A Government Pass to Perdition

We must change track on how we think about lifting the lockdown. A decentralised, general equilibrium thinking will help in finding better alternatives.

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

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We are in for another 19 days of limbo. There’s a new set of guidelines for what’s being opened up in Lockdown 2.0 but it isn’t substantial. Some concessions have been made for opening up agriculture and industries in rural areas. There are lifting of restrictions for construction activities within limits. Any increase in economic activity is welcome but this won’t move the needle for the economy as a whole. There’s serious stress in the economy on the ground. Most businesses are at 5-10 per cent of their usual monthly revenues while continuing to incur 50-60 per cent of their costs. Fresh credit is not on offer from banks. They are mortally scared to lend now when no one knows which sectors or business models will have a fighting chance to come through this crisis. Working capital is scarce and everyone is deferring their dues. Migrant workers aren’t coming back in a hurry. Those still in cities are in dire straits and desperate to get out. The whole economic machinery is jammed. How to restart it is an unprecedented public policy challenge. A clear-headed response to this is being hampered by a unique set of biases coming together in our polity.

The Grand Vizier of Central Planning

One of the preferred ways of the government to lift the lockdown is by opening certain sectors. This partial equilibrium model of thinking is useful in classrooms to understand economic concepts. But the real economy out there is messy, convoluted and hugely intermeshed. This sector-wise partial equilibrium approach won’t work. Take the construction sector that’s being opened up. It is the single biggest employer of unorganised daily labour. How do you get the sector started when most of them have left the cities? How do you get them back with railways not operational and inter-state movements stopped? What assurance does a migrant have if he comes back to the city and there’s again a stringent lockdown, he won’t be left to fend for himself? Has anyone asked the construction or the real estate sector about what do they need to restart? The answer would be a request for one-time restructuring of the stressed accounts, a longer moratorium on loans and some leniency on NPA classification of real estate loans. Besides these, there is a possibility of sharp fall in demand of commercial real estate because companies are reducing their expenses and work-from-home seems to here to stay. So, what construction activity will really begin in such a scenario where labour is scarce (pushing their wages up), liquidity is at a premium and demand is weak? But we are hoping construction can be started without addressing these issues.

You can replace construction with any other sector; agriculture, auto manufacturing or consumer goods. You will reach the same conclusions. Take auto for instance. A plant can start their manufacturing lines from tomorrow. But there’s no guarantee the hundreds of their parts suppliers who are smaller and unorganized will be starting up as well. Or, the key parts that are sourced from suppliers outside India will be available. Even if you aren’t constrained by this, who is going to be buying the vehicles? The passenger car sales were down 50% while commercial vehicles fell 88% in March ‘20 over the same month last year. Why will a manufacturer spend precious cash to produce vehicles at this time when there’s no visibility of demand picking up?

There are exogenous factors – labour supply, interstate logistics constraints, dependence on other sectors for input raw materials or imports – that will mean starting that particular sector alone will yield nothing except unfinished inventory at various stages of the value chain or a significantly lower production than demand. The usual queues of customers will follow. What’s more, even some of the proposals suggested for rebuild or reconstruction efforts beyond immediate relief suffer from the same mindset. One long-term proposal bandied about is for significant investment in healthcare with a hospital in every district and planning for a 5X increase in our healthcare workforce. A general equilibrium thinking on these areas will lead to similar questions about lack of teaching faculty available in India, regulatory and financing hurdles in setting up medical colleges, hospitals, health centres or telemedicine infrastructure and an absence of a transparent system to set up colleges and award degrees in healthcare by Indian and foreign players. But these don’t seem apparent to policymakers.  

The default mental model of the economy among the executive and the legislature is that of a giant planning machine where you plan for a certain volume of output (say, motorbikes) and you derive a specific volume of inputs (steel, tyres, plastics etc) that you must produce. You do this for each industry and the planning algorithm will give you a complete picture of what every sector must produce every year. Granted the reality has changed a bit over the years but this schema is planted deep in the minds. This is the P.C. Mahalanobis model – a variant of the Leontief input-output model. Overseeing this is the grand vizier of central planning. The simplest gauge of efficiency of this model? Well, my dad booked a scooter when I was born, and we got it delivered when I was in Class VII. We got our lessons in virtues of patience early in life.

A state or a central authority can’t estimate or control demand or divine a price for a product. Despite the weight of evidence, history and economic logic stacked against it, the allure of this model doesn’t diminish for the state. If we let the sector-wise lifting of restrictions happen, in no time, the state will propose licenses and allocate quantities that can be produced by players in this sector because there will always be an availability constraint of a particular input. Each player in the sector will have to depend on the state to send them a quota of specific raw materials or imports their way. Till normalcy returns (which no one can predict now), the state would effectively control the means of production. Welcomes to the 1970s.   

Conspiracy of Yes

Speaking truth to power – there’s no Hindi (or any other Indian language) equivalent to this. It isn’t a surprise then the Indian industry is completely innocent of such a notion. There are a handful of op-eds and edits about the looming economic disaster if we don’t get our act right in lifting these restrictions. But they hardly matter to the policymakers if the constituency that’s getting impacted the most isn’t complaining. Industry bodies, trade associations and leading voices of the industry are handing out carefully constructed and balanced statements that praise the state for the stringency of the lockdown with a minor garnish of advice on the economy. All the hand-wringing is left for private conversations between fellow sufferers. There’s no raising of alarm about the real situation on the ground. They know things are bad, yet they assent rigorously to every policy proposal that will make things worse. Everyone is in on the conspiracy of yes.

The state continues to believe in the virtue of its actions; not the dire reality of the results. It loves the sound of its voice. So the industry is busy playing back the same which is music to the ears of the state. Every act becomes a masterstroke and every address turns into a masterclass. You can’t blame the state. It is doing what it believes is right and extending its reach deep into society. But for the industry to play along in the face of such adversity boggles the mind. In the bhakti tradition, the ultimate goal was to lose willingly your identity and your material self in devotion to the almighty. The destruction of self was an exalted goal. This is as close we can get to the modern bhakti tradition.      

Bold and Decisive Leadership Sweepstakes

Every CM wants to be seen bolder and more decisive than the other. States were in competition to announce an extension of lockdown earlier than PM’s address. States who have low case counts and whose economy can hardly support an extended lockdown were happy to publicise their decision as forward-thinking. The attribute of bold and decisive leadership has crowded out every other virtue of decision making – considered, sceptical, experimental and planning for failure. There’s hardly any place for nuanced thinking or trying out multiple options while formulating a public policy anymore. Instead of using the federal structure to our advantage to enable each state (and subsequently, each district, ward or panchayat) to figure out the best response for itself, we have gotten into a ratcheting up stakes of who can shut down things better than others. Of course, that’s the easiest game in town. There are hardly any takers for the other difficult game of opening up while continuing to flatten the curve.

What To Do?

It is very difficult to imagine any kind of real economic activity returning before mid-June if we continue to hew to these three forces – following partial equilibrium thinking and central planning models, living the great bhakti tradition, and outdoing the other in bold leadership stakes. The recommendations we have made on how to get back to 75% normalcy in previous newsletters – focus on restarting consumption by opening up shops and establishments in a graded manner, fully opening up interconnected green zones across states where the cases haven’t doubled in the last 10 days or have fallen, compulsory masks in public spaces where economic activity has restarted, sealing of hotspots completely, aggressive testing, a strong fiscal package to help most impacted sectors survive for 3-4 months with limited revenues, a bank revitalization programme that solves for the systemic stress and helps unclog credit lines with a one-time effort of clearing the NPAs and getting international credit to the banking system – should be acted upon immediately.

Else, brace for lockdown 3.0, 4.0…. infinity.