'One Device is the Distinction Between Social Lockdown and Economic Lockdown’
You chair the Harvard University’s EGROW Foundation, which has done a lot of research on a Covid-19 infected world. Where do you see the Indian economy headed and what are your reactions to the big economic package announced by the Union Finance Minister?
You mentioned our research. We think of it in terms of three sub-sectors of the economy in three phases. One is essential commodities. You will all recall when the lockdown occurred, essential commodities were exempted from it. Everything else was locked down. The point I have repeatedly made is that people have not understood that the rest of the economy was shut down. There are two other divisions of the rest of the economy. One is what I call contact sectors, which you call hospitality, transport, et cetera. There are a lot of people congregated by the nature of the service. And then there is the rest of the economy, which is basically manufacturing, mining, construction and allied services. There are certain services within it which have to be functional for manufacturing to function. So this is a framework which has been used. Then there are three phases, which is critical. This one is the lockdown phase and the second is the transition, when you are phasing out slowly and different issues arise and then, normalisation. So, when you are in a lockdown, fiscal stimulus is totally irrelevant. If you think of fiscal stimulus in the normal way, you inject purchasing power into the economy and you expect demand to increase and supply to go up. Well that’s impossible for this risk. Our estimates show that 40 per cent is roughly essential services, but this 60 per cent is more demand, more supply. If you’re going to inject, hundred per cent of GDP into it, nothing will happen because it’s locked down by order. There are two critical issues. One is the government (state and Union) must ensure that people have enough to eat – that they don’t starve. The second issue is that in this type of situation, legal asymmetries arise, because the government has ordered a lockdown. But if I’m a business person in a mall, a shop, I have to pay the rent, I have to pay the interest, I have to pay the debt. And on top of that, if you tell me I must keep a hundred per cent of my labour and pay hundred per cent (of wages) I’m going to go bankrupt. So, the real problem in this space is mass bankruptcy. It is not an issue of stimulus.
And what did the government get right?
There are a lot of good things that have been done, but I think the (economic) sector has to be freed up, which is again another concept. One device is the distinction be tween social lockdown and economic lockdown. Though I think on economic lockdown you have to be much more liberal even in those red zones. Social law must be even more strict, not just in the red zones, but also in the orange zones. So, I’m saying these rules on individuals must remain as stringent as they are now, but we have to open up the manufacturing, mining and construction sectors with strict rules. The same physical distancing rules will apply. I’m saying the phasing should be chosen carefully.
This is the new normal. Well the fiscal stimulus will not work in the way it was imagined because we are purposely bringing down the demand, because we don’t want people to go out and there is an equal amount of disruption on the supply side. So, the economic measures of the past will not work in the immediate term. But we have to think medium term and long term. So, tell me, what should be the priorities of the government?
The first package the finance minister announced on May 13 basically addressed this bankruptcy issue. In the current situation, financial, monetary credit is very important. So, the point was to inject liquidity, into the institutions et cetera, and RBI did what it could. What I found was that the optimal way for a government to intervene is by something I call the collateral subsidy, or you can call it a backstop. You can call it sharing of risks. So, in that sense I am very happy, because this whole package that has been announced – except for small amounts of it, which don’t relate to this issue – will all be driven by that philosophy.
You know, some people have said that we don’t need deferment. We need more capital support. I’ve heard this before, that small MSMEs are saying, this is not giving us extra cash. Well, I’m sorry, that is not the objective. The objective right now is to avoid mass bankruptcies. Cash will not be useful till you start opening up. We haven’t opened up. I think the whole manufacturing, mining sector will be opened up everywhere, including in the red, zones. Once that happens, we get into transitional issues. It’s a very dynamic situation. Again, I come back to what you brought up earlier. The pandemic is a new thing. It’s created huge uncertainties. I think that the government should not be imposing new legal requirements, like forcing you to, give full pay or to keep a hundred per cent employees. You have to give flexibility and it’s not even necessary for welfare purposes. In a lockdown, me, you, the cook, housekeeper, the man on the street – even if he had his full wages – he can’t spend it. The only thing you can spend it on is essential commodities. So, if I’m getting my full pay or my full pension, I’m saving 70 per cent of it, because my expenditure on essential commodities is just 30 per cent.
We announced a lockdown much ahead of a lot of countries and our casualties are much lower than that of other countries ...
I have no inside information but they advised that don’t allow anybody to go back from the urban areas to the rural areas. I think that was bad advice because, as I said, this pandemic is so unique. The Spanish flu spread much faster in the London slums. So, if somebody has a home in a village, please let them go.
