Re-visiting the Economic Survey on India's handling of the pandemic

The first chapter of the Economic Survey of 2020-21 is devoted to India's handling of the pandemic. The note of exuberance is unmistakable. The Survey claims that the early and stringent lockdown reduced the loss of lives and, at the same time, paved the way for a V-shaped economic recovery:

India’s policy response to the pandemic stemmed fundamentally from the humane principle advocated eloquently in the Mahabharata that “Saving a life that is in jeopardy is the origin of dharma.” Therefore, the “price” paid for temporary economic restrictions in the form of temporary GDP decline is dwarfed by the “value” placed on human life. As the Survey demonstrates clearly, using a plethora of evidence, India’s policy response valuing human life, even while paying the price of temporary GDP decline, has initiated the process of transformation where the short-term trade-off between lives and livelihoods is converted into a win-win in the medium to long-term that saves both lives and livelihoods.

One stringent lockdown and we were done with the problem- so the Survey suggests. India's experience was unlike that of many other countries that did not impose as stringent lockdowns and had to face second and third waves:

The analysis in the chapter makes it evident that India was successful in flattening the pandemic curve, pushing the peak to September. India managed to save millions of ‘lives’ and outperform pessimistic expectations in terms of cases and deaths. It is the only country other than Argentina that has not experienced a second wave. It has among the lowest fatality rates despite having the second largest number of confirmed cases. The recovery rate has been almost 96 per cent. India, therefore, seems to have managed the health aspect of COVID-19 well.

.....India, in fact, has been an outlier in its experience with COVID-19. It reached its first peak in mid-September, after which rising mobility has been accompanied with lower daily new cases .. Globally, many European countries and US have been facing deadly second and third waves around this time with easing of lockdowns and increasing mobility. Most countries had to re-impose intermittent lockdowns while India has been increasingly unlocking. These trends reinforce that India has been effective in combating the COVID-19 pandemic.

The message is clear: India had won the war on covid. The Survey went on to almost rule out any further wave of covid:

 Also, most countries experienced their subsequent waves within a period of 2-3 months of crossing their first peak. These second waves have been more lethal in terms of number of cases. (Figure 23). The fatalities in US were 2.9 times higher during second wave. The prospect of India facing a strong second wave is receding with the start of the vaccination this year.

 The authors of the Survey must be regretting those words!

Clearly, the severe lockdown last March was not the last word in the war. Did the analysis above lead policy-makers on to relax restrictions a trifle too hastily? It may appear so. 

But that raises another question: if lockdowns cannot be relaxed quickly enough, what does that bode for economic recovery? What is the correct severity of a lockdown at any given point in time? 

Alas, a year into the pandemic we are left with more questions than answers.

 

Covid and conspiracy theories

It's fair to say that we- and this includes the scientific community- know little about Covid-19. We don't quite know how it arose, we are not sure if masking and social distancing are effective and we don't how well vaccines work and what their long-term effects are. The scientific community appears divided on the subject. The particular course that nations have adopted is driven by scientists and doctors in the establishment.

Conspiracy theories abound. There is one school that believes that masks are part of the effort to simply whip up a crisis atmosphere so that the state has an excuse to curb civil liberties. Frankly, I don't know what to make of these theories. But when a respected journalist, such as Neil Clark of the UK, says that the requirement of masking is part of a conspiracy, it does make one wonder.

Clark says that those who argued thus last year were dismissed as crackpots. But masking remains very much in place:

Masks would be temporary – restricted to shops – and as soon as the Covid threat had passed they would be dispensed with, like social distancing. Anyone who said these measures were designed to be permanent – and were part of the global elite’s plan to keep the plebs muzzled up forever – was dismissed as a ‘crank’ and ‘a conspiracy theorist’.

Well, nine months on, and where are we?

The UK government has issued a ‘road map’ for taking us – with the speed of a 150-year-old Galapagos Island tortoise on sleeping tablets – out of lockdown. But there’s no mention of when masks and social distancing will be dispensed with.

Well, that could be because Covid hasn't gone away. When people said masking was temporary, they didn't know that Covid would last as long as it did.

Clark is on firmer ground when he says there were no masking requirements in the UK last March and April and masking was introduced even as deaths fell:

We shouldn’t forget that in the week that masks were first introduced last summer, deaths with Covid literally reached zero.

The BBC’s Health Correspondent Deborah Cohen asked the World Health Organisation if their change of advice on masks had been due to political lobbying, and they did not deny.

Why, if masks were so important in preventing transmission, weren’t we told to wear them last March and April? In fact, government scientists advised us not to wear them.

And why is masking becoming semi-permanent? To create a general state of fear:

If cases and deaths with Covid have plummeted to zero, but we want to make people live as if there is a permanent pandemic, to keep control over them, and to introduce ‘Covid-certification’ to restrict where they can and cannot go, how else can we keep Project Fear going without masks? It’s the only way we’d know that these were not ‘normal’ times. Which is, of course, precisely why they were introduced when deaths had dwindled to very low numbers. 

Phew! I thought that the pandemic was stressful enough without such theories.

If you want more such theories, you only need to visit the blog of Paul Craig Roberts, former Asst Treasury Secretary in the US and former Deputy Editor of Wall Street Journal. Here is a sample of websites that Roberts points to.

Medium term economic impact of the Covid crisis

The world economy will bounce back from the Covid shock of 2021. The IMF estimates global growth at 6 per cent in 2021 consequent to the decline of 3.3 per cent in 2020. But the effects of the shock will linger over the medium term. Global output in 2024 will be 3 per cent below what it had been projected before the pandemic struck.

The good news is that the impact of the Covid shock is far less than that of the global financial crisis (GFC). The IMF estimates (in World Economic Outlook, April 2021), global output was down by 10 per cent over a similar period, consequent to the GFC. I may be allowed to pat myself on the back a little bit: I had said in a post a few months ago that the pandemic shock- touted as the 'worst in a century' (or even centuries)- was likely to prove far less lethal than the GFC. The reasons the IMF gives are the ones I had given: the financial sector had not collapsed and the policy response had been stronger than in the GFC.

Chapter 2 of WEO is worth reading. It gives a good account of how exactly the pandemic has impacted economies and how the impact of recessions in general tend to linger and impact mediium-term output.

As is well recognised by now, the pandemic impact economies on both the supply and demand sides:

• On the supply side, lockdowns reduced effective productive capacity. Some businesses also experienced lower productivity because they had to reorganize production to increase the physical distance between workers. These initial sectoral supply shocks spilled over to affect supply in other sectors through links in production networks.  
• Demand fell due to reduced mobility and as precautionary savings rose amid heightened uncertainty. The initial supply shocks also propagated to a decline in demand. This propagation was amplified in many cases by liquidity-constrained households and firms forced to cut back on outlays, leading to more layoffs and further declines in private spending.

 How do recessions, in general, result in permanent damage to economies. The WEO explains:

• First, unemployment may remain high even after the recession (Blanchard and Summers 1986) and couldresult in a smaller labor force as discouraged workers exit. Human capital accumulation and future earnings can be affected by skill deterioration during extended periods of unemployment, delayed labor market entry for young workers, and negative effects on educational achievement in the longer term.

• Weak investment could result in slower physical capital accumulation and affect productivity through slower technology adoption. 
• Productivity could also be permanently affected by the loss of firm-specific know-how as a result of bankruptcies and their spillovers (Bernstein and others 2019), the effects of a decline in research and development and innovation during the recession,and an increase in resource misallocation (see, for example, Furceri and others 2021).

 Two other points are worth noting. There are ordinary recessions, pandemic recessions and financial crises- induced recessions. These follow an ascending order of severity of impact on the economy. Secondly, in the Covid crisis, advanced economies are likely to be less impacted than developing economies. One reason is that advanced economies have been able to provide stronger policy support (perhaps because rating agencies are willing to tolerate higher debt in advanced economies) and they have had better access to vaccines and therapies.