The Botched Policy Response to Fighting Corona

by Partha Sen

The prospect of the Prime Minister addressing the nation at 8 PM (no matter on which date) sends a shiver down my spine. One cannot but recall the demonetization experience of November 2016. In spite of that unpleasant experience, we expected a well thought-out policy response to the corona pandemic that was knocking at India’s door. Hamstrung by decades of neglect of its public health system by the various ruling parties, the outcome was going to be grim. Nevertheless, one has to use the resources one has, notwithstanding the past neglect. Mathematicians tell us that if you cannot do the best with what you have; you will never do the well with what you do not have. But was the response to the impending corona crisis well- thought out?

There are lessons to be learnt from the demonetization exercise for the Corona experiment. The big difference was that in the former case, it was a policy upheaval because one person had heard voices in the air, while in the Corona case the problem is serious and everyone should rally behind the government, if a half-decent policy package is proposed.

Both these interventions by the Central government really hurt the poor. In the first case people had purchasing ability that was nullified at a stroke. In the second, people’s ability to earn a livelihood was attacked. It is obvious that before a policy announcement, some planning is required. On this it is instructive to compare the demonetization policy with the one proposed for the Corona virus pandemic. The time before announcement in the demonetization case was possibly quite long (we will never know exactly how long) but the implementation lead time was four hours. The time between announcement and implementation had to be short because surprise was the key. The State governments were not consulted because they had no role to play; indeed they might have given the game away.

In the Corona case, the time to plan the lockdown was not very long. And the interval between announcement an implementation was again kept short (a magical four hours again). If the State governments were in the loop it was, at best, perfunctory. And the Corona story (from a policy point of view) is unravelling because of this tardiness.

India’s growth strategy involved by-passing the poor and relying on a trickle-down policy. Primary education and health-care were neglected. Even when the (much hyped) growth rate was going through the roof, the allocation for health in the budget was pathetic. The country’s preparedness (or the lack of it) for the pandemic is the outcome of this.

Since independence, industrialization has not occurred on any scale; thus it was not that the general public with increased incomes could afford to pay for health from their own resources. The Indian growth strategy was skewed in favour of the rich and upper-middle classes. Financial liberalization generated oodles of money from financial transactions. While this is certainly true at the aggregate level, the policy response will have to use some of the economic and social safety nets put in place in spite of the preference for elites (e.g. the reports of the Rajasthan and Maharashtra governments using MNREGA and Kerala’s flattening the infections).

A lockdown to implement social distancing to prevent the virus from being transmitted rapidly was always on—the alternative to this would have been business-as-usual, clearly an unthinkable proposition. For the society as a whole, lives come before livelihood. Everybody knows that some amount of preparation to minimize the economic and humanitarian costs was essential, especially to ensure the economically vulnerable were protected. This unfortunately was observed mainly in the breach. Following a four-hour notice, one month later the promised ration supply still has not reached the beneficiaries in large parts of the country.

The preferred medical advice was lockdown and test (not just a important because the issue of livelihoods cannot be on the back-burner forever. The case for the extensions of the lockdown is very weak, if that is all that the government will do. This notwithstanding the possibility of the pandemic starting to gallop. We should have thrown everything that came our way early on testing. Whatever testing had to be done should have been done by now, so that problem areas could be identified and, if required, the lockdown extended in problem areas. Of course, there is a lot of uncertainty here—e.g. no one could have lockdown). This is very predicted the Tablighi Jamat fiasco. But this notwithstanding the policy response on testing was to scour the skies to see if cargo planes were arriving from China and South Korea!

If planned properly, it should have been possible for the State chief ministers to tell the residents of the state what preparations had been made (something that could be verifiable immediately). And those citizens who wanted to go back to their village should have been given a time frame to do so. From a lockdown perspective this a retreat. But given that a lot of people were sleeping on the streets or were living ten to a room, social distancing was a contradiction in terms (as was maintaining proper hygiene). In the event, this did not happen—the urban daily wagers and others decided to leave for their villages anyway, where in these troubled times they saw a safety net in food and housing. What could have been a policy planned orderly retreat, was replaced by a scuttle, as the poor voted with their feet. The decision by a large number of migrant workers to walk to their villages hundreds of kilometers away, caught the government off-guard. And provided proof (if it was needed at all) that it was completely clueless.

Consistent with India’s social and economic power structure, the response of the State and Central governments was predictable. There have been flights arranged to bring back citizens from abroad, buses to ferry engineering and medical school aspirants to their families, but nothing for the faceless migrant. Stay where you are, and, if lucky, get some ration there. But even here there is a catch—you must download apps to access these. Woe betide you, if you do not have a smartphone, and were not provided enough education by the state to navigate an app.

In addition to the historical neglect of health in India, there are more recent causes. The economy was in recession and tax collections were low. The mess that is our GST is in, meant that the State governments on whose shoulders a lot of the responsibility of ensuring nutrition availability to the poor, just do not have the wherewithal to tackle the problem.

Wherever the migrant labourers are, during the lockdown, essential supplies have to be provided for them. The government’s knee jerk reaction was to ban all transport of goods deemed to be non-essential. Trucks were stranded on the highways. And then the drivers abandoned these and went home. Presumably, the truck owners have to at least break-even in plying their trucks. And they must be given some leeway to make money while transporting the essential commodities.

Now the government has to respond with an economic policy package. This has to take care of those who have lost their livelihood in informal activity e.g. the daily wagers, but also SME’s and organized industry. While monetary policy can be used for the modern industry, fiscal policy mainly consisting of transfers has to be used to alleviate the suffering of the poorer sections. And it must be said that what the government has promised is really peanuts. This is the time to err on the side of generosity (meaning the amount of relief, and not charity), bypassing self-imposed bureaucratic hurdles. The alternative is to see widespread hunger and malnutrition.

The budget rules on the States have to be loosened. They will be responsible for taking the package to the needy. MNREGA funds for employment have to be made available. The shortfall in their share of GST revenue has to be released immediately. The Centre is still not wanting to let go of rules about deficits, when it should be throwing everything that it can to stave off the humanitarian crisis. Fiscal prudence would be wrong both in terms of doing long-term damage to the labour force, and in terms of justice (that is an integral part of the democratic process). These people should have access to food and shelter until things normalize (and that could be a very long time). The deficit will balloon but some expenditures on vanity projects can be put on hold (the redevelopment of the Central Vista in Delhi, and the bullet train come readily to mind). The monetization of deficits should also not be ruled out—the government needs to borrow, and if the credit is not readily forthcoming, then it should borrow from the RBI.

The other aspect concerns industry. Here I think the government has limited options of intervening directly; it has to provide credit facilities, some tax relief etc., but not use fiscal policy. There will be some sectors (e.g. aviation, banking) that may need bailing out—how to do that is not clear at this time. It is possible, industrial activity could take a long time in bouncing back, or could do so quickly. There is a problem of co-ordination and misguided intervention by the state could be very costly. There is a supply shock, and at the aggregate level a demand shock; and possibly drying up of credit. Government policy should be limited to providing an enabling environment via monetary policy.

Thus the authorities should throw the “kitchen sink” in fighting the humanitarian problem, eschewing the call to keep some of its powder dry for subsequent rounds of infections etc. This is battle that must be fought and won here and now. On industry, there might be some elbow room (except SMEs which need attention immediately).

Partha Sen is retired Professor of Economics, Delhi School of Economics