IPC’s Big Think: Abhijit Sen (Part 1)

IPC is launching a series of ‘big think’ interviews where experts break down crucial policy issues and their solutions in the simplest way possible. Our first is with Abhijit Sen, economist and former member of India’s planning and finance commissions. He dissects the COVID-19 crisis from an economic as well as medical angle and recommends solutions. The interview is in two parts. This is part one. 

On a quiet locked down evening Abhijit Sen spoke to IPC for well over an hour to examine our response to the COVID-19 crisis and suggest how it could have been different. He also outlined - as simply as he could - the steps we should take from hereon, in the months ahead. He discussed these in the context of the Atmanirbhar Bharat Abhiyan economic package that Finance Minister Nirmala Sitharaman has announced in five tranches, and independently of the package as well. 

For reference, here are the five tranches of the package: Part 1 Part 2 Part 3 Part 4 Part 5

And here are key excerpts from part one of the interview:  Difference between COVID-19 and Past Crises This is a crisis quite different from (economic) crises in the past. The crises we’ve had in the past were either to do with supply side or demand side shocks. For example, a monsoon failure is a supply side shock. You have shortages, and those shortages are derived entirely from the failure of production. So rain fails, agriculture fails, and it creates inflation etc. Then we’ve had a crisis, for example, in 2008, which is to do with a demand side shock. Essentially, the world economy went into a demand crisis following the Lehmann crisis. And we weren’t immune to that one. 

This one is different because you’ve got a phenomenon where the shock is really a medical shock. It is to do with a disease. Response to it was a government attempt to control the disease by imposing lockdown, and the lockdown imposed simultaneously a demand shock because people didn’t have income - because we told people you can’t go out and earn anything - but it also meant that simultaneously you got a supply shock, because most units couldn’t produce.  Problems with our Response so far  Our response should have comprised a phased government response, but the government has in a sense created an economic crisis in its effort to control a medical crisis. Now while that is understandable, any government should actually measure the impact of one on the other and take the middle view.  What we’ve got, unfortunately, now at the end of almost two months, is that while we are in some ways better off in controlling the virus, we are a long long way off from ideal. We might tell ourselves that we are doing better than some countries, but we are pretty bad in Asia, we are very far away from any flattening of the curve, and we are in fact number 10 at the moment or number 11 (in terms of the number of infections and deaths), and we are heading towards number 4 or number 5 pretty soon. We can pat ourselves on the back because the doubling time (of the number of people infected) has gone up from 3 days to 11 days, approximately, but that means nothing at all, because the doubling time has to be at least 14 days before anything happens. Usually the flattening takes place when the doubling time is above 20 days or so. But we have started opening up things already because we have realised the economy is taking too much of a hit. 

‘Our response should have comprised a phased government response, but the government has in a sense created an economic crisis in its effort to control a medical crisis.’ Opening and Closing the Lockdown: Mistakes We Shouldn’t Repeat This complication is a consequence of too soon and too big a response - in terms of the lockdown that was announced - to a medical problem. Now we’re witnessing too soon an opening of things and the medical crisis is likely to prolong as well. I think any starting point for policy is not to kid ourselves, to actually be clear that where we are is not a very nice place to be in.  Now, what are the things which are necessary in a crisis such as this? Obviously you realize that there is no real alternative to preventing people from mixing with each other, and some form of lockdown is obviously an essential part of this whole thing.  On the other hand, for example in the Indian case, it could be argued that even on the 24th of March when the Prime Minister announced the lockdown, he should have actually laid out a period in which people could adjust to it. The incidence of the disease was much less, the possibility of it spreading quickly was much less than it is at the moment.  Instead, what happened is we announced the lockdown, but there were pent up demands among migrants to go out. So now, as we’re gradually opening up, they’re travelling and spreading the disease. You’ve got places like Dharavi where it is a bit like Wuhan used to be. 

‘We announced the lockdown, but there were pent up demands among migrants to go out. So now, as we’re gradually opening up, they’re travelling and spreading the disease.’

So, I don’t think we should allow something like this to happen again. You’ve got to phase things properly, and allow people time to do whatever they want to or have to, should they, for some time.  If we had done this back in March, we wouldn’t have the sort of migrant crisis that you’re seeing now, and the cost on the people would’ve been correspondingly less in terms of the income costs as well as the suffering. That’s important because in our effort to stop people dying from COVID-19, they shouldn’t die of hunger. 

‘In our effort to stop people dying from COVID-19, they shouldn’t die of hunger.’ Universalising Minimums: Food & Cash  The first thing should be to guarantee a certain amount of minimum income and food to everyone. And to some extent - what was announced even in the early (Nirmala) Sitharaman announcement shortly after the first lockdown, and in the recent one (as part of the Atmanirbhar Bharat Abhiyan economic package) - an effort to that end is being made via the PDS, but this is all within the existing structure of who is entitled, who is not entitled, rather than saying: “This is a crisis. Everybody has a right to live. Everybody has a right to food.”  That could’ve been done, and it could’ve been universalized for the next two months, next three months, next four months, whatever it takes. We choose a small amount of things to do for people, but we make it universal. Many people won’t take it, but those who need it should not be denied it. 

‘We choose a small amount of things to do for people, but we make it universal.’ 

This is also true of a certain amount of cash. Cash payments are more difficult than food, but nonetheless, a certain amount of cash payments could’ve been made. If you had done this for about 2 months, 3 months, or whatever period seemed necessary - with food and cash - it would’ve actually given people a certain degree of confidence in government, and they wouldn’t be rushing around all over the place. The chances of panic reactions would’ve been less. Panic reactions are bad for the medical problem.  Police Approach Vs. Medical Approach  But the panic part actually got even worse, because much of our approach to the lockdown was a police approach rather than a medical approach. It wasn’t convincing people that this is so good for you, it was actually saying that if you don’t do this you’re a bad guy. The effect is that anyone who is infected is considered a bad guy. And as Randeep Guleria, the AIIMS director, keeps pointing out, the costs of that medically are very big, very high.  Medical Issues: Tracing Spread, Preventing Panic Medical issues are as important as the economic issues here. And they will remain important in the future as well. Since much of the strategy that we’ve adopted is to encourage social distancing, we have to identify cases where there is disease, and then do a follow up in terms of trying to find out contacts. Most of this is best done where there is already a contact identification system, or you develop one based on the ASHA (Accredited Social Health Activists- instituted and appointed throughout India by the government’s National Rural Health Mission to act as health educators and promoters in their communities) and the Panchayat. Kerala’s done the best job on that one. But other states have also done it because we’ve got a history of using this system in certain other diseases like tuberculosis.  However, in some places like Dharavi, we might have actually crossed the point where this will help. With cases mounting so quickly, there may be limits to the contact tracing method. So it’s very important to decide a strategy in terms of timeline. 

‘It’s very important to decide a strategy in terms of timeline.’

But the number one priority is to prevent panic. For any decision, give people some time. You announce that you want to do something. You get the news to them. Prime Minister Modi is such a great communicator he could’ve done that, rather than say that within four hours we close everything down.  COVID-19 Impact on the Urban Vs. Rural Economy It’s important to remember that while - after a few days - we got the urban economy more or less completely shut, our rural economy, especially agriculture, continued to function more or less normally. Because nobody was actually following the lockdown there. So agriculture didn’t really suffer any production shock. We had a good monsoon, so output - which was expected to be good - was good. There was an expectation that there might be labour shortages but, despite labour shortages, most of the harvesting had been done, and the agriculture output is pretty good.  That doesn’t mean the agriculturists won’t suffer a shock, but that their shock will be a demand shock. They are not supply constrained, they have a lack of urban demand, especially the entire hospitality industry which has practically shut down. So prices they are getting are much lesser, especially where there is ineffective MSP and that’s a continuing crisis that had begun before COVID-19, but has got stronger because of what’s happening now.

‘The shock the agriculturists suffer will be a demand shock. They are not supply constrained, they have a lack of urban demand.’

Rural areas, however, are likely to actually face a bigger crisis now that migrants are going back. Because, for one, given the scare that there is, there will be a certain degree of choot-achoot and discrimination and untouchability that will come back and so the social conditions will not be great.  But, more importantly, a very large share of rural incomes - which is from urban areas - would have dried up. And now it’s not only dried up, you’ve got those additional people coming back who have to survive but they are unemployed. So rural areas will now bear a surplus of people, on a lower income than before COVID-19.  However it’s around the same time that the urban areas which have been at almost zero output, are being opened up. So that you could expect to see a certain amount of recovery in economic activity, and therefore in income, in the next few days, but with the great danger that if the COVID-19 numbers keep going up, you might have another knee jerk reaction, and another lockdown.  Decentralisation of Policy-Making around COVID-19 Now, in policy terms, what I would say at this phase is: Don’t try to do anything national. Leave it to local authorities, or at worst to the states, to actually control social distancing. Don’t try to do that at the national level, except some things like railways and air-travel, which are obviously at the national level.  Secondly, as far as interstate movement is concerned, the government should focus on allowing more movement rather than less. If the states actually want to restrict movement, they need to have a certain say in it, but their interest should be in keeping things open.  As things open up, things will happen differently in different places. Some states will get much larger costs than other states, and that has been the case over the last two months as well.  And all states will bear a much greater burden than the centre has, because all the burdens that have been faced so far have largely been the states' burden. Their taxes have collapsed, and they’ve had to spend a lot of money. 

Now the way they’ve been financing it so far is by front-loading the amount they can borrow for the whole year. But that’s running out. So the first thing on Nirmala Sitharaman’s list of policies should have been - and this wasn’t the case, it was the last thing on the list - either more money directly to the states or - what the Finance Minister announced - which is a larger fiscal deficit permission.  But then they have proceeded to weigh these down by conditionalities, most of which will take time to prove. They might look good to someone who is trying to monitor how states do, but this does very little for states which are supposed to act quickly and have already got into much larger debts. 

In fact, as an ex member of a finance commission, I would say that out of a package of Rs 20 lakh crores, 40% or Rs 8 lakh crores has to go to the states. Some of it could be provided fiscally and some of it through a loan. But if we had done that, we’d have done a lot more, than whatever it is we’re doing. I think the federal approach is essential to tackling the problem this describes.

‘I would say that out of a package of Rs 20 lakh crores, 40% or Rs 8 lakh crores has to go to the states.’ What the Centre Should Do: Keep MSMEs Running, Prevent Bankruptcies, Keep Workers on the Books Where the centre does have a role, and a big role, is in keeping production going or at least preventing massive bankruptcy in our small production centres.  Now the big sector, which is most at risk, is the MSME sector. And the FM’s announcements on the MSME were broadly in the correct direction. But certain things should have been made clearer. 

What it essentially said is that there is a moratorium on loan payback, and that she was willing to extend more credit to the MSMEs, and was willing to give a certain amount of guarantees to the banks so that they would play ball with the state. What that is supposed to do, and I think it would be the correct thing to do, is try to minimize the risk of bankruptcies in the MSME. There are similar risks, of course, involved in larger enterprises as well, but for the MSMEs it’s critical, because a lot would go underground.  Second, if you really wanted to keep the workers getting some incomes, then at least that part of the working capital which goes to paying wages should have been kept going even if the units weren’t meeting production targets. 

‘If you really wanted to keep the workers getting some incomes, then at least that part of the working capital which goes to paying wages should have been kept going even if the units weren’t meeting production targets.’

Now this need not be a subsidy. The government might have deferred the subsidy element to it but it could have kept things going by announcing that that amount would be available, and the government could have met that not so much through wage subsidy, but as an interest subvention. 

But for this to happen properly, you have to actually give the bank a much more proper guarantee. So the banking system should be required to give the moratorium, and told that a guarantee will be picked up by the government. This is something only the central government can do, the state governments cannot. So I would’ve thought that the central government should’ve acted in using the banking sector, at the first stage, to simply keep companies from not going underground because of debt requirements, and to keep a certain amount of working capital going so that the enterprises can at least keep their employment on their books, maybe even with some wage cut. 

Now note that so far I haven’t said anything about a stimulus. I’m simply saying keep the system going while the lockdown continues. I’m afraid we’ve not done that very well either. 

Part 2 of this interview will be up soon. 

Abhijit Sen has spearheaded public policy design and implementation in India as a member of Finance and Planning Commissions as well as head of various high level commissions and committees. He has also taught economics at Jawaharlal Nehru University and been an adviser and consultant with various international organisations such as the United Nations Development Programme (UNDP), the International Labour Organisation (ILO) and Organisation for Economic Cooperation and Development (OECD). He is a recipient of the Padma Bhushan for his service in public affairs. You can read more about him here

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