View: Whichever way one counts it, bearing the economic cost will be a challenge

What is the economic cost of Covid-19? While the question seems simple enough, it is difficult to find a straight answer. If I follow an accountant’s instinct and begin to tot up the different items of medical supplies and health infrastructure critically needed, things begin to get a little tricky with a raft of assumptions kicking in.

Take the need for more ventilators for the most severely affected. India currently has 40,000 ventilators. The medical fraternity estimates that in the worst-case scenario, India needs at least 80 times this number. Let’s assume that this worst case will be averted and purchase just a quarter of that number (8 lakh). A domestically manufactured ventilator costs Rs 5-7 lakh and if we were to purchase them at Rs 5 lakh a piece, the bill comes to Rs 40,000 crore.

Spending on healthcare cannot be restricted to buying ventilators. We need more testing kits, protective gear for healthcare workers, more hospital beds… While it’s true that GoI does not need to bear the entire cost (states and the private sector will pitch in), it may have to do the heavy lifting. Suddenly, the initial amount of Rs 15,000 crore earmarked for directly managing the disease doesn’t quite seem enough.

Let’s take a more ‘economic’ approach and define economic cost as the cost the government (Centre and states, but with the former paying the larger fraction) needs to bear. What do the experience of other countries tell us? Italy, one of the worst Covid-19-affected, has spent about $28 billion (1.3% of its GDP) just to fight the virus. The US is spending $117 billion (about 0.5%). How much should India spend just to ensure that the virus doesn’t kill millions?

Some could argue that since vulnerability to the virus rises with age, India’s young population is an asset. 6% of India’s population is above 65, compared to 23% in Italy and 16% in the US. However, India spends just 3.7% of GDP on health, compared to Italy’s 9% and the US’s 11%. It, thus, has to ramp up quickly from this low base.

India also has a large incidence of diabetes, heart ailments and respiratory illnesses such as tuberculosis that is often undetected. These are risk factors that increase vulnerability to the virus. The implication: GoI has to spend at least 1% of India’s GDP — about Rs 2 lakh crore ($29 billion) — over the next few months to fight the virus.

Then there are the costs of ‘keeping people at home’ — call it ‘adjustment cost’ — that is, ensuring subsistence for casual workers and the self-employed during the lockdown and its aftermath. A number of economists, including myself, believe that while the relief package of Rs 1.7 lakh crore announced by Finance Minister Nirmala Sitharaman has its heart in the right place, it is insufficient.

How much would be sufficient? Many recommend a semi-universal cash transfer for three months to all Jan Dhan accounts, instead of the myriad schemes in the GoI package. To get the minimum transfer per account, it might make sense to take the MNREGA average wage of Rs 202, and assume a worker needs to work for 15 days a month for subsistence. So, the transfer could be Rs 3,000 a month for three months.

There are about 34 crore Jan Dhan accounts. So, the total transfer works out to roughly Rs 3 lakh crore, about 1.5% of GDP. This sets a threshold for the minimum sufficient ‘adjustment cost’. Whether GoI chooses a simple transfer or multiple channels, this is the minimum expenditure that, on the aggregate, will make the relief effort meaningful.

Then there’s the business of providing stimulus to sectors likely to be decimated by the virus — aviation, hospitality, SMEs. GoI has to support cash flows – pay their utility bills, subsidise interest payments on loans, GST dues, etc to enable them to resume operations. Add to this other job-creation efforts such as increased MNREGA and public works spending, and 1-1.5% of GDP seems necessary as pure stimulus.

Add the costs under the three different heads and the total economic cost of Covid-19 mitigation could well turn out to be 3.5-4% of GDP – a hefty $100-114 billion.

This is not the only measure of economic cost. Macroeconomists might measure the cost as the difference (loss) between their estimated GDP growth for 2020-21 under normal circumstances (N) and that estimated under Covid-19 (C). Looking at the swathe of estimates, the most extreme revision seems to be a cut from 4.5% (N), down to 0.5% (C). The most optimistic loss estimate is 2.3% in an N of 5.5%. Thus, loss or economic cost ranges from 4% to 2.3% of potential GDP (N). These forecasts take in large spending by GoI to fight the virus, bear adjustment costs and stimulate the economy, as well large cuts in interest rates by RBI.

It may be coincidental that the two estimates lie in the same ballpark. One measures the gross expense needed to prevent the economy from collapsing. The other measures how much the economy would lose even if minimum necessary expenses were made. Coincidence or not, both highlight the fact that the economic cost of Covid-19 is large. Bearing it will be a challenge.

The writer is chief economist, HDFC Bank. Views are personal