Virus outbreak has undoubtedly disrupted the entire global economy and India is no exception. The recent announcement of an economic stimulus package of ₹20 lakhs crore by the government is directed to boost the economy. The Finance Minister announced economic packs in installments and has indeed undertaken ambitious reforms amidst the crisis. Moving beyond just viewing the growth and development from Gross Domestic Product context, it is crucial to make sense of how a crisis manifests into a series of other issues.

Before moving into the economic problems faced by India, a simple metaphor would help us to understand the situation better. Imagine a car being your country’s economy, sometimes there could just be a problem with the headlights, sometimes a flat tyre or sometimes even an engine failure that you may have to replace the whole system. The first step is always to diagnose the problems to find out what went wrong. To comprehend the crisis using various economic lenses, let us look at  key economic theories across the political spectrum that will offer a much more holistic sense of dealing with the economic crisis. 

Marxian and Real Business cycle theorists 

Although I have mentioned Karl Marx- one of the most influential political economists- most of the work will have to be extrapolated to figure in a crisis situation. But Marx would definitely not be happy with the labour laws exemption in few states. Real-Business-Cycle theorists are appropriate to study as their ideas and theories are mostly formulated based on external shocks and risks. An traditional economy that is dependent on agriculture is highly vulnerable to face negative growth given external threats like bad weather, poor harvests etc. So the theories are premised on looking at the structural issues that could have caused the crisis. Although the virus is not structural, Indian economy faces multiple challenges that reduce the resilience to face the crisis. In other words, they would say ‘Sure, COVID-19 was a trigger, but what caused the migrant crisis and unemployment’. It is important to know that Indian economy has certain systemic issues that got further exposed during the lockdown. Irrespective of the status of the lockdown- inefficient system with low demand, high unemployment, falling agricultural productivity and poor allocation of credit are the real problems. So the much integrated approach of business cycle theorists would make us look back into the policy mistakes done in the past and utilize this time to rectify them in order to revive the economy out of crisis. 

Keynesian

During the Great Depression John Maynard Keynes proposed a popular idea to redefine the role of government to possess a fair amount of intervention.  He wanted the government to intervene during the crisis- departing from the classical school of thought (where they let the markets decide for itself) Keynes actually attempted to imply “you know what, consumers and producers can be irrational”.

By this framework, the government goes to spend its way out during a crisis even at the cost of having huge public debt. Keynes did not bother about the mounting public debt, he believed the economy would recover subsequently and can manage better . More importantly, demand was the key in his framework of analysis to bring the necessary economic growth. What do we mean by demand here? In a keynesian way this is how it would work. Let us suppose now the Indian economy is stressed, government is the only entity that could stimulate by pumping in more money.  When the government provides public investments, cash handouts, direct benefit transfers, tax cuts and interest rate cuts by RBI ( broadly as fiscal and monetary policy) then it simply means people have more money in their pockets. When most of the people in the country are left with extra money they would start spending on things which means more business and service units would crop up. The business sector will employ more people and thereby create more income and the cycle goes on. A simple investment made by the government on building a road could actually create a ripple effect on employment and income and hence bring the economy back on track.  To posit his ideas to the current crisis, he would prefer the government to spend as much as they can on people right now to bring the demand back. But I am afraid that this idea could actually change in the current scenario given the fact that even if people had money, the supply is limited due to lockdown. Therefore the extra money might not actually stimulate as we expect. But all we can say is Keynes would have been happy if more demand side measures were taken to pull the aggregate demand. Policies need to facilitate demand stimulation with necessary monetary policies that would increase the output eventually. Looking at the reforms taken by the Indian government, I do not think Keynes would be completely on board because he would prefer an immediate stimulation instead of reforms that would take much time to materialize. All the infrastructure and public investment projects will obviously take some years to actually happen while the demand side measures are substantially less. So clearly, Keynes would ask for cash handouts and ‘helicopter money’ along with immediate public investment that can infuse money in the economy. 

Monetarists

The next economic thought group is University of Chicago, monetarists-Milton Friedman. Although monetarists are criticized for having incomplete theories, their ideas are very relevant in the context of the central bank. They prefer to have much less government intervention. In  simple words, monetarists will not like RBI changing the interest rates. Their argument is related to how high inflation and low inflation is largely due to the artificial changes made by the Central Bank of a country. Just to elaborate a little more on the concept of  inflation, it means general price level. When the RBI cuts the interest rates it simply means banks have more money to lend to people  and they invest on additional things (which might not be of worth too) that would increase the general price levels. Eventually, the price bubble would burst and clearly people are left with low value assets and investments. Basically investing in something that is not worth it but still invest  because you have excess money due to the RBI cutting the rates. Vice versa would happen in case of low inflation but the key take away is monetarists want some stability in money supply. In the current context, monetarists would not recommend RBI to undertake so many rate cuts. Right now as a monetary policy measure, various interest rates have been slashed that most of the economic package announced is just from RBI. How can this be a problem according to monetarists? High Inflation! 

An artificial interest rate cut might not cure the economy but actually invite more problems. High inflation with low employment is a trap that no one wants to get into. However, monetarist theories were incomplete and free market monetarists evolved to offer more explanation on why an economy needs limited control from the government. 

Austrian School

The final one being the Austrian school of economics celebrated Laissez Faire (no government intervention). Although the core idea might not be suitable for a crisis situation, it is still an economic thought that is worth entertaining. If not to the whole economy, parts of the policies can be framed using the individual rights and free market economy which will counter the state entirely taking control using the crisis situation and warrants private property and individual rights to the business sector. One of the prominent Nobel laureate economists, Hayek propounded for individual rights. Current pandemic has clearly disrupted small scale businesses and enterprises. Taking the extreme position of letting the business sector hold private property and compete during the crisis which would decide who makes the profit is more or less a zero sum game (someone wins at the cost of others). But is it worth doing given that most of the population is dependent on self employment and is it logical to consider that there would be no market failure? 

Unlike the Austrian school of thought, the COVID-19 has imposed many complex problems. Although privatization is happening in key areas, it is unsure if that is to encourage free market interaction or just the government realizing its own inefficiency in the system. Privatization of industries comes with a huge burden if the regulatory framework lacks effective implementation. Exploitation of the working class, excessive profit, tax evasion, financial manipulation etc are the past outcomes. However, in theory privatization could be a standard reform to encourage better business in the future. 

Having discussed these important economic ideas, it is worth recalling the car metaphor. It is pointless to fix the headlights when the engine has a problem but that does not mean fixing headlights are wrong. Similarly, now we have an engine problem and these theories are like parts of the puzzle that offer different types of solutions. No particular theory is promoted, in fact there are many theories and ideas that exist. Therefore, it is important to diagnose the problem correctly to prescribe appropriate solutions. At the end of the day we all want to achieve welfare and a better living standard for all. Moving beyond a simple GDP talk, the discussion on the stimulus should be directed to understand the system ruling the economy. 

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