For a time it appeared as if India were exempt from the depredations of the novel coronavirus COVID-19 playing out in China and Italy. Now we find the number of cases of reported infection increasing rapidly here. There is concern that this may yet be only the tip of the iceberg as testing has remained very low in relation to the Indian population. The government has responded to this by allowing the private sector to conduct tests. Altogether the governmental response has been quick, though some believe tardy from a medical point of view. It is on the economic front however that a response is yet to be seen. Not doing anything could be consequential.

          The first impact of the coronavirus was to disrupt the global supply chain originating in China. As produced inputs from the country enter into manufacturing elsewhere in the world some production cannot take place, leading to lower national income in all the countries involved. This in turn affects demand for imports in these countries, and the originally supply-side disruption would have turned into a demand-based contraction. There is in addition to this purely economic force at work the consequence of the sealing of borders to be reckoned with. An essentially tribal response denying 'foreigners' entry comes into action now. It affects tourism and business interaction, leading to a slump in the transportation industry. There is speculation that some airlines may not survive the current downturn.

          When investment, which is largely impacted by anticipation of the future, but some part of which responds to the present state of the economy, gets affected we can imagine a feedback loop between investment and income which would generate a downward spiral for the world economy. As India is now integrated into it, it is bound to be adversely impacted by the global slowing. A silver lining would be the lowered price of oil. We cannot so easily say which of these two channels will predominate.

          For India the global slowdown due to the coronavirus comes at the heels of a domestic slowing for over three years, which may now be accelerated. Private investment, already under the influence of pessimism, is unlikely to provide a counter to the downward momentum. There is now an overwhelming case for the government to raise public spending to prevent a slump in aggregate demand. It is noteworthy that in the United States there has been a concerted effort to respond to the threat of a major downturn to its economy. Moves have been made to counter its anticipated impact both by the central bank and the federal government. The Chairman of the US Federal Reserve is quoted as saying that the US Fed will undertake quantitative easing of 700 billion dollars while President Trump has approached Congress with a stimulus package of 850 billion dollars. This totals to a thrust amounting over one and a half trillion, a huge amount even for the world's largest economy. It is entirely the right approach to the problem and timely in its conception.

          By comparison we have not seen a clear response from the Government of India or the RBI. A reluctance to publicly discuss the state of the economy and to recognise a threat to its prospects is inadvisable. Faced with the possibility of a serious economic crisis involving output decline and unemployment there is only one course of action for the government to adopt. That is to step up aggregate demand via greater public spending. In principle the government could hand out cash which would have a multiplier effect alright but it would be preferable to invest in income generating assets. The ideal such investment would be in infrastructure, which uniquely holds out the possibility of increasing both demand via the wages paid out in creating it and in raising productivity of private enterprises. There is, however, in the short run a danger of extreme hardship for the poorest which would require alleviation.

  Two stand in the way of  an expansion of government expenditure. One is the pre-announced glide path of fiscal consolidation under the Fiscal Responsibility and Budgetary Management Act, whereby the government of India is required to take the fiscal deficit to 3 percent of GDP. The Narendra Modi government has made such a fuss about 'fiscal prudence' that it would not want to be seen as violating its own totem by allowing the deficit to rise. The second is an apparent ideological commitment to small government which takes the form of shrinking public expenditure. In pursuit of its ideological predilections this government has managed to lower public expenditure as a share of national income. The role of public expenditure in the economy may be discerned from the slowing that has ensued.

          After the global economic crisis of 2007, professional opinion has by now swung towards a recognition of the stimulating role of fiscal policy when the economy is downcast. In the west today this view is largely influenced by the reality that the nominal interest rate is barely positive, which means that there is not much scope for monetary policy action which works through interest rate cuts. However, there has long been a recognition of the limits of interest rate cuts when private investors are pessimistic about the future. This diagnosis may be expected to extend to quantitative easing which aims to increase the money supply in the economy. However, not even banks flush with loanable funds can ensure that investment takes place if firms hold back. We are reminded here of the saying that you can take the horse to the water but you cannot make it drink. It is for this reason that the economics profession recommends a fiscal stimulus for a slowing economy.

          Part of the art of managing an economy is to realise that there are no rules for all seasons. The economy is an emergent phenomenon, changing its character as it evolves. We need ever creative responses to this feature. At times the present may be satisfactory, at times it is not. Right now we are facing a situation when it is not just unsatisfactory but, failing a providential reversal, set to damage our prospect. Interestingly public authority in the United States have recognised this. In India the public authority have been somewhat slow to respond.

          As the uncertainty deepens, the Government of India must increase its expenditure. The focus of the spending should be two-fold. There should be income support to the vulnerable for the short-term and increased spending on infrastructure for the medium-term. A ball path figure for the second would be for government to double its expenditure on capital formation and hold it there for at least a couple of years. The RBI must support this plan by purchasing the government bonds issued to finance the increased. Legislation would be necessary to enable this, and bipartisan support to the initiative would be vital for confidence among investors. As stated by Keynes, "the boom is the time for austerity".