Covid-19: Cost of lockdown on Indian economy

Covid-19 pandemic has halted the otherwise vibrant world economy and disrupted normal life all over the world. India reported her first case on January 30 after China had reported 7,734 cases and 170 deaths, Japan 11 cases, Australia six cases, France five cases, Germany four cases, Canada three, South Korea four, United States five, Singapore 10, Malaysia seven, Singapore 10 and Thailand 14 cases respectively.

Though the first reported case in India has been much later than other advanced countries, it has created significant havoc to the Indian economy already. India has also reacted fast and has taken several stringent actions to control the spread in an attempt to avert a major mishap in terms of saving the number of lives. Given the nature of infection and uncertainty regarding the number of cases, until a vaccine and medicine are discovered, social distancing and lockdown are the only solutions to save lives. India had taken the heroic decision of locking down the entire country on March 22, when even China did not completely seal the borders of the entire country. This has benefitted India in terms of saving the number of potential infections. As a result, the transmission rate has been lower in India.

The number of confirmed cases has increased over time in some countries which had high incidence. India clearly has been at the bottom of the list, and that shows the success of the complete lockdown. Though the USA had just five cases when India reported its first case, the USA has recorded the highest number of cases (nearly four lakhs with over 11,000 deaths as per the latest figures). The USA had put stringent measures in place only after the number of cases hit a five-digit mark but not at the fast pace as done by India. India is the only country to have pulled strings and completely stop the activity as soon as the number of cases reached 450. The stringent lockdown has saved the country of many cases (much higher than that of the USA), which could have imposed huge costs on the health infrastructure and productivity of the nation. But this bold step definitely has imposed and would continue to impose huge repercussions on the economy, especially for those whose livelihoods have been lost due to reduced consumption and loss in wage-earning opportunities and reduced economic activity. It is not apparent as to when the situation could be tamed and how long the lockdown would last.

The trade-off is now between the number of lives saved from the epidemic versus the costs of the Indian economy. Covid-19 would cost the Indian economy dearly. Based on the research carried out at Indian Institute of Technology, Bombay, by these authors and the team as part of IIT Bombay-MHRD initiative, the impact of the economy has been assessed at three different levels – on lost work opportunities for casual labourers, and also those who were getting benefit under employment guarantee programme, livelihoods impacted due to reduced consumption of some key services like entertainment, saloon etc. and lastly, stalling of economic activity in the formal economic sector.

The sectoral contribution to GDP from the entertainment, travel, hotels and restaurants has been immediately hit while that of manufacturing and financial services has been impacted with varying lag. Using the data from various official government statistical reports in employment, census, national account statistics and national sample surveys, potential loss to Indian economy has been estimated under different lockdown days.

While estimating the consumption foregone, complete drop in expenditure for entertainment, travel, beauty parlours has been considered and reduced expenditure for some activities has been considered. For calculation of loss in GSDP, it has been assumed that the effect on some sectors is immediate (hotel and restaurants, transport), some have been affected with some lag, where lag depends on the sector (impact on manufacturing is faster than on financial services) and some will be affected partially with slow impact (e.g., agriculture) and some sectors will not be affected (public administration or utilities like electricity, water etc.).

The estimates suggest wide-variation in the values across the districts and States depending upon their dependence on these services and the structure of the state economy. However, at an aggregate level, for an Indian economy of the size of Rs 140.78 lakh crore (2018-19 estimates), the lost income to marginal workers is nearly Rs 58,000 crore (0.41% of GDP) for three weeks lock down. The impact soars to Rs 1,65,000 crore (1.18% of GDP (Gross domestic product) if lockdown persists for two months. Not unexpectedly, the most impact is to the marginal workers from Uttar Pradesh, Telangana, Bihar, West Bengal, and Madhya Pradesh, forming the top five States, as they forgo nearly 45% of this total income.

The corresponding figures for lost consumption expenditure are Rs 1,10,542 crores (0.79%) and Rs 3,15,834 crores (2.24%) for 21 days and 2 months respectively. Maharashtra, Uttar Pradesh, West Bengal, Tamil Nadu, and Andhra Pradesh are the top five States affected by this, again forming nearly 45% of the lost expenditure. Regarding lost GSDP due to lockdown, the figures are 3.46% of GDP for 21 days lockdown and over 12.0% of GDP for a lockdown of two months. As expected, Maharashtra, Gujarat, Tamil Nadu, Uttar Pradesh, and Karnataka suffer most with a nearly 47% hit is GSDP.

These estimates reflect only the direct impact on the economic sector, the social sector, and the household consumption sector but not the aftermath of the pandemic – the financial anguish, bankruptcies, and increased unemployment. A simple logistics model for India as of data on 14th April 2020, indicates that this week is crucial, and the inflection point is around the corner, with 11,000 cases. With Covid lockdown 2.0, we hope that social distancing is much stricter as people are more aware now of the misery imposed by the pandemics and would like to get the curve flatter sooner than later. The Indian economy as well the world is sailing in rough waters, but the impact of locking down to save lives is a tough choice. If we open too soon, the unhealthy population would not in any way contribute to the productivity of the nation. So probably, the only option is to pull the chain and bring the engine to an abrupt halt.