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Photo: Sanjeev Verma/HT
Photo: Sanjeev Verma/HT

Opinion | Let us not underestimate the pandemic’s economic fallout

We have taken prudent steps but we will need a finely calibrated lifting of the lockdown to save our economy from a collapse

The world has changed over the last three months in ways that no one anticipated. We have a pandemic cascading across the globe. Its first victims, China, then South Korea and Singapore, are now slowly returning to some kind of normalcy. But it continues to spread across the world—Iran, Italy, the US, Spain, France and more. Other countries, where covid incidence is still low, wait with bated breath—India, Sri Lanka, Bangladesh, Ethiopia, Nigeria, Tanzania and more. Global health experts have their hands full and we have to wait for all the analysis they can bring to us on this virus.

I want to comment here on the economy. As soon as one mentions it, some react by saying that that can wait, we must first deal with saving lives. This is a mistake. A whiplash of the economy can create as much devastation in terms of lives lost as any pandemic. Some of the world’s biggest fatalities were caused by policy missteps. The Bengal Famine of 1943, for example, saw 2-3 million deaths, not because of food shortages but because of disruptions in supply chains from farms to homes. The Chinese Famine of 1959-61, which resulted in 15-40 million deaths, was a direct outcome of China’s “Great Leap Forward" in 1958.

To come to grips with what is happening, we need to understand what’s novel about this pandemic of 2020. It is not its magnitude alone, but the fact that it is happening in a globalized world, with global movements of people, digital connectivity and social media. This virus spreads easily and can get large if not controlled, but, as yet, it is nowhere near the pandemics of 1957-58, 1968 or the Spanish Flu of 1918-20. What is different this time is that, despite stumbles, we are taking steps to counter it like in no other pandemic before. This is made possible by our new digitally-linked world and modern science. Therein lies hope, but therein lies a risk as well. Such mega actions all around the world will have ramifications for the economy that no one fully understands.

Consider India’s lockdown. It is good to see India taking early action, even though there is no denying that we should have anticipated the hardship caused to poor workers and migrant labour, and taken preventive steps. But these early actions have to be carefully managed if we do not want the virus to be dwarfed by an economic collapse. We have to take lessons from countries that have managed to control the epidemic with nuanced action. Once the three weeks are over, it is important to take steps to unwind the all-India lockdown in a measured way and have more targeted lockdowns. Following South Korea, we need to locate regions and pockets which have to be kept under close watch and locked down, with others being opened up with rules of behaviour in place—masks, social distancing, quarantining those unwell—so that the rest of India can get back to producing goods and services, and help the locked-down areas.

We have to start some of our domestic flights and trains, with new rules. We may, for instance, decide that planes can only fly with one-half or one-fourth seat occupancy to enable social distancing on board. Airline companies will begin to earn small profits and businesses will begin to operate slowly, and production chains will open up.

We have to use incentives—taxes and subsidies—to encourage a massive shift of resources from hotels and the leisure sector to hospitals and medical supplies. It would be a folly to think that the government alone or the private sector alone can do this. The fiscal deficit will increase during this time, but we have to live with that and take corrective measures six months later.

The virus will not be gone from the world over the next several months, or maybe even years. But we cannot live with a total lockdown beyond a certain period because of two distinct risks—one, a disruption in food and essential supplies and, two, the risk of a currency collapse.

Vis-à-vis the US dollar, the Indian rupee now is the weakest it has ever been. But this, India can manage. India has one of the finest central banks and its actions over the last two weeks have been excellent. But if the economy collapses, it will be impossible for the central bank to do much. It is sobering to recall what happened to Indonesia in 1997, when in less than 6 months its currency crashed by 400%, which would be the equivalent of the rupee going from 75 to the dollar to 300. We have to take early measures against this, and for that, we have to get the wheels of the economy running.

It is a fine balance between controlling the virus and enabling the economy to function. We must have the resolve and the wisdom to strike that fine balance. All the proposals above are suggestive. No one has any final answers. We need to bring ideas to the table and try to do our best—collectively. For this is a battle not of one group against another, one ideology against another, but a test for humanity. It is, in a strange way, a metaphysical moment, a challenge we have to take on together to emerge into a better world.

Kaushik Basu is chair professor at Cornell University, Infosys Prize Jury chair and president of the International Economic Association​

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