Like the catchphrase ‘there will be blood’, with Covid-19, there will be loss. Loss of life, business, growth. Efforts can only be to minimise losses. What is the option for minimum loss?
Restricting movement is the accepted way to slow the virus, ranging from mild precautions in Sweden to curfew in China. India has had a national lockdown for 40 days extended for 14 days with modifications. Lockdowns have critics who criticise the ‘high economic cost’. There are pressures to lift lockdowns ignoring illness possibilities.
However, as the trajectory of the pandemic is unclear, a lockdown is the least loss-causing option. This becomes unambiguous when we take probable virus scenarios, consider GDP cost of lockdowns and apply the ‘human capital’ concept of economics. For Covid-19 probable scenarios, the most authoritative study was by the US government’s Centers for Disease Control and Prevention (CDC) with global consultation. The CDC estimated infections for 60-70% of the population with fatalities between 2-7%.
These figures forced action from a recalcitrant US President Donald Trump and influenced decisions worldwide. In India, assuming a higher level of immunity and a reduction of 50% in spread, CDC’s epidemiological exercise still implies, with no lockdown, infections for 30% of the 1.37 billion population. India has a fatality rate of 3.3% with 37% below 60 years, implying 5 million deaths in the 18-60 age bracket. Due to Covid-19 and lockdown, the World Bank has reduced estimated growth of India’s GDP in 2020 to 1.5-2.8% from 4.2-5.4%, IMF to 1.9% and ADB to 4%. The losses are 2-4% of the $2.9 trillion GDP that work out to Rs 3.7-7.5 lakh crore.
These estimates have not considered the ‘cost’ of deaths and illnesses and have disregarded the ‘human capital element’. That human beings should be taken as a component of capital and assigned economic values was labelled the ‘human capital revolution’ in economics and resulted in Nobel prizes for Theodore Schultz and Gary Becker. Loss to the economy due to Covid-19 must include human capital losses too. Besides being ‘capital’, humans are also producers and consumers. Deaths reduce this component of capital and impact current and future economic growth. Losses due to deaths have to be considered in the economic cost of pandemics as there are varying death numbers in different strategies.
How is loss due to death assessed? Gary Becker, in Health as Human Capital: Synthesis and Extensions, calculates the cost of human life. Beginning with the ‘monetary value’ placed on a man’s death’s probabilities, Becker takes average annual earning over 1,900 working hours, which was $40,000 in the US in 2007, adds hours spent in the household sector and extends the calculation to estimate value of an American life for a person dying young in 2007 at about $4.4 million. He substantiates this with empirical estimates in literature. For calculating the cost of lives in other nations, the ratio of per capita income of that country is taken against the American per capita income with extrapolations for different ages.
Doing this for India for death at the age of 47 in 2020 gives $58,000 or around Rs 39 lakh. The average age of those dying from Covid-19 in India is 47 in the age group 18-60 years, the ‘productive’ age of humans in society. Deaths in this are a direct loss to the economy. Rs 39 lakh in India or $4.4 million in the US for the ‘economic value of life’ may sound excessive, but Becker explains that it is because usually we think of value of life in terms of earnings alone. In India, even if the value of human life is calculated only by earnings, then too a lockdown has a lesser loss than the no-lockdown scenario. For daily earnings at MGNREGS wage of Rs 202, assuming,
with Becker, a 1:1 ratio of work and household gives an annual earning capacity of Rs 1,47,460, which is near the per capita net national income of Rs 1,35,050. Fourteen years of working life from 47 to 60 years gives Rs 20.6 lakh as the average Indian ‘earning capacity value of life’ at 47 years. If there had been no lockdown in India, the loss in the productive 18-60 age group due to the projected 5 million deaths with an average economic value of Rs 39 lakh is Rs 19.5 lakh crore. With earning value of life in terms of minimum MGNREGS wages, this economic cost is Rs 10.3 lakh crore. We are not considering other age deaths or losses due to illnesses as our thesis is proved with only these.
Thus, due to deaths in the productive age group, economic loss in a no-lockdown scenario, ranging from Rs 10.3-19.5 lakh crore, is much higher than the losses to GDP due to lockdown, as projected by World Bank, IMF or ADB, which range from Rs 3.7-7.5 lakh crore. The US Federal Bank and MIT compared the severity of measures taken by 43 American cities in the 1918 Spanish flu epidemic. The analysis of employment, manufacturing and bank losses established that the ultimate economic cost of stopping a pandemic by lockdowns was lesser than that of not stopping it.
Seattle, with five months of lockdown and a booming post-flu economy, and Saint Paul in Minnesota with one month of lockdown and a scarred post-flu trajectory were a compelling comparative example.
Further, lockdowns can be area-specific for tackling a pandemic that is not spread uniformly over a nation. For affected regions, lockdown and restrictions are the best response and the total loss is lesser than if there are no restrictions. So the lockdown from March 25 was the most sound decision for the people and economy of India. (Email addresses:poulomi@shuklasharma.in, prashant@shuklasharma.in)
Poulomi Pavini Shukla Economist & advocate at the Supreme Court of India
Prashant Sharma IAS officer of 2012 batch, working in Uttar Pradesh cadre