WAVES of new variants of the old accursed pandemic is bad news for the health of the planet. On top, the economic disruptions that these have been creating is a double whammy. The only silver lining is that people learn fast to tackle new situations, however difficult these are. As a South African doctor conclusively proved the infection by a still more infectious variant of the old COVID-19 virus, it sent a shiver down the spines. All countries woke up to the possibilities of another round of mass sickness, overcrowded hospitals, shortages of essential medicines and medical services and then fresh lock downs. Several countries have already imposed fresh travel restrictions. Japan for one has been supercharged and has reportedly stopped all international flights coming. Some European countries are doing so, amidst already spiking COVID infection rates.

 

China, the country which had let loose this horrible plight on the world, has been pursuing its crude policy of zero-tolerance to COVID infection. Brazil has been another weak spot, with large incidence of infection, omicron or no omicron. The doctors are already saying that although the virus mutant is far more infectious than the earlier Delta one, it has so far proved to be less fatal. The symptoms of the omicron variety are much milder and do not immediately require hospitalisation. However, this still called for medical attention and treatment, particularly to isolate and spot its spread. And there lies the cache. If controlling the spread of the omicron variety of COVID needs still more vicious isolation and lockdown, then this is surely going to affect the global economic recovery now underway. The IMF had forecast comfortable economic recovery before the news of the omicron spread. Now, after its emergence and rapid spread, these would have to be reviewed. Already, global financial markets have reacted to the news of the new variant and its typical nature.

 

Markets have fallen sharply and these are still waiting for further details. As more and more news appear about the omicron variety, the financial markets would surely react. By itself, this will leave dents on countries, depending on their other strengths or weaknesses. This is not unknown. Immediately after the global financial melt-down in 2008 and subsequent disruptions, the economies had gone into a tail spin. As the US economic authorities had responded to the evolving scenario, these further left collateral damages. A kind of financial market instability following severe omicron spread and fresh lockdowns could once again give rise to uncertainties. This would of course depend on their current economic strength. However, it is possible to anticipate that those already facing high inflation (and some are), having smaller kitty of foreign exchange reserves, exposure to short-term loans and dependence on exports to China or US, will face possible inflection points. The risks of public health and hygiene apart, the downside risks now emerge from what two major economic powers would be doing. Both China and the United States are the engines of the global economy and their domestic economic policies will influence what happens to others. There are two principal threats now.

 

The first is that China is slowing down and a slower China poses threat to a host of countries with numerous related risks. The second is the monetary policy stance of the US Federal Reserve and the rippling financial woes these could inflicts across the world. These Chinese economic trends are posing a serious problem for the global economy. Real estate is estimated to constitute close to 30% of the Chinese GDP according to some very conservative calculations by well-down China expert Kenneth Rogoff. The trouble of the real estate behemoth, Evergrande, which owned over $300 billion in loans to various banks and individuals who have kept their money with the company, is facing difficulties in repaying. Some of the loans had defaulted and the company is struggling to meet its obligations. Any failure on the part of Evergrande could spill disaster to Chinese banks as well as a large number of Chinese household investors. Such a development could undermine the Chinese financial system and the Government has not shown any signs of bailing out the company as part of its calibrated stance to correct the real estate bubble.

 

It is seeking to convey an impression than whoever is in trouble, the Government isn’t going to bail out. This might be good in the long term, but in the short and medium terms this could be hugely destabilising. In addition, the Chinese Government’s steps to tame the technology sector in the country and its tech billionaires also has had an unnerving impact. Whatever happens in China is in mammoth scale. So the Government attempts to teach a lesson to the billionaires also has are scale implications. A series of global financial operators have been hurt by the move of the Chinese Government. If all these leave the Chinese economy going slower or even to grind to a halt, this could seriously impact many other countries.

 

A drop in Chinese consumption of iron ore, steel, aluminium and much else, coupled with a weaker consumer sentiment in China would bring down its imports. It could affect countries exporting commodities to finished products to China. On the other hand, a tightening monetary policy of the United States could also affect countries. As far as these would influence the exchange rates and flow of funds into a country, these would be vulnerable. How is India laced in this situation? Fairly comfortably. With foreign exchange reserves overflowing and relative price stability, India is not exposed to risks from either of these potential sources of instability in the global economy. It emerges that sine exports counts for less, India should not be very exposed to drop in global demand. (IPA)