Keeping the economy going while battling Covid-19

Errol D Souza/Astha Agarwalla | Updated on March 31, 2020

Stimulus packages are not going to be sufficient. We need measures that ensure the economy recovers for the sake of the poor, those in the informal sector, and the self-employed who are losing jobs

A day after the Finance Minister announced the Pradhan Mantri Garib Kalyan Yojana relief package worth ₹1.70 lakh crore, the RBI joined in with a reduction in the repo rate and other measures to ease financial stress and expand liquidity in the market.

The RBI Governor pronounced the banking system is safe and asked us not to worry about our bank deposits. This is the third shock to the banking sector in the recent past. The first was the failure of YES Bank where a rescue plan involving a range of Indian banks was put together to mitigate the vulnerability on the financial system. The second was the Supreme Court ruling directing telecom operators to pay dues to the government valued in billions. A panic selling in bank stocks with heavy exposure to the telecom sector followed. The third shock is the virus outbreak and the lockdown that will result in lower corporate growth and an increase in losses.

The lockdown foregrounds the prospect of lost jobs and the closure of small and informal businesses. With no economic activity and forgone cash flows, banks’ viability is in jeopardy. A moratorium of three months on EMIs as announced will be a relief for those with loans outstanding. But for the banks it will mean a worsening of their balance sheet positions.

This will lead to demands for relaxation of NPA (non-performing asset) classification norms which will bring the country back to where the banking sector was a few years ago, before the 2015 Asset Quality Review of the RBI revealed the deep fissures that had the potential to impart instability to the financial system.

Liquidity stress

A major policy intervention doubles the entitlement to foodgrains to be supplied through the public distribution system. The distribution of LPG gas cylinders free to the needy and the direct benefit transfer of ₹500 per month to women under the Pradhan Mantri Jan Dhan Yojana are welcome measures for the vulnerable. The issue staring us in the face, however, is the liquidity stress felt by the vulnerable sections of society due to job-losses that will push them increasingly into debt.

Lockdown is a policy choice, with possibilities of back-loading of casualties immediately after the constraints are lifted, since there is no concrete information about how long a person is infected by the virus, the period of transmission and contagion, and possibilities of mutation. The other choice is selective isolation and increased testing with possible front-loading of casualties but increased chances of improved immunity in the medium term.


Lockdown controls the contagion immediately and limits stress on the healthcare systems, giving time to augment the healthcare capacity. However, this choice will certainly lead to a self-fulfilling feedback loop of supply and demand slowdown, and resulting in severe economic recession. These are serious trade-offs facing the nation about how to keep the momentum of growth without being affected by the debilitation impact of the virus, but the focus on relief is veering us away from debating these.

Mass testing

Epidemiologists have warned us of vast under-counting of the number of infected due to lack of testing capacity. South Korea and Taiwan are being referred to as countries that combated the virus without lockdowns. Seoul had rolled out a mass testing programme when the outbreak started in its fourth largest city Deagu. As many as 10,000 tests were conducted each day. In contrast, Japan is blamed for testing fewer than 10,000 people in total and some have alleged that this under-detection was aimed at rescuing the Tokyo Olympics.

But Japan did acknowledge limited capacity to perform the polymerase chain reaction (PCR) test that confirms the presence of the virus and prioritised accuracy over volume. That is why South Korea could increase testing whereas Japan could not. After a few days of decline in new infections South Korea suddenly saw an increase from a cluster of infections at a call centre in Seoul. Mass testing works to control the pandemic and to keep the economy going if it is accurate.

In the US more than half of the cases reported come from just one location, New York. The Democratic Governor of NY, Andrew Cuomo, is of the view that you can’t run the state with the economy closed down and resorted to testing in NY at levels that on a per capita basis exceeded those in South Korea. To get the economy going and to reverse job losses and financial turmoil, stimulus packages are not going to be sufficient. We need measures that ensure the economy recovers for the sake of the poor, those in the informal sector, and the self-employed who are losing jobs.

We need to acknowledge risks and devise our response to the virus keeping their situation in mind. The lockdown period must be utilised to improve testing capacity and augment critical response infrastructure. Once we get out of the lockdown period we must allow a quick return to work, emphasise testing and quick isolation for those who develop symptoms, and promote safety via hygiene and personal distance in interactions. The cure of continued lockdown should not be worse than the problem of devastation from insufficient income.

D’Souza is a Professor at IIM Ahmedabad, and Agarwalla is Associate Professor at Adani Institute of Infrastructure Management.


Published on March 31, 2020

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