Economic cost of the lockdown

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Economic cost of the lockdown

Saturday, 04 April 2020 | Barun deb pal Sanjib Pohit

Economic cost of the lockdown

The Indian economy will face an income loss of Rs 1.7 lakh crore per week or a total of Rs 5.1 lakh crore during the three-week-long shutdown called by the Govt

The pandemic COVID-19 has already affected over 10,16,395 people across the world and there have been 53,238 deaths worldwide. Out of this, over 20,000 people died in the last three months alone. Health experts across the world are yet to discover a vaccine for this deadly virus that can be applied for human use worldwide. This is despite the fact that about 35 companies and academic institutions are racing to create an anti-Coronavirus vaccine. There are at least four candidates, which are being tested on animals now. The first firm to conduct a human trial, Boston-based biotechnology firm Moderna, will enter Phase-II of trials, which means widespread human application by early summer. But this is not fast enough. The World Health Organisation (WHO) is expecting an exponential spike in the number of Coronavirus cases across the world in the coming days and is providing necessary information  to vulnerable countries. As a result, national and local governments across the world are encouraging social distancing among the people and more and more nations are going into a lockdown mode.

India is already in the second week of its 21-day lockdown that was announced by Prime Minister Narendra Modi on March 24 in a televised address to the nation. Despite its size and the density of the population, the entire country, that includes 28 States and eight Union Territories, has gone into a lockdown, making it the largest such exercise in the world.

The country, which has a poor healthcare infrastructure has no option but to do this, as social distancing is probably the surest way of stopping the spread of the Coronavirus among the 1.3 billion Indians. However, health experts say that nothing can prevent the country from going into stage-III of the outbreak and the lockdown is just delaying our entry into it. It is giving us more time to prepare for stage-III and increasing the chances of us taking advantage of any medical breakthrough that takes place.

But, the big question is, for how long can India afford to shut itself down? As it is the Indian economy was in a shambles before the outbreak. Now, it also has to bear the huge economic loss of the three-week-long complete shutdown and the burden of the financial relief package of Rs 1.75 lakh crore that was announced by the Government for the country.

Once this nightmare is behind us, it will become really hard for the Finance Ministry to prepare an effective package for a quick revival of the economy. Here are some estimates of the direct economic loss to the nation and some possible interventions for quick recovery.

The third advance estimate of India’s Gross Domestic Product (GDP) published by the Central Statistical Organisation (CSO) revealed that India’s estimated GDP for 2019-2020 stood at Rs 47 lakh crore, which turns out to be Rs 3.6 lakh crore per week, of which 17 per cent is earned by casual labour, 21 per cent by regular wage employees and 62 per cent by self-employed workers. The lockdown will affect all these workers on a different magnitude. According to the Periodic Labour Force Survey (PLFS) data for 2017, a whopping 25 per cent of total workers in India are casual labourers (i.e. almost 93 million people) earning about Rs 1,754 per week. Another 23 per cent of the total are regular wage earners who get an average Rs 4,063 per week. The rest, 52 per cent workers, are self-employed ones that include own account workers, the self-employed and helpers in household enterprises. According to the PLFS’ estimates, a self-employed person earns about Rs 3,460 per week. The complete shutdown will affect casual labourers the most as their income depends on working days available in a week.

The situation is, of course, marginally better for regular wage employees. But nearly 46 per cent of the total regular wage earners in India do not have the benefit of paid leave. Therefore, if their salary is not protected during the lockdown period, they will lose their income. On the other hand, self-employed people will lose profit earning from their enterprises/firms due to close of operations.

The lockdown will affect various sectors differently. As Modi’s speech indicated, only production and distribution of essential commodities and services have been allowed to be operational. That includes food supply, goods transport, manufacturing of medical equipment, pharmaceutical, medical facilities, communication and financial services. Therefore, workers will definitely suffer income loss if they are engaged in the locked down sectors.

Another 40 per cent casual labourers are engaged in the construction sector, which will surely be closed for 21 days leading to income loss to the respective workers. A further 10 per cent of casual workers are engaged in manufacturing industries, where almost 90 per cent of economic activities are closed for now. The assumption of 90 per cent shut down of manufacturing is based on the output share of food and medical equipment sectors in total production.

The estimate is based on the 2016 Supply Use Table (SUT) of the CSO, which indicates that foodgrain processing and medical equipment contribute to about 10 per cent of the total GDP of the manufacturing sector. Thus, about 45 million casual workers (i.e. 50 per cent of total casual workers) will be vulnerable, provided agriculture and allied sectors continue to provide job opportunities to the rest of the workers. This is a reasonable assumption for the agriculture sector as harvesting of Rabi crops usually starts in most of the States in late March/early April, coinciding with the complete lockdown period in the country. Hence, the aggregate income loss of the casual workers will be Rs 0.3 lakh crore per week during the lockdown period if we consider their per week income earning to be of the same level as in the third quarter (October-December 2019) of 2019-20.

Additionally, as 46 per cent of regular employees do not have the benefit of paid leave, it is estimated that almost 15 per cent of total regular wage employees will lose their income due to the shutting down of economic activities. Thus, it is estimated that the regular salaried group will lose Rs 0.35 lakh crore per week as compared to their weekly income obtained during the third quarter of the Financial Year 2019-20.

Since 53 per cent of self-employed people are engaged in agriculture, we assume, there will be no direct impact on their income during this time. However, the income of the rest of the 47 per cent of self-employed people will be affected if they are engaged in locked down sectors. Based on calculations of the sector-specific impact, almost Rs 1.05 lakh crore income of the self-employed people will be lost per week. 

In effect, the Indian economy will face an income loss of Rs 1.7 lakh crore per week or a total of Rs 5.1 lakh crore during the three-week-long lockdown.

Considering that almost 95 million workers/entrepreneurs will be hit and if we consider that each of them supports on an average four people, nearly 380 million people will face severe welfare threats. This estimate is only for the direct impact on income for a period of 21 days. The economic loss will be much higher if timely recovery does not take place and if we are forced to go in for an extended lockdown going forward. So what should the Government  do to improve the situation?

As per estimates, the shutdown will cause a loss of Rs 5,261 per casual worker, which is nearly equivalent to the income support given by the Government to the farmers through the PM-KISAN scheme (i.e. Rs 6,000 annual income support to farmers). It makes sense to extend this scheme to the casual labourers engaged in the non-agricultural sector.

Regular wage employees without entitlement of paid leave are highly vulnerable during this period. Therefore, firms can be encouraged to compensate wage loss to those employees and a tax benefit package for the firms may be thought of.

Self-employed people will also face a severe loss due to the economic downturn. Boosting effective demand in the economy can encourage investment and in this context the first two measures will play a key role. So far, an amount of Rs 15,000 crore has been allocated for the heath sector for improving healthcare facilities.

The Finance Minister’s recent announcement of a Rs 1.75 lakh crore package to help the economically-weaker sections survive the loss of jobs and income that would be the inevitable fallout of the Coronavirus outbreak is not adequate.

As indicated above, this is only one-third of the loss of income estimated during the shutdown. Of course, the Government has issued instructions exempting workers and labourers from paying rent for a month and assured wages for them during the lockdown period. This may no doubt lessen the burden. However, foolproof implementation would not be an easy proposition despite the Government’s best intention.

(Deb is with IFPRI and Pohit works for the NCAER. The views expressed are personal)

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