Page 383 - ES 2020-21_Volume-1-2 [28-01-21]

10 Economic Survey 2020-21 Volume 2

fuelled by the precautionary and/or panic behaviour of households and firms faced with the
uncertainty of dealing with a pandemic that had no cure. This is because households voluntarily
took precautions which affected demand, especially for non-essential items. The lockdown
reinforced this response to the pandemic. The public health measures, adopted to contain the
spread, engendered sizeable immediate economic costs as they led to almost full suspension
of economic activity, curbed consumption and investment, as well as restricted labor supply
and production. COVID-19, therefore led the world to the predicament of saving ‘lives’ or
‘livelihoods’ as the steps taken to flatten the infection curve, steepened the macroeconomic
recession curve (Figure 10).

Figure 10: Trade-off between Flattening COVID-19 Infection Curve
and Steepening of Recession Curve

Source: Adapted from Gourinchas, P-O (2020)

Demand-side and Supply-side Shocks

1.14 The pandemic has been a unique economic shock that has triggered both supply and
demand side shocks simultaneously across economies around the world (Figure 11). Increased
uncertainty, lower confidence, loss of incomes, weaker growth prospects, fear of contagion,
curtailment of spending options due to closure of all contact-sensitive activities, the triggering
of precautionary savings, risk aversion among businesses and resultant fall in consumption and
investment – leading to the first order demand shock. The supply chain disruptions caused by
closure of economic activity and restricted movement of labour lead to the first order supply
shocks.