COVID-19 Impact: Some Contrarian Views

Two important questions: How deadly is the virus and what should be the policy response. Two articles that make convincing arguments about deadliness of the virus being overestimated are as follows:

  1. Covid-19 total lockdown: An economic and humanitarian disaster by Rupa Subramanya on orfonline.org
  2. Is the Coronavirus as Deadly as They Say? by By Eran Bendavid and Jay Bhattacharya in the Wall Street Journal.

Both the above articles argue that the actual fatality rate of COVID-19 should be much lower than what is being reported if calculated correctly. The second article is behind a pay wall unfortunately but the crux of the argument is based on the wrong way of fatality rate calculation- should be calculated as percentage of infected population and not as of confirmed cases done by several epidemiological modelers. Here is what they say:

How can we reconcile these estimates with the epidemiological models? First, the test used to identify cases doesn’t catch people who were infected and recovered. Second, testing rates were woefully low for a long time and typically reserved for the severely ill. Together, these facts imply that the confirmed cases are likely orders of magnitude less than the true number of infections. Epidemiological modelers haven’t adequately adapted their estimates to account for these factors.

Given this background, an article by two renowned development economists, Debraj Ray and S Subramnain becomes especially pertinent.

In India’s battle against Covid-19, we are inevitably confronted by the choice between social distancing on the one hand, and denying people their livelihood on the other. Recognising the unsustainability of a general, mandatory lockdown, Ray and Subramanian put forth a proposal whereby the young are legally permitted to work and the locus of measures to avoid intergenerational transmission is shifted to the household.

I am glad that at least the Delhi and Kerala governments are resorting to humanitarian policies like opening food shelters to care for the plight of migrant workers, however, it might be worth deliberating on the policy proposals by Ray and Subramanian above.

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How has currency in circulation behaved in India?

The following graph represents the behavior of currency in circulation in India over the past two years following the demonetization announcement on November 8, 2016. The giant dip you notice is immediately following the announcement that rendered Rs. 500 and Rs. 1000 currency notes illegal. They contributed 86% of currency in circulation at the time. It took about two years for the currency in circulation to be back at the pre- demonetization level.

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Dynamic macro perspectives on India’s Monetary Policy

I reviewed the book Monetary Policy in India: A Modern Macroeconomic Perspective edited by Chetan Ghate and Kenneth M Kletzer, Springer, 2016 for EPW recently.

https://www.epw.in/journal/2018/28/book-reviews/monetary-economics.html

Overall, the articles in the book represent a significant and substantial contribution to the literature on monetary policy of India- definitely from the point of view of application of dynamic macroeconomic models to the policy environment of a typical developing economy.

 

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NPR’s Podcast on Demonetization

NPR’s Planet Money did a two part podcast on Anil Bokil and his organization Arthakranti who convinced Prime Minister of India Mr. Narendra Modi about demonetization as a solution to India’s poverty, corruption, and black money related problems. This was back in 2013 when Mr. Modi was Chief Minister of Gujrat.

Arthkranti is a plan conceived by some accountants and engineers to curb corruption and improving tax compliance in India. According to them, limiting the use of cash is one of the solutions. I have already talked about what is wrong with this solution here, here, and here. I also wrote a critique of Arthakranti proposals few years ago while I was grad student and did not think that anyone would take these proposals seriously!

Nonetheless, it is interesting to hear what Mr. Bokil has to say. NPR guys did a good job here.

I thank J P Konning for making me aware of this podcast through one of his tweets.

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Demonetisation and the recent GDP growth estimate

My paper on Demonetisation is now published at the Economic & Political Weekly as Demonetisation through Segmented Markets: Some Theoretical Perspectives.

The analysis therein concluded that there would be a decrease in real GDP over the next few quarters as all the adjustments forced by the demonetisation pan out. The extremely slow remonetisation of the economy on account of shortage of new cash and poor logistics only seemed to be reinforcing this conclusion. Therefore, the recently released GDP growth estimate of  7.1%  does not make sense. It has surprised economists and political commentators alike. For example,  Ajit Ranade expresses his surprise in the following tweet:

screen-shot-2017-03-02-at-11-24-46-am

Expressing doubt about the estimates, Mihir Sharma at Bloomberg asks if the Indian data is going the Chinese way.  So how do we explain this estimate when economists as well as the IMF predicted the growth to be down to 6%? The analysis put together by The Wire based on interviews of some economists suggests the following possible reasons:

  1. The downward revision of Q3 F16 growth is pushing up the growth estimate for the current quarter. This downward revision could be because of poor agricultural growth in 2015-16.
  2. Pile up of inventories in the distribution channels could have been recorded as increased consumption expenditure. This is the channel stuffing phenomenon where the wholesalers pushed goods down the distribution channel still probably expecting the sales to revive after remonetisation.
  3. The rich may have spent on big ticket commodities like cars. For e.g. Maruti Suzuki recorded some increase in revenue pushing durable consumption expenditure up.
  4. The official GDP estimates don’t really measure informal sector activity with accuracy and it is the informal sector (unconnected households and firms) that has been hit very hard by demonetisation.

If the above reasons are true, then the growth estimate would most likely be revised downward later as data catches up with the decline in economic activity. However, for now the BJP government  and Prime Minister Modi could take all the credit for the improved growth and boost their political capital when it matters given the UP elections.

 

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How India can reduce the size of its black economy

Here is the link to my article, “How India can reduce the size of its black economy” in thewire.in

It is partially based on an earlier blogpost on the same topic.

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Demonetisation: Some Theoretical Perspectives.

Read my latest paper on the Great Indian Demonetisation Experiment here.

The analysis is based on a simple textbook version of a segmented markets model (Williamson 2011). I prepared this is as a teaching note and therefore is fairly non-technical. The reference to an older edition of Williamson’s brilliant text is because the segmented markets model has been dropped from its subsequent editions to accommodate latest macroeconomic developments in the developed world.

Williamson S (2011), Macroeconomics, Pearson. 

 

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