Covid-19: Escaping the economic dangers

  • Blog Post Date 01 June, 2020
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E. Somanathan

Indian Statistical Institute

As long as the spread of Covid-19 is not controlled in India, there is a threat of new complete or partial lockdowns in response. In this post, E. Somanathan contends that any further lockdown risks incurring a loss of over 10% of GDP without stemming the spread of Covid-19. The ideal strategy is to find and isolate the small fraction of infected people through incentivised testing, while allowing business as usual to resume.


The lockdown has pushed the Indian economy into a temporary depression that is unprecedented in its magnitude. It is very likely that, in the last month, GDP (gross domestic product) has been somewhere between 30% and 60% below that of the same month last year. Since we usually worry about GDP growth (an increase) being as low as 4%, a decrease of 30-60% gives some idea of the scale of the calamity. If the lockdown lasts only a few weeks, and GDP bounces back to normal soon after, we will probably endure no more than a slightly negative growth this year – something not seen in India for 40 years, but perhaps bearable.

Unfortunately, as long as the spread of the disease is not controlled, there is a threat of new complete or partial lockdowns in response. This uncertainty can prolong the output decline, and make it last for months, even years. To understand why, we need to recall that the economy is not just a number of disconnected cells that add up to a total, so that if you lock down one cell, you lose only the output from that cell. No, the economy is like the human body, with a circulatory system through which blood brings oxygen and nutrients to every cell, and takes away wastes. If you block off one city or one state, the entire circulation of goods and services is affected. Every factory sources its inputs from some other factories, and sells its output somewhere else. Lock down one of them, and the entire network is stressed. Lock down many, and the network simply freezes up. Just like the body can survive without oxygen for short periods of time, the economy can survive a lockdown of a short duration. But, exceed those limits, and the result is disaster in either case. Developed economies can survive closures for much longer because most of their output and employment is formal, they have vastly better social security systems to pump money to workers and the unemployed, and they have much better-developed financial systems to pump credit to firms that need it. It is a foolish fantasy to imagine that we can do the same.

Therefore, we must have no more lockdowns, partial lockdowns, or even the threat of a possible lockdown. A partial lockdown, in any case, is worse for disease control than a full lockdown for the simple reason that if only half the shops – or buses, or railways – are open, then they will each be twice as crowded, and infection will spread faster. Even the possibility of a future lockdown can easily prevent firms from re-opening, and migrant workers from returning to their workplaces. Re-opening means that large costs have to be incurred, and if the expected sales – in the case of workers, wages – don’t materialise, then those costs will become losses. Similarly, if credit is needed to re-open, or to keep running, then lenders will be reluctant to risk their money in an enterprise that may fail when the next lockdown comes along.

How can we control the disease with lockdowns taken off the table? Some simple low-cost measures, like requiring mask use in all public places, will help. However, this is unlikely to be enough. The best possible strategy is to find and isolate the small fraction of infected people while letting everyone else go about their business.

The way things have been done so far, when you are quarantined, unless it is home quarantine, you will be made to stay in an uncomfortable place with other infected people. And, even at home, you will lose your earnings while quarantined, and if you are not lucky, you will lose your job altogether. Treatment is confined to overcrowded public hospitals, except for the minority rich enough to pay for private treatment. No wonder, then, that so many people are trying to escape quarantine, making it very difficult to find and quarantine the infected.

But, what if people were willing to be found? Then, the task facing the health authorities becomes very easy. The ones who have symptoms will simply step forward to be tested. This is how the developed countries have taken care of this problem. They have done it by minimising non-home quarantine, paying generous amounts of money to people if they are quarantined, and free hospital treatment for the seriously ill. We have to do the same. Everyone who is home-quarantined should be paid Rs. 500 a day to make up for the loss of earnings, and everyone who is quarantined away from home twice as much. The government should take over every hotel in the country (they are all empty and losing money) and pay them off-season rates to have quarantined people stay comfortably in decent surroundings. Firms that attempt to dismiss employees who were quarantined must be fined heavily. Finally, enough kits have to be produced to test the people who will step forward to be tested. The government has to pay for all the testing and treatment, whether by private or public labs or hospitals.

All this could cost real money – Rs. 1-2 trillion over the coming year – although, if done quickly and determinedly, the infection will be controlled, and the expenditure will be much less than that. There will be some corruption as well. But, the alternative will very likely be failure to find enough of the infected people, another surge of infections, another set of lockdowns, a collapse of incomes – so that even if a lockdown is lifted, people do not have the money to buy goods – more firms going bankrupt, and the vicious Keynesian spiral leading to the loss of maybe 10-20% of GDP – about Rs. 20-40 trillion. That big a hit to GDP would mean that government revenue would collapse, making it difficult for the government to provide the help a bleeding economy would need. Further, the damage to the economy will be perpetuated to the next year, and the infection will not be controlled. The meltdown would be so complete as to be unimaginable today.

The voluntary and targeted approach outlined above will work better if there is good information on where there are active infections. Testing people for the purpose of quarantine and treatment is not very effective in this case since it will miss everyone with mild or no symptoms. Testing a random sample of people (about 1,000 would be enough for reasonable accuracy) in each district every week, with PCR tests that catch active infections, will give up-to-date information about the percentage of infected persons, even those who are asymptomatic. By pooling samples, just 50-100 test kits would usually be enough per district per week. This will allow planning to rush testing equipment, medical staff, and supplies to areas where infection prevalence is high, so as to deal with the expected surge in cases, and avoid the economic disruption caused by the panic that nasty surprises bring. If the disease is kept under control with this strategy, historians may look back on 2020 as just a blip in our story of progress.

This post first appeared in the Financial Express:

1 Comment:

By: V Baskar

Enough is enough. We cannot continue the present approach for too far. Besides the random testing, we need to give a chance to alternative system of medicine like Homeopathy, Ayurveda and Siddha. Each and every household should be taught about the importance of keeping hygiene and also taught about immunity boosting foods.

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