Even before the full impact of COVID-19 on Indian health is clear, the economic impact of anti-pandemic measures poses serious problems. The Indian economy was in dire straits before COVID-19 reached our coast. In particular, blocking and other restrictions on movement, supported by scientific and political consensus on their inevitability, have directly led to a dramatic slowdown in economic activity across the board. What impact do they have on the Indian economy? This question requires an urgent answer.
We provide a first quantitative response using a methodology based on the input-output model (IO) technique that was first worked out by the economist Wassily Leontief. Such models provide detailed sectoral information about production and consumption in different economic sectors and their relationships, as well as the total wages, profits, savings and expenditure in each sector and according to each section of the final consumer (household), government, etc.). The intermediate consumption is decisive, namely the consumption of the production of other sectors by some sectors (as well as the consumption within the own sector).
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The main advantage of such a model is that it allows the impact of changes in a sector to be calculated directly and indirectly, which has made this model somewhat ubiquitous when it comes to calculating the economic impact of disasters. This also makes it well suited to assess the economic impact of COVID-19. Unfortunately, the last officially published IO table for India was for 2007-2008. In our estimates, we use the IO tables for India published by the World Input-Output Database for 2014, which update the IO tables for individual countries based on time series of national income statistics.
To calculate the effects of the block, we first construct four different scenarios for the number of working days lost in different sectors. Assuming that the estimated annual production is evenly distributed over the year, it is possible to calculate the daily production and thus the daily production loss. The direct and indirect effects of the lock are then estimated using I / O multipliers, which are assumed to be constant. We then calculate the percentage decrease in national gross domestic product (GDP) from 2019 to 2020 that this impact will affect.
Impact on different sectors
Our model (see table) shows that the loss of GDP in the most conservative scenario, where the average number of production days lost is only 13, is between 17 lakh crore (7% of GDP) and 73 lakh crore (33%). of GDP) in the most effective scenario, in which the number of days with lost production averages 67. In intermediate scenarios with 27 and 47 days of lost production, the GDP decline is £ 29 billion (13% of GDP) and £ 51 billion crore (23% of GDP). We reiterate that the number of days with lost production given here is only an average of all sectors and that we contribute to the calculation of different numbers for each sector, based roughly on the publicly available information and exercising some judgment. Further details can be found at https://bit.ly/2UXK5WR). These, of course, require a more detailed presentation, an exercise that is undoubtedly best done by the national statistical institutes and their counterparts at country level. These estimates are also in good agreement with other estimates, such as those of the OECD, which suggest a 20% loss in GDP for India.
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Even if it is assumed that the sectors have different blackout periods, all sectors face considerable losses due to their interdependency. If we assume the scenario where there is a longer lock, averaging 47 days in different sectors, we find that the mining sector has the largest 42% drop in value added, even though this sector itself has been closed for 35 days, for example is assumed which is less than the overall economic average. The electricity sector saw a 29% drop in value added, although it does not need to be shut down per se. In all sectors, losses are expected in terms of both wage compensation and the availability of working capital.
The linear nature of our estimates, inherent in I / O analysis, does not allow for feedback effects and assumes that the output will start where it left off without further restrictions. We tried to correct this by using the number of days with production losses in different sectors. However, this may not be enough to capture the ongoing economic impact. Today we are faced with the unique situation in which both supply and demand in several sectors have collapsed. In some sectors, such as agriculture, the impact may be delayed if the anti-COVID-19 measures or the pandemic itself affects farms in the next Kharif season, although reports suggest that much of this year’s Rabi was successfully harvested. Given the database we use and the initial nature of our analysis, we have not explicitly considered possible export outages due to lack of demand in other parts of the world and the unavailability of imported intermediates, which are critical to the Indian economy. We are also unable to adequately separate the effects on the informal sector, which is partially aggregated with the formal sector in the database we use and which is sometimes not taken into account due to a lack of data. Dealing with the difficulties of the informal sector requires special sectoral considerations.
However, the most striking feature of even this simple calculation is the broad economic impact of the anti-COVID-19 measures that we are currently implementing and which are expected to continue in a modified form for a short time. Measures such as debt relief, deferral of income and tax collection, immediate relief of cash and benefits in kind for the poor, and the revision and expansion of public distribution are undoubtedly necessary, but far from sufficient. Our numbers suggest that resorting to huge stimulus packages that industrialized countries have already implemented is by no means wrong.
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The way forward
India needs a similar strategy. As Kerala Prime Minister Pinarayi Vijayan emphasized, exceptional times require exceptional measures. Not only do we have to compensate the wage earners in the formal and informal sector and the livelihoods of the informal sector and pump cash into our hands, but also companies have to be provided with handouts for small and medium-sized companies and with a multitude of concessions even for larger companies. It is important to maintain the production capacities of the Indian economy across the board. The annual budget already approved for the current year clearly cannot withstand such massive efforts and must be checked by suitable parliamentary measures.
A redistribution of spending to keep the budget deficit “under control” through measures such as cutting government wages is unlikely to be helpful. Aside from sending the wrong signal to private sector employers who have been warned to maintain wages and salaries during the ban, it is very likely that demand will continue to decline as the government is the country’s largest employer.
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Finally, it should be noted that the current crisis is not a transformative moment for the Indian economy, although the scale of the impact and recovery process will undoubtedly drive the economy in new directions. However, the “greening” of the economy or more radical transformation measures are not particularly relevant in their current state. What is needed is to ensure the key role of the state to raise an economy at risk of being brought to its knees and to restore an appearance of its normal rhythm through unprecedented levels of government investment.
Tejal Kanitkar is at the National Institute of Advanced Studies in Bengaluru and T. Jayaraman at the M. S. Swaminathan Research Foundation