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A recent Barclays Report, reducing India’s GDP growth forecast to 0% for the calendar year 2020, from its earlier projection of 2.5% just three weeks ago, on 24 March 2020, heightens anxieties and slashes ‘confidence’ in these covid-19 times. This report, like others of its ilk, fails to assess the true nature of the disruption, and thus, provides inaccurate estimates of the covid-19 impact.

Barclays’ domestic economy-centric report refers to an increase in precautionary savings and large job losses as factors weighing down on growth, while making only a passing mention of weak global demand. In doing so, it fails to consider and analyse the pandemic as a global phenomenon, with significant ‘across economy’ network effects in addition to ‘within economy’ multiplier effects.

The network theory of trade posits that as dominant trading economies experience shocks in domestic demand, they become originators of a spill-over cascade, generating and transmitting large-scale shocks across their trade networks and ultimately getting impacted by subsequent-round effects of such shocks themselves. Network effects could be direct spill-overs from a shocked economy, say China’s, to its trading partners; spill in effects, with affected trading partners giving secondary shocks to each other, and spill back effects, with all affected countries radiating those shocks back to the primary centre which generated the initial shock. In the past, the world has been witness to such spill-overs as a rebalancing China acted as the focal point of global trade disruptions. In the current scenario, we need to imagine and account for multiple such points of origin—staggered in their effect, even as there could be multiple rounds of shocks emanating from a mutating virus, which cannot be modelled econometrically.

A recent paper by Kohlscheen, Mojon and Rees (https://www.bis.org/publ/bisbull04.pdf) performs a scenario analysis of the macroeconomic spill-over effects of the pandemic. It uses four scenarios based on combinations of the size and shape of the GDP decline. A 2.5% to 5% drop in GDP captures the severity of the decline, while V-shaped (best-case) and W-shaped (worse-case) shock scenarios capture the efficacy of covid containment. The study suggests that the impact of a pandemic-induced recession in an inter-related global economy could be much larger than estimated hitherto. Thus, emerging market economies (EMEs) like India could experience an output loss ranging from 6.6% (from the baseline before the virus shock) if the pandemic struck only EMEs, to 12.3%, once spill overs from advanced economies are taken into account.

These estimates would point to negative GDP growth rates in India, rather than the benign zero growth rates suggested by Barclays. However, the shape of the decline, based on the discovery of a vaccine, as also possible mutations, may take other shapes, such as flatter U-shape or even an L-shape. After all, the world still has no cure for an influenza virus.

The Barclays report makes the pace of recovery contingent upon ‘major’ policy support by the government beyond a ‘modest fiscal stimulus’, even while it is silent on what constitutes major policy support. In doing so, it overstates the role and efficacy of national governments and domestic economic policies in dealing with such disruptions. As demonstrated by Kohlscheen, et al., an effective containment by the domestic economy without effective containment measures abroad, would still lead to a domestic output loss ranging from 7.2% to 12.5%. The importance of international cooperation in dealing with the virus, both at the health and the economic pandemic levels, cannot be overstated at this juncture.

Further, the report fails to see the ‘behavioural’ nature of the pandemic, and in this sense, the virus and its human victims not ‘behaving’ in the manner that complex econometric modelling would posit. A survey of micro, small and medium enterprises (MSMEs) carried out by this author in the second week of March to estimate the extent and duration of disruption revealed behavioural biases in understanding and coding such ‘Acts of God’. Even after the World Health Organization declared covid-19 a pandemic, before the lockdown, most respondents displayed confidence in the state of the economy, estimating the impact of such disruptions to be minimal—not beyond three months. The lockdown has impacted sentiments significantly.

Consumer confidence in India currently at 83.7 is the lowest in the last decade (tradingeconomics.com/india/consumer-confidence). Global consumer confidence is equally low, with index levels for the OECD (99.3), the US (99.2) and China (96.1) being very close to the levels attained during the Global Financial Crisis (https://data.oecd.org/leadind/business-confidence-index-bci.htm#indicator-chart). Global business confidence is abysmally low as well, with the US (49.1), UK (23) and China (52) (https://tradingeconomics.com/country-list/business-confidence) having the ability to spill over and impact India through trade and financial channels. The role of both consumer and business ‘sentiment’ and ‘confidence’ thus becomes critical in growth projections.

The Barclays’ zero growth rates may underestimate the true impact of a pandemic in a globally integrated economy. Equally so, it underestimates the chances of recovery through confidence-building measures based on multilateral cooperation in fighting global problems. The only panacea to a pandemic recession may be a ‘stay positive’ approach, which discourages business from downsizing and consumers from precautionary savings, thereby providing booster doses of confidence. On the zero growth rate estimate during a lockdown, one may well ask: “Confident, lock kiya jaaye?"

Tulsi Jayakumar is professor of economics and chairperson, family managed business, at SPJIMR, Mumbai. These are her personal views.

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