China's post-Covid-19 path to normalcy: Parallels for India
The study has been authored by Santosh Pai.
The impact of Covid-19 on each country’s economy is a complex function of numerous factors including extent of disruption caused by lockdown, financial health of enterprises and pattern of industrialisation. The response of each national government is a function of its financial strength, type of political system and prevailing social conditions. For instance, stimulus measures must strike a balance between foregoing tax revenue and aiding enterprises to resume operations. Before examining China’s recovery measures from an Indian perspective, we should appreciate some relevant differences and similarities. While India imposed a nationwide lockdown during the first wave, China witnessed region-wide disparity in severity and duration of lockdowns. Public sector enterprises, whose finances are more resilient, comprise a greater portion of industry in China. This gave the State larger control over economic activity. One parameter where both India and China are similarly placed is the ratio of tax revenue to Gross Domestic Product (GDP). This parameter could dictate the ability of governments to forego tax revenue in order to support enterprises dealing with cash flow challenges. Considering that China issued over 10,000 distinct government directives to aid the recovery process, a comprehensive overview of these measures is beyond the scope of this paper. Instead it will attempt to provide a flavour of the main directives from a few important government agencies and highlight different categories of measures that were targeted at specific stakeholders. The intent is not to appraise these measures but to aid reflections on whether the underlying problems motivating China’s measures might find parallels in India.
Resumption of work: The first signal of China’s intent to resume economic activities emerged on February 15, 2020, when a speech made by Xi Jinping two weeks earlier was published. Two weeks later, State-owned Assets Supervision and Administration Commission (SASAC) announced that 48,000 SOEs had achieved 91.7% work resumption. Data on work resumption by private enterprises can only be gauged from indices such as traffic congestion and pollution. One positive aspect of work resumption through directive is the elaborate planning that is required for its execution.
Fiscal and monetary measures: An estimated RMB 2.6 trillion (or 2.5% of GDP) of fiscal measures or financing plans were announced and measures amounting to 1.2% of GDP implemented. The People’s Bank of China (PBC) injected liquidity worth RMB 3.27 trillion (gross) into the banking system via open market operations. It also expanded relending and re-discounting facilities by RMB 1.8 trillion to support manufacturers of medical supplies, micro, small and medium manufacturers of daily necessities and the agricultural sector to prevent shortages. In addition, the policy banks were directed to extend RMB 350 billion worth of credit to micro and small enterprises (MSEs). China’s bond regulator also voiced support for impacted companies looking to raise funds through bonds.
Tax measures: Tax measures are an effective method of influencing economic activity and can take many forms including exemptions, rate reductions, deferments and deductibles. One of the earliest nationwide tax relief measures announced in China was an enhancement in the period within which enterprises could carry forward losses from five to eight years. Other measures included postponement of deadlines for monthly and annual tax filings by one week and two months respectively. These low impact measures eased cash flow challenges without causing a significant dip in revenue collection. The only cut announced in indirect taxes was a temporary reduction in VAT levy on MSEs that supported both small business owners and boosted consumption.
Financial incentives: An abrupt disruption of economic activity impacts each industry in a different way. The impact on individual enterprises within the same industry might also vary depending on their financial circumstances. Hence when relief is in short supply the quality of intelligence that informs its deployment becomes crucial. China recognised this challenge at the outset.
Prevention of job losses: Each year before the Chinese New Year holidays, workers across China settle their annual dues with employers. Migrant workers are often organised according to their place of origin with identified leaders who help keep them in jobs throughout the year in one or more locations. Such an arrangement gives both management and labour an inherent element of flexibility at the obvious cost of job security. A group of workers might not return to the same factory if they find a better opportunity or the factory might scale down their annual production target reducing their demand for workers. Due to this practice, the overlap of the Chinese New Year holidays and Covid-19 outbreak might have been a blessing in disguise for China. It meant that vast pools of labour could be deployed selectively in desired locations with minimal transaction costs.
Domestic consumption: China’s heavy dependence on export revenues was perhaps the weakest link in its recovery plan. This, when combined with lower consumption levels across the world due to spread of Covid-19, backlash against China for initial mishandling of the pandemic, and efforts to decouple from China by the United States and other countries, presented challenges for its recovery prospects.
(The study has been authored by Santosh Pai)