The lockdown hammer

Keeping the economy locked costs lives too and it may not be a price worth paying

The ongoing Covid-triggered lockdown, now nearly eight weeks old, has hammered the Indian economy harder than any other external or internal shock (including wars, harvest failures, oil price hikes and demonetisation) experienced since Independence. And it has done so with unmatched speed, ferocity and pervasiveness. Even if it is substantially lifted from May 18, as I fervently hope, the damage to the economy, its institutional fabric and livelihoods is likely to be massive and lasting.

Just consider these early signals of economic damage:

• As the rolling household surveys by the Centre for Monitoring the Indian Economy (CMIE) show, about 120 million Indians, or 30 per cent of the total employed, lost their livelihoods between mid-March and April as unemployment soared to an unheard-of 24 per cent and participation of the working age population in the labour force dropped to a historic low. Three quarters of the livelihood-losers were daily wagers and small traders/hawkers, the remainder being split about evenly between salaried workers and business persons with fixed assets. Nothing remotely like this has ever happened in India before.
• As industrial output slumped, the IHS Markit Purchasing Managers’ Index (PMI), which normally fluctuates between 48 and 55, crashed to 27.4 in April, the lowest level in its 15-year history. The PMI for services (excluding government) plunged even lower to 5.4, a record low globally.
• Merchandise exports plummeted by 35 per cent in Mar­ch and the April data is expected to be much worse.
• Revenues of central and state governments collapsed by 50 to 80 per cent in April, bloating borrowing requirements and impairing governmental capacity to carry on normal programmes and res­pon­sibilities, meet the rising needs of the jobless and the poor and strengthen public health capacity.
• The complex and ever-changing lockdown guidelines created serious difficulties for their consistent, coordinated and efficient implementation across different tiers of government and multiple departments and  agencies. For businesses and economic agents, the challenges were manifold, resembling the bad years of the licence-permit raj.

Given this extraordinary and unprecedented level and intensity of economic disruption, how does one explain the relatively sanguine forecasts for India’s economic growth in FY 2020/21 (in the range of 0-2 per cent) by the IMF, the World Bank and most investment banks and credit rating agencies?  How can economy-wide employment collapse by 30 per cent and output (GDP) decline by only 3-4 per cent? Frankly, it’s a huge puzzle (Nomura and ICRA are among honourable exceptions to this ultra-optimism syndrome). Official estimates, even for the first quarter of FY 2020/21, will not be available till October. In this vacuum for realistic projections of GDP, I offer a couple of guesstimated scenarios (Table).

To begin with, we need a reasonable benchmark for the level of economic activity (GDP) during the strict lockdown month of April. Guesstimates by informed analysts range from 40 to 60 per cent of GDP being locked down. Accordingly, Scenario A assumes that the rate of economic activity was 50 per cent of the level last April, that is, GDP growth in April 2020 was minus 50 per cent.  Assuming, importantly, that the current lockdown is substantially lifted from May 18 and there is no re-imposition of lockdowns thereafter, Scenario A paints a profile of recovery in economic activity for the remainder of the year. The recovery is likely to be gradual as some restrictions are bound to remain for narrowly defined hotspots and containment areas and there will be requirements of social distancing, sanitisation, etc, all of which will be costly for businesses and rolled out gradually. Besides, it will take time for disrupted supply chains to be repaired, battered businesses to be revived and migrant labour to be wooed back. 

Illustration by Binay Sinha

 

Scenario A yields a growth estimate of (-) 14 per cent for the full financial year. In Scenario B, the key initial condition assumed for April is more optimistic: Economic activity at the rate of 60 per cent of the previous April, that is a GDP growth nadir of minus 40 per cent, which (as in Scenario A) improves steadily over the year. This scenario leads to a GDP growth projection of (-) 11 per cent for 2020/21. What is stri­king about both scenarios is the unprecedented drop in national output that is indicated. But can we really expect substantially better outcomes given what we already know about the massive scale of damage and disruption?

Needless to say, these are only scenarios; reality could be quite different, either better or worse. I offer them as (hopefully) reasonable guesses. Anyone can easily outline alternative trajectories for national output during FY 2020/21. I only suggest that they need to specify their assumption/estimate for GDP in the starting month of April and in the final quarter of the year to facilitate fair assessment.

 

Finally, let us revert to CMIE’s employment nu­m­bers. They are the best available, concurrent, nat­ion-wide indicators of the economic consequences of lockdown and related polices for India’s 270 million hou­­seholds, especially for the lower half of the income pyramid. The 120 million lost livelihoods affect close to that number of households. So the deprivation and destitution resulting from the lockdown may be almost universal among the poorer half of the nation’s population.

Many economists have called for large scale government spending support in cash or kind to ameliorate the plight of the job-losers. This will certainly help, but there are two problems. First, the assistance will not reach many millions of those affected. Second, with government treasuries drained by revenue losses, there is a real problem of sustainability. 

It is more important to lift the lockdown swiftly and restore the bulk of the lost livelihoods through renewed employment and economic activity. That will also replenish government revenues and revive the capacity of central and state governments to discharge their manifold responsibilities. Yes, the lifting of the  lockdown will lead to more Covid infections and deaths. That central dilemma remains. As I pointed out in my previous article (“End lockdown or not?”, Business Standard, April 9), there are deaths on both sides of the ledger: Maintaining the lockdown is also likely to cause many thousands of deaths among the jobless and the poor from malnutrition, disease and starvation. At this critical stage, the balance of uncertain risks and considerations favours swift restoration of job-intensive economic activity.

The author is honorary professor at ICRIER and former chief economic adviser to the Government of India. Views are personal. This article was submitted before the details of the new economic package were announced