Government Budgets

A different economic approach

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How to balance the trade-off between the health of economy and public health.

Context

The Covid-19 pandemic and subsequent 21-day lockdown by India has forced us to resolve the public health versus economic health trade-off.

The debate over lockdown

  • No clear idea on number of lives saved: As it fights COVID-19 with its meagre healthcare resources, India has chosen to bring the economy to a near halt with no clear idea of how many lives can be saved in this manner.
  • What is going to be the cost of this decision? The 21-day lockdown will reduce the gross value added (GVA) during this period to near zero.
  • More than half the GVA is contributed by the unorganised sector.
  • A disproportionate burden of the economic cost has fallen on this large segment.
  • Debate: The suffering of the stranded migrant labourers has set off a debate: is the disruption and the economic pain justified?
  • Is it worth sacrificing the economy to save lives?
  • And at the core of such questions is a policy dilemma: should public health matter more than economic health?

So, what should be the policy objectives?

  • In time, a vaccine will become available. But the economy cannot remain shut until that happens.
  • A prolonged lockdown will extract a huge economic cost.
  • Therefore, the policy objective must be to find ways of ensuring that the lockdown ends early without compromising on public health.
  • Following are the policies that could ensure the twin objective of not ending lockdown without compromising on public health.

1 The policy of aggressive testing and isolation

  • The economic cost of combating COVID-19 can be reduced by combining aggressive testing and isolation, a strategy proposed by economist Paul Romer for the U.S.
  • For it to work, people must be tested in large numbers.
  • Those who test positive must be isolated. This will make it unnecessary for the rest of the population to stay home and it will allow the economy to restart.
  • After ending the lockdown too, testing of randomly selected people must go on in large numbers, so that those found infected can be isolated.
  • Eliminating the fear of isolation: The success of this will depend on eliminating the fears associated with isolation. Such fears can be reduced only if isolation facilities are good.

2 Ramp up the manufacturing capacity

  • The second precondition is the substantial ramping up of manufacturing capacities for medical-grade masks, gloves, gowns, ventilators, testing labs, etc.
  • This ought to be on a scale large enough for domestic use and, if possible, for exports for costs to be low.
  • The strategy calls for fully operational hospitals to be constructed in every district of the country in a matter of weeks.
  • Problem-solving of an unprecedented order will be required.
  • Recently, garment manufacturers in Coimbatore were asked to explore the possibility of re-purposing production lines to make masks.
  • There’s been no progress on this front, as the special-grade fabric required is difficult to source.
  • What about the funding? In normal times, governments wrestle with dilemmas such as whether to allocate the limited available tax money to education, health, public transport or a sop that could change the outcome of the next election in their favour.
  • But during a public health crisis, all resources must be used to ramp up healthcare capacities.

Way forward

  • Investment in healthcare can resolve trade-off: Since the state of the lockdown is not a normal condition, the usual policy levers become ineffective.
  • Loan moratoriums and cash transfers can fend off bankruptcy and defaults for a few months and buy time on non-performing assets in banks.
  • But they cannot make good the GDP lost due to the economic shutdown because liquidity and cash released by monetary and fiscal policies cannot get transmitted to the real sector during an economic shutdown unless they are funnelled into the sector that is still active, which is healthcare.
  • If the public health sector can be the economy’s main engine for six months, the public health versus economic health trade-off can be resolved. The spread of COVID-19 will slow down.
  • The economic pain of combating the virus will reduce.
  • There will be jobs, including for low-skilled construction labourers. If planned and executed smartly, the severe health infrastructure deficit will get addressed.
  • Remove the price controls: Sadly, India’s economic policies for fighting COVID-19 are the opposite of what’s needed.
  • In a crisis, the first instinct of policymakers is to slap controls. Just about everything from masks to kits has been placed under price controls.
  • This has removed the incentive for private labs to ramp up capacities.
  • The government should fully subsidise testing: At zero MRP, more people with symptoms will come forward to get tested. Private labs will quickly ramp up capacities if they don’t have to worry about losses. The number of suppliers will increase. Costs will reduce. Private enterprise and technological innovations will come up with cheaper tests that produce results quicker.
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