CORONACONOMICS.

Its really not the time to celebrate the downfall in the prices of oil and other resources. It is the consequence of the growing corona virus disaster that threatens a deep global recession. In every recession commodity prices fall , but that indicates coming pain more than gain. Fiscal and monetary polices which are used to tackle such problems may not work this time. Whether financiers label it as such or not, the world is already in a recession. We have double whammy of demand and supply shocks. The pandemic is forcing not just provinces like Hubei, but entire countries like Italy to shut down to averse the disease and even waive mortgage payments despite the blow to its financial sector. Lending will freeze everywhere. This forced inactivity is a huge demand and supply shock at the same time, since it restricts production and disrupts global value chains.

Now in the present picture, China mentions that the virus in under control, workers are returning to work and closed factories are restarting. But the virus has spread all across the globe and this might get precarious, even to the US. Everywhere, travel, trade, transport, and tourism have crashed. Schools and universities are being closed and the meetings and presentations are being postponed or being cancelled as of now. The oil collapse is another blow to the economy but a sight of joy to the consumers . To combat sustained increase in shale oil production in the US, the Organisation of Petroleum Exporting Countries (Opec) Russia last year agreed on production cuts to stabilise, but then the virus erupted and hindered the oil prices and its demand. Opec and Russia could not agree on further production cuts. So, as a result everyone opened their oil spigots to gain market shares. Brent crude has somehow crashed from $65 a barrel a few months ago to just $35.

The revenue drought will mean less money for government investment at time when private investment has frozen. GoI should mop up half the oil crash windfall through higher taxes to maintain public investment, PM-KISSAN and other schemes. Even so, GDP growth could plunge below 4%. The fall in tax revenue will send fiscal deficit far above budget limits. RBI financed most of the fiscal deficit last year through open market purchases. It should be even more aggressive in the coming year. This leave ample liquidity in the banks and keep the interest rates low.

Economists have been unusually in their assessment of both the impact and policy antidote for the corona virus. Their are couple of things which economists can agree on, though. Firstly, this is both the demand and supply chain shock. While the lockdown of production systems across economies will dent incomes, it will affect the inflation rates not only in India bit other respective nations under corona illuminati. The second and perhaps the most important thing that most of the economists agree on will be that the COVID-19 will work through two effects, the immediate impact will be shutting down of the factories and offices will an output and income but besides this the more lingering impact is the second round impact on global supply chain.