-prevention/)

 

In short, extreme cruelty by mankind on animals and birds has caused this pandemic. And all nations are responsible for this cruelty. Industrial farming of pigs and chicken, of cows for milk, etc., several such cruel practices werestarted in the capitalist western countriesand this is the chief cause of this virus.

 

According to me, in the same way, globally, half the human population lives in stress because of poverty and wars inflicted by greedy lobbies and nations. This stress also affects world peace and welfare. It is time we take notice of this fact.

 

PREVENTING FUTURE VIRAL PANDEMICS

To prevent such pandemics, one should not only turn vegetarian, one should turn vegan. It is a simple philosophy. Love your animals as you love your family. Love your employees as your own family. Love is a great strength. The absence of love or callousness has immeasurable negative power. Philosophy includes the principles of how to live happily in society and the world. In Hindi it is called: . In English, it’s ‘The relationship amongst: Individuals, Universe and God’.

 

A useless plastic straw that we throw away travels a few thousand miles through the ocean and hurts a tortoise. The tortoise is in stress. Its stress affects world peace. We do not give cognition to the stress suffered by billions of lives around the world. It is high time that we recognise the philosophy that the stress caused inthe tiniest of lives will one day come back to haunt us. We have ignored the warnings of numerousenvironmentalists. Let us now hear this warning by Mother Nature or . This is the time to RESET everything and challenge all our assumptions. The virus has proved that we have to live as one family, . The solution to this virus and many other problems may be found by the world in co-operation and notin competition. All national boundaries are man-made and artificial. The ultimate truth is – We Are All One, .

 

If someone had saidbefore seeing the above video,‘Don’t be cruel with animals’, the mass commercialised industrialist as well as the consumer would not have listened to him. The government would not interfere considering ‘philosophy and ethics as a matter of personal choice’. But after seeing the video anyone who believes in prevention of pandemics and other mass tragedies may want to practice and spread the message of Universal Love and Truth.

 

A reader may ask,‘Okay. I have understood that the cause of the current pandemic is human cruelty to animals and birds. But as an individual, what can I do?’The answer to that is,‘One individual cannot change the world. He cannot stop industrialised animal farming. But he can stop eating animals and consuming dairy products.’When many individuals stop buying any product which involves cruelty, businesses will have to change their practices. If we do not reset our business practices and our personal lives, nature may (or may not) give us another warning.

 

PANDEMIC’S IMPACT ON ECONOMY

Both the Indian and the global economies have suffered a serious setbackdue to the current pandemic. How serious is it? How long will it take to recover? As recently stated by Mr. Sanjiv Mehta,CA, Chairman of Hindustan Unilever, no one can provide a proper answer to these questions. Economics is a social subject. Unlike the laws of physics, the results of actions in economics cannot be predicted. They depend upon society’s psychology, culture, readiness to put in hard work and so on.

 

To explain the issue in simple terms, one can use the analogy of a person who has suffered a heart attack. He knows the reasons of the attack: Lack of exercise, an over-indulgent lifestyle, and so on.‘Can he or will he recover? How good will be the recovery?’The answer to these questions is, ‘Of course he will recover.’ ‘How well he will recover depends upon whether he has learnt his lesson. Will he change his over-indulgent lifestyle? Will he start exercises? And does he have the will power to return to a healthy life? Is he a positive thinker? Does his positivity translate into action?’

 

This analogy can be applied not only to individuals hit by disease, but also to nations hit by disasters.

 

The current pandemic has already caused serious damage to economies. And the damage will continue for some time. Nations and the world are not going to die. We will all recover. How well do we recover is the issue. The quality of recovery depends upon how well we reset our businesses and our personal lives.

 

Supply chains have been broken and damaged.The demand for many goods and capital assets has evaporated. When both supply and demand go down, there is necessarily a contraction of the economy. There is no alignment between reduction in supply and demand. In other words, the supply of goodsA, B and C has stopped. The demand for goods C, Y and Z has evaporated. Hence the contraction in the economy can be even worse.

 

In agriculture, tea gardens and mango and grape orchards, vegetables and so onare adversely affected. Agriculture has been exempted from the lockdown. But then a lot of migrant workers have gone back to their native places. Transport is affected. Even the manufactureof medicines is seriously affected.

 

Where does a nation start with relief and recovery actions? The Government of India (GOI) and the RBI have already announced different packages of financial relief – all together amounting to Rs. 5 trillions. (one trillion is a short term for one lakh crores.) Food Security is provided to 80 croresof Indians. The GOI has started with ensuring that the poor daily wage-earners do not stay hungry. They are being provided food and fuel in different ways. It is my personal knowledge that, at least in Gujarat, the GOI is reaching the poor.

 

Having discussed stress and the pain in animals, let us turn to the stress and the pain in human beings.Let ustake an example.The covid-19 virus has spread in the Dharavi slum. Hundreds of people are infected. This has raised fears of community spread. The Central and the State Governments are worried. They do not see any practical solution. They are frustrated. Imagine an invisible tiny virus frustrating the Government of India. Why has this situation arisen?

 

In Mumbai, some flats are sold at a price of Rs. 1,00,000 per square foot, or even more. In the same city, several million people live in slums, on footpaths and in chawls. Many people just do not have a roof over their heads.

 

Why is there such a wide difference in incomes and wealth?

 

We do not ask this question. Society in general doesn’t care. The government has excellent schemes for slum development. Market forces will make it practical to give decent homes to many slum-dwellers. And instead of spending money on slum redevelopment, the government will get revenue. And yet, the Dharavi redevelopment scheme has not taken off for so many years. Why? Because of corruption and greed.

 

Imagine a poor person living in Dharavi. Most people there do not have toilets and bathrooms within their tiny homes. They use common facilities. Imagine their fear of viral infection. They can’t leave Dharavi due to the lockdown. And they can’t live in Dharavi because of the abysmal living conditions. What amount of fear and stress are the people living in Dharavi suffering from right now? Won’t that stress affect us and our governments? Nature has already provided the answer. It will affect all of us.

 

There are many individuals and NGOs who question the current pitiable condition of the poor. They work on the ground in helping the poor. Many of them have achieved good success. May their tribe grow;may their enthusiasm to help the poor infect society and governments. May we see a day when every family in India has a home.One such dreamer is Prime Minister Narendra Modi. He has already planned a scheme for this purpose. I remember saying in my presentation at the BCAS Economics Study Circle in 2015: ‘If all the welfare schemes planned by Mr. Modi are executed in reality (not just on paper), then India can have 12% GDP growth for the next 20 years.’This is the solution and the answer to the question, ’How will the economy be affected by the present pandemic?’

 

India has a huge unsatisfied need. And India has sufficient natural resources to provide food, clothing and homes to every individual in the country. But the market system will not permit it. Under a capitalist market system,farmers, teachers and doctors earn less than share market speculators and tax consultants. A producer of goods and services earns less than a film star and a sportsman.This market system has to be reset.

 

GDP

GDP is a misleading statistical figure that has become popular to such an extent that it has become harmful. When a jungle is destroyed and factories are set up, GDP goes up. But there is no consideration for the damage to the environment, the loss of life of animals, the huge difficulties to tribals and so on.If the Indian rupee rises to Rs. 36 per dollar, our GDP will jump from $2.8trillion to $5.6 trillion. This shows that the exchange conversion market is an illusion. When liquor and cigarette production goes up, the GDP goes up.Share market speculators speculate and GDP goes up with zero contribution to the real economy. I am not worried if the GDP falls, but the people would be free from pollution and the resultant diseases.

 

There is none and there will be no direct relationship between welfare and GDP.

 

THE CORONA SHOCK: NEGATIVE OIL PRICE

On Monday, 20thApril, and also on Thursday, 23rd April, 2020,the price for a barrel of crude oil on the New York Commodity Exchange dropped to negative $38. What is a negative oil price? Why did it happen? And what can be the consequences?

 

This has happened because of excess supply of crude oil and lack of storage capacity for the excess. Global production (extraction from oil wells) is 100 million barrels per day (MBD). With the almost global lockdown,the entire transport system and factories have stopped. Now only domestic and agricultural consumption of power continues. As per oil experts’ opinion, the demand has gone down by atleast 25%. However, production of crude oil continues at the same pace. Saudi Arabia, Russia and the USA have agreed to cut down production by about 10.3 MBD. This cut will be effective from 1st May, 2020. But the surplus of supply over consumption will continue. Global storage tanks are almost full. In the USA, people holding a ‘Buy’ contract have no storage space. Assume that a buyer has already paid the full price. Now, either he has to lift the oil, or pay $38 per barrel to cancel the contract. A negative price reflects the cost of storage for an indefinite period. However, these negative prices will not last. It is estimated that in the short term the price may settle around $20/barrel.

 

Crude oil is the most important component of energy today. Hence, the USA has used it as an instrument in its currency war. Its government insists that all global trade must happen in US Dollars. Some nations refused. They were ready to sell their oil in Euros. Hence the attacks on Iraq, Lebanon and Libya and the sanctions on Venezuela and Iran. This is a classic illustration of a currency war using commodities as weapons. When the opponents do not succumb to sanctions, the USA starts a weapons war. [See a clip of the news on CNN dated 23rd April, 2020:New York (CNN Business) 22nd April, 2020.]

 

The report said, ‘The Trump administrationordered Chevronto halt oil production in Venezuela, dealing another blow to the nation. The directive is part of President Donald Trump's effort to pressure the regime of Venezuelan President Nicolas Maduro by starving it of cash. Despite having more oil reserves than any other country on earth, Venezuela's production has imploded because of tough sanctions imposed by the United States and other reasons.’

 

But there are other factors to be considered. When oil was sold at $100 per barrel, the USA started shale oil production on such a scale that it became free from imports of crude oil.The average cost of production of shale oil is estimated to be $40 per barrel (estimates vary). When the oil price was high, shale gas producers took huge loans on small capitals and did business. Now, with the oil price being less than $40 per barrel, most of them are making losses. Because of the viral pandemic, the global economy has slowed down. The demand for oil may remain low in the short term. Hence prices may remain under $40 for many months. Some shale oil producers may even go insolvent.

 

Domino Effect:When an oil producer goes insolvent, the following people also suffer losses: Speculators in oil prices, speculators in shares of oil companies, banks and institutions that lent to the oil producers, speculators in bank shares;, employees of all of the above entitiessuffer and ultimately the government loses tax revenues. When these loss-making companies are bailed out, the common man, the taxpayer, suffers. Thus, one loss has a domino effect.

 

We have seen this oil industry projection at some length. There are many other enterprises that are also highly leveraged. The airline industry is a capital intensive, high revenue cost industry with widely fluctuating profit margins. The lockdown may have caused huge losses for all airline companies. Some may go insolvent. Many other enterprises will also go insolvent. That means huge losses for banksand the financial system. Will it result in banks going insolvent? Will central bankers around the world be able to save the banking system?

 

In Maharashtra, mango and grape orchard owners can’t export their fruits. All over the country, many farmers cannot sell their products even within India. Most of their products are perishable. They will suffer huge losses. Who will bear these losses? The list can go on.

 

Suddenly, the force majeure clause is being invoked by parties for not fulfilling their part of the performance. Everyone looks at themselves. As if the ship is sinking! If this happens on a very large scale, then the economy can come crashing down. The economy is really like a giant machine with several wheels within wheels. All these wheels are connected by bearings, gears and chains. Some wheels stopping or slowing down may disrupt the machine. But if several wheels stop functioning, then the bearings can break down and the machine stop. We need to identify all the wheels, bearings, gears and chains in the economic machine. Observe them, help them, and ensure that almost all parts function.

 

SOLUTION: ECONOMIC ACTION

Confidence at the highest level is crucial.The US and European economies have been built over a few hundred years. The Indian and Chinese economies and societies have been built over a few thousand years. How can these economies be destroyed if a pandemic disturbs them for a few months? Only when an economy has its fundamentals seriously wrong can it be damaged. Probably, all countries, including communist countries, are working on Capitalist Market Economics. These need to be RESET. In other words, extreme disparities in income, wealth and welfare have to be reduced. Every producer of goods and services must get at least a living wage. There should be no or minimum stress caused by unfair economics at the human level.Poor people constitute the base of the economic pyramid. When the base is strong, the structure will be steady. And it can come up fast. If the poor at the base die due to starvation, the whole economy will be badly affected And it cannot recover fast enough.

 

The Government of India has affected a large financial relief package. And the Prime Minister has his heart in the right place. First priority is being given to the poor, daily wage earners, hawkers and others. Cooked and uncooked food is reaching the poor in villages through the government machinery. There are corners where the government may not reach. These are being reached by NGOs. Cash is reaching the poor under ‘Direct Benefit Scheme’. Tax refunds are being expedited. Banks are asked to release more loans. Provident fund claims are being released quickly. Through all practical measures the government is ensuring that cash flow in the nation must continue. Cash in the society is like blood in the body. It must remain circulating. Otherwise the body parts will get numb. And even the smallest part going numb will affect the whole body.

 

One big relief this time is fromthetax departments. Every year, from January to March, Income-tax and GST officers get into overdrive to collect tax revenues, whether departmental claims were right or wrong. Big refund claims,howsoever legitimate, are withheld for the 4th quarter. That pressure is off this year. And revenue targets have naturally gone for a toss.

 

Will this huge expenditure of Rs. 5 trillion cause abudgetary deficit? Yes,certainly the budgetary deficit will increase. Will it cause inflation? May be, maybe not.The Food Corporation of India (FCI) has over 70 million tonnes of food stocks. Every year, substantial quantities of food rot and have to be disposed of. If this stock of food is used, the market demand-supply equations will not be affected. There need not be any inflation in the price of food. There are some other items whose demand has fallen. In the case of some other items,it is the supply that has fallen. All together, as a combined figure,there may be a minor inflation. (Any guess for the future is to be taken with a pinch of salt.) But in times of recession, it will help the economy rather than damage it.

 

ON TOP OF THE ECONOMIC CHAIN

Man is at the top of the food chain. No other animal eats man. Man eats almost every animal and plant. Man contributes little to the nature,but he exploits nature to the maximum extent. Similarly, there are many people within mankind who are on top of the economic chain. They contribute little to the economy/ society and yet earn disproportionately large incomes. It is for governments to identify the enterprises on the top of the economic chain. Do not spend a single rupee and a single minute on these people. They will manage.

 

BAILOUT PACKAGES

All nations have announced huge bailout packages. Most of the funds for these packages will come simply by ‘printing money’. How long can money supply influence and when does it become useless or even counter-productive? To understand this point, consider an extreme hypothesis: Indian GDP is Rs. 190 trillion. Can we say,‘Just print Rs. 190 trillionand no one has to do any work? They can relax and enjoy.’ We cannot do that. People have to work and produce goods and services. A currency note that cannot buy anything has no value.Having ruled out the extreme hypothesis, one needs to work out the right balance. Every enterprise that breaks down due to the pandemic will be a wheel that stops functioning. Save that wheel. Lend it sufficient cash to make it turn again. Once it starts running, stop lending. Slowly take back the loans. On the other hand, the daily wage earner can be given food free as long as the lockdown runs. Probably, for one more week. Then stop all free doles. His hunger will make him hunt for work. And those millions of wheels will start functioning once again.Bailout packages is a huge subject by itself. But I will not go into that right now.

 

There should be no central command in the sense of planning from top-down. A central command will make mistakes and commit blunders. Let everyone find their own way. Ensure continuity of infrastructure. Those who need help should be helped. Give priority to very small enterprises, then to small and medium, and finally to large. Let individual spirits find individual solutions. Open up the market with safety. Planning by every individual and every enterprise,with the government supporting them, is the best approach.

 

Note: This article was written on 24th April. Before it gets published in our journal, I had the opportunity to listen to the Economic Wizard – Mr. Mohandas Pai on BCAS Webinar on 9th May. I am adding a few more notes.

  1. When India works for full year, it generates GDP of say Rs. 200 Trillions. It is clear that Indian economy will not work for at least two months due to Covid Pandemic. As simple arithmatics, GDP should fall by 17%. There are many variables. Some things continued even during lockdown. Some things will not work even after the lockdown is lifted. On the whole, Indian GDP for the financial year 2020-21 can fall by 20%. From an estimated growth rate of 5% if there is a fall of 20%, our GDP may fall by 15%. This can cause massive repercussions. As discussed earlier, Government, RBI & peoples’ job is to ensure that the wheels within wheels work with minimum damage. Otherwise the domino effect can cause far more losses.
  2. Long term stability lies in Indian economy being an independent economy. Neither based on exports, nor based on imports. In still longer terms, when we all – Government to people are sensitive to the weakest of the lives; and when we ensure welfare of all lives; we can have a truly satisfied, peaceful India.

 

CONCLUSION

India and the world have suffered huge personal and economic losses. All this because of a tiny, invisible organism which probably does not even have life. This is a warning that Mother Nature has given to Mankind. If we learn the lesson, if we reset our lifestyle and our capitalist market economics, we can prevent future pandemics. If we ensure that every individual and every fit enterprise survives this pandemic, then the human spirit will ensure that in the short term the economy will be functioning well. Ignore the share market indices and GDP statistics. Focus on welfare of all – ‘Unto The Last’. Adopt Gandhiji’s and Vinobaji’s concept of SARVODAYA.