COVID-19 Is An Exogenous Shock To The Economy

Pronab Sen, is a well-known economist and the Country Director for the India Programme of the International Growth Centre. He is the former Principal Economic Advisor at the government of India’s Planning Commission and the first chief statistician of India. In an exclusive conversation with Rajat Mishra he said that the assessment of the world economy plunging into depression is flawed as the current crisis is an exogenous shock.

Would it be correct to say that the novel coronavirus is putting the world on the path leading to the great depression? What is your assessment of the entire situation?

Well, firstly let us be clear about the use of terms and we have to understand how the great depression really arose. It arose from a fundamental misunderstanding of how the economic system works. But now we have a fairly good idea as to what should be done. The issue that crops up here is whether we can do the appropriate diagnosis. But I do not think that the lack of understanding is the problem now. We will certainly have a world going into a recession. Technically, a recession is two consecutive quarters of negative growth, and depression is four quarters of negative growth. So, now the whole problem lies on how long this situation will continue. The big unknown factor here is the time. 

WTO said that COVID-19 is putting the world on the track of a great depression. So, do you think that this assessment is flawed?

Yes, I do. We may technically slip into depression but it will not be one, as it arises from an internal logic of the economic system. The outbreak of the virus is an exogenous shock which is having the repercussions on both the production and consumption. I believe the policymakers of the world are concerned and are aware of what measures should be taken and when.

We are particularly talking about the Indian economy when you see them from a vantage point, focusing on the 21-day lockdown, the complete disruption of the supply chain, and demand. What do you think is the assessment of the economy and what would be the ramification of this lockdown in the long run?

Everything depends upon how quickly and appropriately the government intervenes. As I have said earlier, it all depends upon the duration of the pandemic. If you look at the current situation when the entire country is under lockdown, the demand stimulus will not work until and unless there is a supply response to the demand. Now, at the moment, there is no supply response. 

We also have to keep in mind that the government does not have the administrative reach to address some 62 or 64 million enterprises that exist in this country.  Hence, the government should put the responsibility on the financial sector. 

Then comes the stage at which the economy production side starts off again. Here, we need to address that the working capital limits have to be extended in order to run the production process, or else we will be back to square one. 

How do you see the lockdown lifting in the future? 

If at all possible the lockdown should be lifted in a phased manner. By doing this, the return to normalcy will be gradual.

It is better to have this process move sequentially. You first have a product that generates income, and then generates consumption.

Goldman Sachs slashed India's GDP growth rate to 1.6 per cent in FY21. And there are other rating agencies that have their own prediction. So what is your assessment and what is your prediction?

As I have said, it is not the right time to make such predictions as we do not know the duration of the pandemic. We are still in the early stages.