Quarantined economics

Most countries are going to face this difficult trade-off between health and economic impact and there is definitely going to be a serious impact on both. While the total number of deaths in India is still low compared to many other countries, there are widespread concerns, even amongst experts, that the count may see a sudden spike and social distancing remains the only way to prevent community spread of the contagion. The blow to people and businesses could have been considerably softened but for lack of foresight, planning and strategies. That would have saved a mad scramble by the government too. The trade-offs between public and economic health is different in the developing and developed world. The speed and scale of the economic downturn generated by the Coronavirus are unprecedented.

Pandemics have long been seen as possible 'black swan' events – unexpected negative shocks with major consequences. But for the public and private sectors, they have tended to rank low in a long list of threats. This is likely to change, just as Hong Kong and Singapore's experience of SARS has shaped their health policy and their response to the Coronavirus. What is happening today seems sure to establish pandemics as a core risk for large businesses, along with the likes of cyber-attacks, terrorism or climate change. India has a fragile economic and social fabric compared to advanced countries. But does it follow that we should prioritise economic growth at the cost of human life? More importantly, is that reason enough to lift/ease the lockdown until the purpose for which it was imposed in the first place — to flatten the curve and slow the spread of the disease — is served? Are lives in India less important than in advanced countries?

Many countries around the world are currently implementing a lockdown of most economic activities to contain the spread of the COVID-19 pandemic. In the countries that have put one in place, the debate is now turning to when and how to get out of the lockdown, so the economy can restart. How long the pandemic will last is guesswork but past diseases seem to follow a pattern of the worst outbreaks ending quickly while milder outbreaks persist and then flare up again. The disease may end with warm weather but it may also become seasonal, like colds and flu. Working assumptions for this economic forecast are that the disease spreads widely around the world, causing illness and some deaths, and then peters out over the summer. This is a highly speculative projection, though.

Short economic downturns are likely in each country affected, though on different timelines. The Chinese case suggests manufacturing and transportation are recovering. If this pattern holds, then we'll see about one-quarter of decline, not the two quarters we usually use as a benchmark of recession. There may, however, be lingering effects. On the demand side, spending will be depressed as people avoid shopping malls, theatres and restaurants as various restrictions (quarantines, travel limitations, etc.) are imposed to contain the virus. People who are unable to work for these reasons will have less money to spend, though people with stable incomes will end the month with more money available to spend after the epidemic is over.

The supply chain effects will trigger additional supply restrictions, as well as reinforced demand reductions as workers are sent home for lack of raw materials to process. Thus, 2020 may well be a year with rolling slowdowns, pulling aggregate economic activity down worldwide. Most places will be in economic expansion for six to nine months of the year, so no global recession will ensue but the pace of growth in our country too will be lower than otherwise expected.

At the peak of a serious pandemic, a near-full lockdown is better than nothing in unprepared countries like India. However, the lockdown should not be long-lasting, with its duration being determined by its marginal (health) benefits and (economic) costs. The policymakers in the country couldn't visualize the numbers and sense of the insecurity of casual workers employed in the informal sector in the urban areas particularly in metropolitan cities like Delhi and other big cities! Lack of coordination and the political equation came in the way of smooth implementation of social distancing strategy. The sudden upsurge of daily wage earners and migrants in the wake of the closure of factories, shops, eateries, and other economic activities in Delhi and other neighbouring cities proved to be the 'Achilles' heel' for the Government.

Indian economy is passing through a difficult time due to overall slowdowns all over the world. In an economy like ours which is already reeling under a depressing demand, rising unemployment and lowering of industrial output and profits, all of which happening together for several quarters now, a supply-side bottleneck would deliver a big blow to our economy.

Every crisis has shaped behaviours in one way or another. The Coronavirus chaos won't be an exception. It's high time we start focusing on healthcare sector investments. After years of being on the backburner, health systems should be back in the spotlight as the virus emphasises the need for stronger public healthcare systems. The private sector in most areas has miserably failed to rescue the Government and the people.

Another aspect of our economic strategy in the coming days should be rediscovering the benefits of localisation over globalisation. Countries turned inwards when the Coronavirus spread and the sudden supply chain shock left many countries smarting. Business Groups may be tempted to look closer home for their needs as they try to minimise the chances of such shocks in the future.

Success in containing the virus comes at the price of slowing economic activity, no matter whether social distancing and reduced mobility are voluntary or enforced. As the pandemic takes hold across the world, those hit the hardest — within countries but also across countries — will need support to help contain the virus and delay its spread to others.

The writer is a Professor of Economics at Delhi University. Views expressed are strictly personal