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Home / Opinion / Columns /  Opinion | A production model that could guide an economic resumption

The current economic situation resembles an involuntary general strike, as workers cannot reach the capital assets or land that they need for production. This makes it different from a sudden stop in production because of a war or natural calamity: neither the labour force nor capital assets have been destroyed. The general strike is involuntary because the distancing has been imposed by governments to deal with an unprecedented public health crisis, rather than out of choice.

What we are experiencing now is thus primarily a supply shock. There will be a subsequent demand shock as the lack of income damages the ability of people to maintain consumption and/or that of enterprises to invest in new capacity even after the virus threat recedes. The modern economic policy toolkit is generally better suited to deal with a collapse in aggregate demand, rather than a sudden stop in production. The lack of a widely accepted set of policies to manage a supply shock is especially relevant when the national conversation is gradually moving towards ways to partially exit the stringent national lockdown that was imposed as an initial defence against the spread of covid-19.

How does one think of a gradual exit from the lockdown? Consider a very basic economy with two sectors—an agricultural sector that produces food from land, and an industrial sector that produces other goods. There are two ways to think about how to get half of total economic capacity back on stream. First, one of the two sectors is allowed to get back to full capacity while the other sector is kept shut. Second, both sectors are allowed to operate at half their capacity.

The implications of both these strategies are dramatically different from each other, once you begin to think about how the two sectors are dependent on each other. Consider the first option. If only agriculture is opened up while the industrial sector is kept shut, then farmers will not get access to the stuff they need to grow and harvest food. Think tractors, fertilizers and jute bags. Similarly, an industrial sector operating at full capacity with no farm production will mean that workers will not get food that they need to be productive. And some industries such as textiles are built on inputs from the farms.

The point is that keeping one sector shut will automatically hurt the production of the other. The second strategy thus makes more sense. Open both sectors in a certain ratio to each other, or more generally all sectors in some proportion to each other. What should that ratio be? It depends on the technology of production in agriculture as well as the industrial sector. Economists have a good way to figure this out. It is called an input-output table, which is a matrix that maps how the production of a certain sector becomes an input in another sector of the economy.

Wassily Leontief won the Nobel Prize in 1973 for the input-output tables he pioneered in the 1930s, which gave a clean representation of how various parts of the US economy interacted with each other. In his Nobel Prize acceptance speech, Leontief gave the following example: “Direct interdependence between two processes arises whenever the output of one becomes an input of the other: coal, the output of the coal mining industry, is an input of the electric power generating sector. The chemical industry uses coal not only directly as a raw material but also indirectly in the form of electrical power. A network of such links constitutes a system of elements which depend upon each other directly, indirectly or both."

What are the policy implications of such profound sectoral interdependence when it comes to thinking about gradually exiting the lockdown? Here are three areas to focus on.

First, the government needs to understand the complex interlinkages in the economy. One way of doing so is to take a look at the several detailed input-output models of the Indian economy. The gradual exit from the lockdown—whenever it is done—will have to be coordinated across sectors. Opening one sector at a time will lead to production gridlocks.

Second, the Indian state has been trained to think in terms of essential and non-essential goods based on the rationing of final consumer goods, including food. That thinking should not be extended to the production of intermediate goods. As a friend pointed out, the same material is used to package potato chips and medicines. So there should be no restrictions on the flow of intermediate goods that are used as inputs; only production of final consumer goods should be controlled for now.

Third, transport will be very important. However, given the current problems of movement, there is some value in thinking about connecting factories in similar supply chains with each other in a way that transport is minimized. One idea is to geotag large factories in the country, which (as far as I know) is not done in any database. Such big data initiatives could help factories source inputs from the closest supplier till the movement of goods across the country gets back to normal.

Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics

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