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The Cure Cannot be Worse than the Disease

Ashray Ohri | June 25, 2020
The Cure Cannot be Worse than the Disease

The year 2020 has kept the world on edge from the very outset – beginning with the bush fires in Australia, floods in Dubai and Indonesia, a potential outbreak of war in the Middle-East after a US airstrike in Iraq and local calamities such as the cyclone Amphan in India’s east coast. And more recently, there was also the locust invasion in western and central India.

Nonetheless, it is the corona virus pandemic that obscures all of these in comparison, both in terms of the magnitude and duration of its impact. The outbreak continues to plague billions of people not just through its health ramifications but also its social and economic impact. To place into perspective, the corona virus pandemic towers over previous virus outbreaks such as SARS, MERS and Ebola and is more aptly compared to the Spanish flu of 1918. In the economic context, it is more in line with damages sustained during the great depression of the 1930’s, surpassing the damage during the global financial crisis (GFC) of 2009.

Past events serve as basis for decision making

This is one crisis that will likely be witnessed only once in a lifetime. Economists and other experts usually try and appraise a crisis by tracing it back to a similar episode in the past. This allows them to gauge the extent of damage or scare that besets them. With a reference in place, experts can brainstorm solutions and combat the calamity in a more effective manner. In tandem, they can also set expectations for people and calm their anxieties by offering a sense of control.

However, the current scenario is as unprecedented as it gets with no clear playbook for either leaders or experts to follow and steer themselves out of trouble. Leaders worldwide submitted to strict lockdowns and social distancing as the most effective way to combat the crisis. This is fundamentally changing the lifestyle of people while also pushing the more vulnerable segments towards the brink of economic destitution. Governments and central banks have allocated trillions in financial stimulus measures – far exceeding amounts seen during the GFC – to aid their economies in tiding over the crisis. However, the quandary lies in the fact that the world is in a state of paralysis as economic activity remains cut off, creating a scenario of high expenditure with minimal income.

As such, there are limits on how long this can continue and it poses a difficult trade-off for leaders to eventually choose between focusing on containing the spread of the virus or reviving economic activity in their regions. The answers to these questions vary across nations depending on their health and financial capabilities and also their infrastructural prowess to withstand such ordeals. Evidently, there is a clear demarcation between the ‘haves’ and ‘have-nots’.

The scope of economic packages announced

On one hand, advanced economies such as the US, UK, Japan and Germany have rolled out stimulus to the tune of 15-16 percent of their GDP on average, while other emerging economies have provided stimulus packages of an estimated 5 percent of GDP. There are further second order divisions in terms of the nature of stimulus which vary from direct stimulus (cash transfers and hand-outs) and indirect stimulus (credit and refinance facilities), with the advanced economies more skewed to the former given their superior financial positions, while emerging economies resort to the latter.

India, on its part, has exceeded its emerging nation peers with a total stimulus of INR21 trillion (10 percent of GDP). However, a major part of this has been in the form of indirect benefits and it also includes the monetary stimulus announced by the Reserve Bank of India (RBI). There are minimal immediate direct transfers, resulting in criticism towards the government on inflating its stimulus numbers without extending any major immediate direct support to the more marginalised segments of society. In fact, after excluding the monetary stimulus of the RBI, the total fiscal stimulus by the Indian government stood broadly at par with its emerging market peers at around 5 percent of GDP.

The cure cannot be worse than the disease itself

Notwithstanding the fact that more could have been done, there is merit to be accorded in that a more prudent approach was undertaken. This is especially after accounting for the fact that both India’s growth and its fiscal position were in a precarious situation to begin with at the start of the crisis. A succession of aggressive and unchecked spending could invariably spiral to large debt accumulation that could make it difficult to sustain over a period of time and eventually lead to a debt crisis, especially in a scenario of low growth.

With the cards of the government and central bank already dealt, the next best stimulus at this point would be restarting the economy as is already happening in a staggered manner. All the supply side support rolled out by the government is of no use if demand is not allowed to simultaneously catch up. While it does risk exposure to the virus, difficult choices have to be made, for the cure cannot be worse than the disease. The fear will subside by the time a vaccine or medical cure is found, but until then life will have to go on vis-a-vis corona.

Severe Acute Respiratory Syndrome (SARS) – There were a total of 8096 cases and 774 deaths between 2002-03. Middle-East Respiratory Syndrome corona virus (MERS) – Total of 2494 cases with 858 associated deaths between 2012-2019.

Corona virus (COVID-19) – A total of 6 million cases reported with deaths totaling 400,000 at the time of writing. Spanish Flu – It is estimated to have reported nearly 500 million cases (1/3rd of the global population) with around 50 million deaths. However, the timing of this coincided with World War 1, which inflated the spread of the virus and the consequent deaths.

India reported a growth of 4.2 percent over the year in FY 2020, its lowest since the GFC in 2009 and a fiscal deficit of 4.6 percent of GDP – its highest over the past seven years.


Ashray Ohri

Ashray is an economist based in Mumbai. He is an alumnus of the Delhi School of Economics and Mayo College, Ajmer. An avid sportsperson, Ashray represented India in the World Junior Squash Championship in 2009.

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