Economies are like wooden skyscrapers; beautiful, but volatile. A single spark can begin its crumble to shambles. Thankfully, we have the government to fight the raging inferno-like economic crisis when the spark burns. Yet again, we face the same situation due to the pandemic: A crumbling skyscraper with flames licking its foundations. Thus, our government must again don its kevlar suit and extinguish the fire before it extinguishes us.
Governments of the past have dealt with post-virus economies in varying hues of terrible, horrible and villainous. Fortunately, our governments are much better equipped than those of the past with knowledge, both empirical and theoretical, of handling economic crises. Our adept handling of the financial crisis of 2008 (albeit our significant role in its beginning) proves that our current knowledge is enough to mitigate the crisis, if not solve it. Yet before we solve a crisis, we must know what it is caused by.
Every economic shift has an antecedent attached to it. In the case of the Indian economy, we needn't look further than newspaper headlines - 'Coronavirus'. While it is certain that the Indian economy was already in a bad shape (see the previous article - Economy of India: Currently, from October 2019), the actual crisis began further into March, when the first all-India lockdown was ordained. In such a lockdown, industries such as Construction, Manufacturing and Agriculture cannot function with efficiency. These sectors happen to be the largest employers of unskilled and semi-skilled workers in India. When these factories and construction sites shut down for varying lengths of time, the contracts of these labourers were terminated, or these workers were fired to escape insolvency/revenue loss. In a typical scenario, these workers would have no trouble finding a job (albeit low-paying) due to the ever-increasing demand for labour in this sector. Hence, this is termed as Frictional Unemployment. Unfortunately, all factories/fields/construction sites have closed about indefinitely. That transitions typically frictional unemployment into Cyclical Unemployment - Unemployment due to the downturn of the business cycle. This transition implicates a slowing business cycle.
Cyclical unemployment usually leads to high unemployment rates, which is the scenario today. However, before we tackle the issue of unemployment shifting demand curves, one must realise that 78 % of adult Indians (self-calculated from various sources) have incomes below $10,000 (low-income by the Indian government). Such low incomes indicate semi-skilled/unskilled labour, which cannot be remotely worked upon. Even if there is a possibility of remote functioning, it cannot be offered to these workers, as their incomes prevent them from fulfilling the prerequisites to remote functioning, or work-from-home. Therefore, a majority of this 78 % are incapacitated and are at the mercy of their employers.
The only rational course to follow when one's job security is threatened is to practice austerity and save the measly additional income per month. This plight is the reason for the demand curve's inward push (Income Effect). While a descending demand curve is usually the cause for a price decrease, there is also trouble on the supply side. Such a sudden labour shortage signifies a freefalling supply, increasing the market price. This problem is ill-timed due to the increased overhead costs being entirely shifted on the consumer, whose curve is now inelastic (in general).
A continued explanation of the coronavirus economy will be written in the next part of this series. Till then, ponder upon the consequences of the pandemic after its decline.
Governments of the past have dealt with post-virus economies in varying hues of terrible, horrible and villainous. Fortunately, our governments are much better equipped than those of the past with knowledge, both empirical and theoretical, of handling economic crises. Our adept handling of the financial crisis of 2008 (albeit our significant role in its beginning) proves that our current knowledge is enough to mitigate the crisis, if not solve it. Yet before we solve a crisis, we must know what it is caused by.
THE CAUSE
Every economic shift has an antecedent attached to it. In the case of the Indian economy, we needn't look further than newspaper headlines - 'Coronavirus'. While it is certain that the Indian economy was already in a bad shape (see the previous article - Economy of India: Currently, from October 2019), the actual crisis began further into March, when the first all-India lockdown was ordained. In such a lockdown, industries such as Construction, Manufacturing and Agriculture cannot function with efficiency. These sectors happen to be the largest employers of unskilled and semi-skilled workers in India. When these factories and construction sites shut down for varying lengths of time, the contracts of these labourers were terminated, or these workers were fired to escape insolvency/revenue loss. In a typical scenario, these workers would have no trouble finding a job (albeit low-paying) due to the ever-increasing demand for labour in this sector. Hence, this is termed as Frictional Unemployment. Unfortunately, all factories/fields/construction sites have closed about indefinitely. That transitions typically frictional unemployment into Cyclical Unemployment - Unemployment due to the downturn of the business cycle. This transition implicates a slowing business cycle.
Cyclical unemployment usually leads to high unemployment rates, which is the scenario today. However, before we tackle the issue of unemployment shifting demand curves, one must realise that 78 % of adult Indians (self-calculated from various sources) have incomes below $10,000 (low-income by the Indian government). Such low incomes indicate semi-skilled/unskilled labour, which cannot be remotely worked upon. Even if there is a possibility of remote functioning, it cannot be offered to these workers, as their incomes prevent them from fulfilling the prerequisites to remote functioning, or work-from-home. Therefore, a majority of this 78 % are incapacitated and are at the mercy of their employers.
The only rational course to follow when one's job security is threatened is to practice austerity and save the measly additional income per month. This plight is the reason for the demand curve's inward push (Income Effect). While a descending demand curve is usually the cause for a price decrease, there is also trouble on the supply side. Such a sudden labour shortage signifies a freefalling supply, increasing the market price. This problem is ill-timed due to the increased overhead costs being entirely shifted on the consumer, whose curve is now inelastic (in general).
A continued explanation of the coronavirus economy will be written in the next part of this series. Till then, ponder upon the consequences of the pandemic after its decline.
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