Page 374 - ES 2020-21_Volume-1-2 [28-01-21]

01

State of the Economy 2020-21:

A Macro View CHAPTER

“Doing the right things at the right time, is the rope
which binds the wealth, making it boundless.”
– Thirukkural, Chapter 49, Verse 482.
The year 2020 threw at the world a bedlam of novel COVID-19 virus, threatening all that
was taken for granted –mobility, safety, and a normal life itself. This, in turn, posed the most
formidable economic challenge to India and to the world in a century. Bereft of a cure or a
vaccine, public health policy became central to tackling this all-pervasive crisis. The imperative
of flattening the disease curve was entwined with the livelihood cost of an imminent recession,
which emanated from the restrictions in economic activities from the lockdown required to contain
the pandemic. This inherent trade-off led to the policy dilemma of “lives versus livelihoods”.
Governments and central banks across the world deployed a range of policy tools to support their
economies such as lowering key policy rates, quantitative easing measures, loan guarantees,
cash transfers and fiscal stimulus measures. India recognised the disruptive impact of the
pandemic and charted its own unique path amidst dismal projections by several international
institutions of the spread in the country given its huge population, high population density and
an overburdened health infrastructure.
As shown in Chapter 1 of Volume 1, the intense lockdown implemented at the start of the pandemic
– when India had only a 100 confirmed cases – characterized India’s unique response in several
ways. First, the policy response was driven by the findings from both epidemiological and
economic research. Specifically, faced with enormous uncertainty about the potential spread of
the pandemic, the policy implemented the Nobel-prize winning research in Hansen and Sargent
(2001) that recommends a policy focussed on minimising losses in a worst case scenario.
Faced with an unprecedented pandemic, loss of scores of human lives captured this worst case
scenario. Moreover, epidemiological research highlighted the importance of an initial, stringent
lockdown especially in a country where high population density posed difficulties with respect
to social distancing. Therefore, India’s policy humane response that focused on saving human
lives, recognised that the short-term pain of an initial, stringent lockdown would lead to long-
term gains both in the lives saved and in the pace of the economic recovery. The scores of lives
that have been saved and the V-shaped economic recovery that is being witnessed – due to the
causal impact of the initial lockdown – bear testimony to India’s boldness in taking short-term
pain for long-term gain.
Second, India recognised that the pandemic impacts both supply and demand in the economy.
The slew of reforms – again unique amidst all major economies – were implemented to ensure
that the supply-side disruptions, which were inevitable during the lockdown, are minimised in
the medium to long-run. The demand side policy reflected the understanding that aggregate