Wishing for a lesser evil

Today, I have two instances to share, explaining exact impact of the Covid-19 pandemic on overall economy. Actually the outbreak of coronavirus is similar to a machine gun which fires bullets in multiple directions to hit multiple targets in one go. Primarily being a health emergency, the outbreak didn’t miss even a small sector of economy and disrupted the two main engines of economic growth – demand as well as supply.

If supply chains got disrupted, the demand side too witnessed loss of steam. Common consumers in an immediate response to the Covid-19 crisis and lockdowns imposed to curb the spread of the infection, stopped spending on things which are not important in their daily domestic chores. They no longer looked at certain services as travel and all related services came to a standstill.

Precisely, restrictions on movement impacted the supply, while’s loss of jobs, income and disruption in overall business activities impacted the demand. So, Covid-induced lockdown in one shot gave demand as well as supply shock to the the economy. This twin shock has left one and all clueless, be it government, economic experts or the corporate world.

Even as government has rolled out sector-specific stimulus packages, the ground situation depicts faint chances of immediate revival of the economy. Interestingly, rating agencies are engaged to revise their economic outlook every now and then as the data capturing of supply and demand continues to vary in an inconsistent manner.

The kind of damage caused by the pandemic to every sector of economy was inevitable and suggesting exact repairing plan to get the economic activities back into action is proving a tough task for the economic experts. The breed of experts is not sure where the dust is going to settle in post-covid situation. In fact, they stand divided on whether the Covid crisis will prove to be inflationary or deflationary. Their expert analysis which is brought into the public domain through media, reveals that they are locked into a debate, where some opine that the pandemic is leading to inflation, some pitch for deflation and some project the impact of the crisis as  a mix of both inflation and deflation. However, economists opining a collapse in demand eventually leading to deflationary pressures overpowering any supply-driven inflation are in majority than their counterparts.

In the context of this demand-supply crisis unleashed by the ongoing pandemic where lesser evil option – inflation or deflation – is debated, let me now come to the two situations, which reveal confusion and cluelessness of small and medium sized businesses known to me. Their tales are self-explanatory.

A small sized entrepreneur was more than satisfied in his line of business activity. He had derived satisfaction for being a successful entrepreneur more for being an owner of a debt-free business enterprise. He didn’t look at bank finance as a way to start his business, but got support from his parents who funded his business. Before the onset of covid-pandemic, his small company recorded higher revenues, more than he was expecting. There was huge demand for his products and for him it was sellers’ market. Immediately after the outbreak of covid-pandemic, things changed. The consumer demand slipped considerably owing to lockdown. Over a period of time, lower demand for his products forced him to reduced the profit margins to lowest level to improve sales. This resulted in loss of revenue, whereas his overall costs remained same and he had to resort to some lay offs. Precisely, his business witnessed huge demand loss as consumers stayed away from purchases.

In another incident, a medium-sized business enterprise faced the same situation, but the company was not debt-free. The entrepreneur had taken route of bank finance to fund substantial part of his business. He was successfully running the business as consumer demand was too good and even scaling up for his products. The pandemic-induced lockdown turned everything upside down for him. Consumer demand fell to lowest levels and his unit stands almost shut. His revenue stream stands dried up and is clueless how would he be able to service the debt (bank loan)? He is even apprehensive about the survival of his enterprise in absence of consumer demand and the pressure of repaying debt which he raised through a bank loan.

In both situations described above, there is loss of jobs, incomes and even growing level of debt leading to steep fall in the revenue stream of businesses.

This is a small example of what happens when the engine of growth slows down and income levels for businesses and households  are adversely impacted.  In fact, there is a chain of such instances in every sector of economy involving every small, medium and large businesses which have succumbed to COVID-19 crisis. It’s rampant that trades have been affected negatively and growth has not only slowed down, but has almost come to a grinding halt. Job losses have added more woes to the unemployment levels with consumption and inflation collapsing. Precisely, the economy with such a scenario is slipping into deflation.

Notably, the pandemic has impacted the analytical abilities of even the best of experts as they have been struggling to figure out the exact economic outcome of pandemic-induced crisis. However, everybody is on same page that economy stands shattered and repairing it in post covid crisis would be time consuming and not an easy task. There are surveys, pointing out to a mix of forces in the ongoing Covid crisis, indicating higher inflation headline. But equally analysis galore which in the backdrop of a collapse in demand overpowering the supply side, lead us to believe that the pandemic will result in deflation.

As we witnessed unprecedented economic stimulus measures by government and the Reserve Bank of India, the impact of the crisis is measured in two trend. Either it will lead to higher inflation or would carry deflationary trends. Even as both are evils for the economy, however, there would be no choice but to wish for lesser evil among the two.

At the moment when pandemic is yet to be controlled ,we are observing new normal in every aspect of life. Once the infection is brought under control, there would be the ‘actual normal’. ‘Actual normal’ means return to a normal social life and supply side of the economy witnessing ease in restrictions. However, demand side would not pick so easily as it’s an uphill task to get people on job again and restore income streams to normal levels. Even the corporates would be conservative to make fresh investments in their venture as they would get engaged in repairing the economic damage which the pandemic crisis caused to their businesses.

It’s also worth mentioning that even in ‘actual normal’ threat of the virus returning in the form of ‘second wave’ will loom large for a longer period. This will also impact corporate investments and will also keep household consumers away from spending.

While summing up the given situation, deflation seems inevitable. Notably, both inflation and deflation are said to be good or bad for the economy, depending on the underlying reasons. It’s deflation that leads to an economic recession or depression.

Meanwhile, the best thing in such conditions is to create an emergency fund, have grip on finances, try to get out of debt and seek opportunities. Since both inflation and deflation are inevitable, let’s pray for lesser evil.

(The views are of the author & not the institution he works for)