A view that’s not uncommon among research analysts and fund managers these days is about the ‘V-shaped/ recovery the economy will make when all of this is over. There are two reasons offered for this. One, what’s changed for a consumer between Feb 1 (pre Covid-19) and now in terms of underlying demand? Nothing. Given a choice, according to this view, they’d be swarming restaurants and malls and planning summer holidays now were it not for the virus out there. Therefore, this is just an interregnum, a snowstorm that will blow over and the morning will be bright and sunny. Second, the huge liquidity and fiscal stimulus that’s been put to action (might eventually be about 15% of world GDP) will kick-in and boost growth when things are back to normal. You will see a strong bull run.
I’m not sure about either. As Ghalib wrote:
“hum ko maloom hai jannat ki haqeeqat lekin,
dil ke khush rakhne ko ‘Ghalib’ yeh khayal achha hai.”
Economics 101 defines demand as both the ability and the willingness to purchase a good or a service. Ability is more concrete while willingness is more a sentiment that takes in emotions, hopes and a subconscious estimate of the utility gained from consumption. These are dynamic in their nature. Demand, therefore, is a point of time construct. So, to believe the aggregate demand wouldn’t change too dramatically over a couple of months of shutdown is being naïve. Nobody who is ever run a business will concur. There is going to be a serious dent in both the ability and the willingness across sectors.
First, let’s take ability. In India, there’s an entire consumption class of daily wagers and contract workers (about 5-6 crs) who would have lost a couple of months of earnings by the time they get back to work. They aren’t going to consume with a vengeance to make up for lost time when they come back to work. A lot of them have taken advances from their contractors or loans to tide over this period. Some of them will live off their family members back at their villages. The one thing this shock will teach them is to save more and consume less in future. Don’t expect consumption to revive in this segment immediately. Even among the organised workforce, there aren’t too many companies in India that can take a couple of months of zero cash flow in their stride. Then there are companies that have already been dealt a body blow – those that depend on summer for a huge part of their annual sales, sectors like airlines, travel, services won’t ever recover lost revenues and smaller companies that choke because of no cash. The impact on their employees is going to be long lasting. Even companies (maybe about 100 of them) who have the ability to weather these 2 months will follow the usual step-wise pattern of responses but under the radar – no hikes in FY 21, partial salary deferrals, hiring freeze for the year, delayed joining dates for new hires, salary cuts and eventually layoffs. There are second order effects to all of these. Demand will take a hit for a while.
Second, what about willingness? It is likely that the virus won’t be eliminated in a couple of months. There is a real possibility of sporadic cases breaking out in different cities through the year. This could mean a real possibility of recurring short-term shutdowns limited to a city or state through the year. This won’t do consumer confidence index any good. Also, this would mean a general suspicion of crowded places like malls, airports and restaurants which will further dampen demand. A general sense of being on the edge isn’t conducive for consumption.
The likely inflation stemming from the stimulus plus the stagnation in consumption on account of the above factors could lead to stagflation. Any increase in interest rates (disinflationary measures) to tame inflation will hurt growth while any reduction in rates to spur growth will increase inflation further. The stagflation conundrum.
Some clear eyed, consultative and hard-headed policy making will be needed in the next quarter. Not the wide-eyed optimism of fund managers.
Reverse Do Bigha Zamin
One of the classics of Indian cinema is Bimal Roy’s Do Bigha Zamin – the story of a poor farmer who migrates to Calcutta aiming to earn Rs. 235 in three months. That would be enough to pay off his debt to the landlord and save his two bighas of land. Balraj Sahni, who in my opinion has played two of the greatest roles ever in Indian cinema (the other in Garm Hawa), plays the role of the farmer turned hand-rickshaw puller in Calcutta. The wrenching three months shown in the film is the story of every migrant worker in a city. Poor living conditions and exploitation are endemic to the city; yet Sahni can make money working in the city. This was true in India of 1953 and it is true in 2020. Urban clusters are still the best option for those caught in the cycle of poverty in villages.
What we have seen in the past few days is the reverse Do Bigha Zamin phenomenon. For the poor urban migrants, here’s the Hobson’s choice. There’s an invisible virus outside that can kill them on one hand. On the other, there’s the invisible hand of the market to starve them if they sit at home obeying the lockdown. They choose the long road back to the village on foot.
When things get better, there’s a classic waiting to be made here.
The Widening Gyre
When I decided to start this blog, I didn’t have to think twice about its name. ‘The Second Coming’ by W.B. Yeats is one of the greatest poems of the 20th century and a personal favourite. Written right after World War 1 (and the Spanish flu), it describes a world of chaos and doom where things are falling apart. The expectation is of the second coming of Jesus who will save this world. Instead, what arrives is a Sphinx-like creature who will likely wreak further havoc. Yeats paints a bleak landscape where people have lost their moral centre, violence rules and there’s a foreboding of an apocalypse.
On Jan 18, 2020, when I started this blog, I had no idea how prophetic my choice would be. I named it ‘The Widening Gyre’ as a reflection of an ever-changing, expanding world that’s distancing itself from its centre in a nod to the conservative in me (conservative in the truest sense of the word). Never could I have imagined the apocalyptic scenario painted by this poem exactly a century ago would unfold within a couple of months of beginning of this blog. I must trust my spidey senses more.
Anyway, I will close with the first stanza of Yeats’ The Second Coming. It is a mark of Yeats’ genius where a single stanza of eight lines suffused with imagery and symbolism has contributed to so many metaphors and figures of speech in the English language.
The Second Coming
“Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.”