This Article is From Mar 28, 2020

3 Points Of Concern On Government's Much-Needed Economic Package

The harrowing pictures of migrant workers walking hundreds of miles on their way back to their villages, after their livelihoods in the cities had dried up, drive home how the negative impact of a calamity gets magnified by poverty. Everyone is vulnerable to the risk of the infection. But the risk is higher for those whose economic vulnerability lowers their chance of surviving the lockdown. They face the stark choice between death from disease or starvation.

Beyond the direct grave health risk that the coronavirus COVID-19 outbreak poses, and the resulting pressure on the healthcare system, its indirect effects are quite serious as well, like the aftershocks of an earthquake. These affect everyone but especially the poor and the vulnerable (and these groups are not necessarily the same, as the latter includes people who might not be poor but are elderly, ill, or have special needs). The aftershocks are caused by a twin and simultaneous supply and demand problem. All consumers are hit by the disruption of the supply flow. But if you are not wealthy or don't have a guaranteed income (not more than 5% of the working population do) that provides you with some cushioning to withstand the shock, you are also hit by a serious income flow problem. Thus it is a double hit for the poor.

In light of this, the central government's announcement of a relief package yesterday is welcome, as have been the steps announced by various state governments, with Kerala leading the way. Without a relief package, a three-week lockdown could have led to the indirect effects of the COVID-19 crisis eclipsing its direct effects. Moreover, the package gets one basic thing right. By combining cash transfers to various poor and vulnerable groups with a direct measure to ensure food security, by doubling the allocation under the public distribution system (PDS), it explicitly takes into account the twin supply and demand problem. What good is only cash when supply chains are disrupted? Similarly, how does it matter if shops are well-stocked when you have no money? Cash or in-kind transfers is a reasonable debate in normal times, but given the current crisis, these are complementary measures.

However, there are several areas of concern.

First of all, is the package sufficiently large to provide subsistence support for the duration of the crisis? The allocation of 1.7 lakh crores is less than 1% of GDP in nominal terms (according to the revised advanced estimate of GDP for 2019-20 released in February). Moreover, the package includes pre-existing schemes for which funding had already been allocated, such as the releasing of funds for the Pradhan Mantri Kisan Samman Nidhi Yojana (PM-KISAN) programme. The PM-KISAN scheme, which provides Rs 6,000 per year per family for all farmers, works out to Rs 500 per month. Yes, it's a start and yes, there are budgetary implications, but when the first priority is saving lives, the allocation needs to be increased, even if temporarily.

Secondly, for the next three months the relief package allows for Rs 500 per month to female Jan Dhan account holders (about 20.8 crores), and an additional ex-gratia amount of Rs 1,000 that will benefit 3 crore widows and senior citizens. However, many informal sector workers are unlikely to have a Jan Dhan account (there are, overall, about 38.3 crore total accounts). Given the danger of excluding some of the neediest, this is a perfect opportunity to do a universal income transfer. Of course, some of those who are not poor will get it, but when the economy goes back to normal, it is always possible to have a temporary increase in direct and indirect taxes to foot the extra bill, which would make it, de facto, a net transfer to the poor.

Also, when saving lives is important (such as in the distribution of relief materials), it is better to err on the side of including some who are not needy rather than that of excluding someone who is needy. In a recent article, Karthik Muralidharan and I had proposed extending the PM-KISAN scheme to all families and, according to our calculations, the cost of this would be 1% of GDP, whereas the cost of the PM-KISAN as it stands is 0.5% of GDP. By merely doubling the allocated amount, this would eliminate all the direct costs of targeting beneficiaries and the exclusion errors.

Thirdly, a key logistical constraint must be kept in mind. While we know that in a crisis like this, one cannot rely on markets to do their normal job of meeting demand with supply, state capacity is also limited. For a total population of 130 crores, with nearly two-thirds of it living in rural areas and the total workforce in the state and organized private sector being about 10% of the working population, how are we going to meet the logistical challenge of providing essential supply lines without relying on the informal sector (e.g., the vegetable seller in the market), and community and volunteer organizations? There simply isn't enough capacity in the state sector or the organized private sector to manage the supply chain at a time of emergency like this. This immediately implies that law-enforcement officers must take a much more tolerant approach to enforcing the lockdown. They should not blindly (and judging by media reports, harshly, with at least one reported fatality) force everyone who ventures out to sell or to buy to go home. The domino effect of an indiscriminately and harshly enforced lockdown in disrupting the emergency supply chain could create a disaster bigger than the public health crisis. What good is saving someone from the disease if they starve to death?

In a crisis like this, the top priorities are saving lives and minimizing hardship. Yes, there is going to be an economic cost. But what is an "economy" after all? It is the network of inter-dependent chains of supply and demand that connect all of us. If the humans that form these chains perish, whether from disease or from starvation, GDP or stock market indices cannot be sustained. We are waging a war against an invisible but common enemy. It is time to put aside our differences - we sink or swim together. And, as in any war, protection of our own, especially the most vulnerable is no less important than combating the aggressors - or what kind of empty victory would we hope to achieve? 

(Maitreesh Ghatak is Professor of Economics at the London School of Economics and an elected Fellow of the British Academy.)

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