Prime Minister Narendra Modi has announced a 21-day nationwide lockdown to prevent the spread of Covid-19. Social distancing has proven to be one of the most effective tools in curbing its spread. Mint tries to quantify the economic costs associated with the lockdown
Why is a three-week lockdown essential?
A systematic spread of the disease across the country combined with the experience of other countries prompted the government to announce a nationwide lockdown. The idea is to ensure social distancing and contain the spread of the coronavirus disease by restricting people to their homes. The objective is to significantly reduce the number of active cases over the next three weeks to avoid community spread and prevent India from entering stage 3 of the pandemic. This is critical because of India’s limited public healthcare infrastructure, which the government intends to augment over the next 21 days.
2. How will this impact India’s economy?
The impact on the economy will be severe as we are looking at a situation of zero value addition over the next 21 days. This means no economic activity will take place for three weeks, except for essential services and public administration. This comes against the backdrop of a slow recovery from the downturn witnessed over the last couple of quarters, which further makes micro, small and medium enterprises vulnerable, while the informal sector will be the worst hit. Several state governments have, however, started taking measures in the form of income support for informal sector workers.
3. What does this mean for the GDP growth rate?
In the event of zero value addition, GDP growth for the first quarter is likely to be adversely affected and may even turn negative for sectors such as tourism and trade. The disruption to the supply chain will be significant and will take a few months to be restored. Estimates indicate that the first two quarters of the next fiscal may witness growth lower than 3-4%.
4. Will this situation push people into poverty?
The sentiment behind the lockdown is to save lives. But many warn it may result in a significant number of people dying due to hunger and poverty arising out of the economic impact of the lockdown. However, this can be avoided if the government takes adequate steps to absorb some of the shock due to the disruption. The economy will gradually recover, with the scale and scope of the stimulus package determining the pace of recovery. Cash transfers can prevent people from falling into poverty.
5. What should be the way forward?
The decision to implement a total lockdown was not an easy one as it is bound to significantly disrupt economic activity across India. Modi said that where there is life, there is hope and that the government will take appropriate action to address the economic concerns. It has addressed some of the issues related to tax liabilities and indicated that a fiscal stimulus is on the way—a comprehensive one would be needed to minimize the economic costs.