Revitalizing the Economy 101

Miscellaneous Jul 18, 2021

It has been 565 days since the WHO officially recognized the Coronavirus from Wuhan, China. The virus itself has caused a domino effect worldwide, toppling economies, disrupting supply chains, the uprise of redundant markets and causing many more alarming news. Based on empirical evidence, a nation must have 70 - 80% of its population vaccinated to edge close to normalization. Due to India's relatively weakened state of finances owing to being a developing country, COVID-19 will still significantly affect the economy until 2023. So the question is, how do we withstand the losses incurred by the virus?

There are very evident answers that governments worldwide are attempting to implement, but the ferocity of the virus impedes any attempt at restabilization. The economy has essentially halted and with lockdowns implemented, demand for goods and services from major industries is at an all-time low. Monetary and Fiscal Policies were implemented using stimulus packages, thereby giving some fiscal stimulus to individuals, companies, and industries. Now, the stimulus package did somewhat kickstart the economy, but it was only a short-term fix. A holistic view of the problem shows that the stimulus wears off very quickly if the enacted policy did not cause major change, such as the production of jobs or a sustainable increase in demand against a sustained solution to supply side problems.

A simple yet very hard to obtain fix is Foreign Direct Investment (FDI). Foreign Direct Investment is an investment by firms in a country (home) in productive activities in another country (host). The firm that makes such investments is also known as a Multinational Corporation (MNC), as it works in multiple countries. From a purely tunnel-visioned-capitalistic viewpoint, the idea of a firm investing in another nation seems redundant; however, it is quite the contrary. These MNCs expand for a multitude of reasons, whether it may be to increase sales and revenue by targeting an entirely new demographic or by taking advantage of different laws/taxes, decreasing the length of the supply chain by using locally sourced primary materials, or even sourcing natural resources back to the home country for further refinement or use in production. These FDIs can be very beneficial for the host country, especially if they are an Economically Less Developed Nation (ELDC). Both the short-run and long-run aggregate supply increase due to the rightwards shift caused by increased investments, increasing employment opportunities, upskilling a relatively large group of unskilled workers, and so much more. So the answer is simple right? Get some FDI!

Well unfortunately, it is not as easy as it seems. As COVID-19 has affected virtually every single country, market liquidity has become very challenging. In order to combat this, central banks worldwide directed trillions of dollars into international financial markets. This served as a short-term fix; however, the substantial liquid capital at the disposal of MNCs pre-COVID cannot be compared to the current market liquidity. Hence, incentives have been put into action. In order to carry through the same, noticeable structural changes are being implemented, both in the corporate and diplomatic spheres. Alas, the structural changes are evidently insufficient, seen by no noticeable change in FDI. An exception in this case is India, where far reaching measures like the Production linked Incentive Scheme with a total outlay of over US $26 billion for key 13 sectors for 5 years to enhance cost competitiveness, quality, efficiency and technology would pave the way for flow of FDI, on the back of highest ever FDI of US $81 billion received during the pandemic year of April 2020 to March 2021.

FDI alone can rejuvenate the entire global economy, by once again fostering the multinational trade routes that we once had in the pre-COVID era, however we are stuck in between - a subpar effort to revitalize the economy due to an extremely inefficient allocation of resources. If the respective world governments were to redirect their efforts towards international collaboration, the economy would in turn stabilize, like it always does. Inextricably interlinked to attracting FDI is flattening of the COVID-19 pandemic, and hence both need to go hand in hand.


Hari Narayanan

A nomadic Comp Sci buff with a liking for Mathematics, Physics, Economics, and Diplomacy :)