The Outbreak & the Economy

Simple arithmetic takes us to some vicious numbers on the fall outs of the Outbreak on our economy. If the Indian economy has been growing at 5% then at the end of March we were at 101.25 on annualized basis growth and if we take only one month of output loss then after we start to restore the economy we would be at 92.8% of the annualized output at the end of April. If the economy recuperates at 8% level of growth from there on till the end of the year, we will end the year with a negative growth of 2.2%.

But these numbers could be anywhere, the question is how will things take shape from here on?

If you have a perfect market, that means prices are driven by supply and demand, you would have predicted things the way textbook economics would have suggested, Econ 101 to 109 would be useless now as prices may not signal what is to come or the direction of finance may not be symptomatic to the usual understanding that buyers and sellers would be solely deciding on what to buy and when to buy.

The invisible hand, no matter how efficient it has been so far, will be quiet and paralyzed, such are the perils of this hour.

Why would this be? The allocation of capital has a hugely different lever to deal with, how much and when this has to be apportioned to the needs of the Outbreak; Covid-19 allocation of capital would be very different than what we are used to.

Firstly I will start with the allocation of resources itself. Economic allocation of resources are done by the market, if supply of goods move up resources would be self-directed towards it, so with demand as well. But when allocation would be based on needs of times and the market simply does not exist, there is a problem.

Many markets have ceased to exist, there is either supply but no demand, or demand but no supply. Individuals to the collective would make different choices from now on, they may not allocate their spends in the manner they did in the past. This will add to the turbulence of the market or whatever exists now.

On the other hand you have huge claims and liabilities piling. Then we come to the crucial question, how would allocation of capital be done, so that the most disadvantaged do not miss out and the most vulnerable have the amenities running for them, including health and basic food and shelter.

Some industries would need bailing out as demand has completely collapsed and even after the lock down is lifted they would see several weeks before demand kicks in.

But the biggest challenge would be distribution and logistics, how would the well intended supplies for the needy reach the intended population.

This is as much an allocation problem as much a supply chain. The resources required to jump start the supply chains of agricultural commodities to the industrial would go through the same bottlenecks and constraints, not all of them fully known. How would anyone decide which ones to be given priority, and which ones to be left out for the moment?

All of this will raise costs. But this will not be as simple to enumerate, as many missing pieces would take over.

Take for example, the intent to subsidize any of these costs; in a normal situation this would have followed the market signals, if supply followed these signals, demand would have been equipoised.

The central planning of such an economy and outputs thereafter can only be managed through cooperation of the highest order. This would mean all governments stepping forward as like a symphony to operate through discussion, from the available data what is best to be administered. Who needs what, when and where.

The markets will only start to operate very slowly and their path of recovery would need administered dosage of stimulus. Left on its own the markets would not simply start as if nothing happened.

We will have to adjust to work that will subsist together with the pandemic, we will have to live with this for some time till we have things under full control. Such a subsistence needs new eco-systems to function, public-private partnerships as never before.

There is no point in wasting precious resources, well identified quick actions are the need of the hour, but it is a very difficult unknown ways of work we are getting into.

We must prepare for the next days to come, not just after two weeks but for months to come.