View: Financial Survey lays out the mental foundations of India’s Covid response


An necessary theme of this 12 months’s Economic Survey is about easy methods to make insurance policies and selections below circumstances of radical uncertainty.

Given the influence of the Covid-19 pandemic on each well being and financial trajectories the world over, this subject is clearly topical. The Survey, subsequently, explains India’s ‘barbell’ technique that mixed hedging towards worst-case outcomes, on the one hand, with step-by-step responses pushed by a Bayesian updating of knowledge on the opposite. It reveals how insurance policies had been focused and sequenced in ways in which would maximise bang for the buck.

The Survey then explores how the identical mental framework might be additionally used to enhance routine administrative processes. Nearly a century in the past, economist Frank Knight offered a distinction between Danger and Uncertainty. Danger pertains to outcomes the place now we have a way of doable future outcomes and their possibilities. Uncertainty pertains to a world of ‘unknown unknowns’.

Though most mainstream economists concentrate on points associated to Danger, the true world is a fancy, evolving place of butterfly-effects, unintended penalties and random shocks. That is much more true when one is confronted by a once-in-a-century shock just like the Covid-19 pandemic. It was the popularity of radical uncertainty that was central to India’s response.

As readers will recall, many world consultants had been of the opinion final 12 months that India’s initial lockdown was pointless, and that it ought to resort to a front-loaded reflation of home demand utilizing a grand one-time stimulus bundle. Some economists, like Nobel Prize-winner Joseph Stiglitz, particularly named India as a rustic that had mismanaged its response and known as for large-scale cash transfers funded by unrestrained monetisation and extortionate taxes on enterprise.

As argued in my ET column at the moment (‘A Very Uneven Opinion’, October 9, 2020,, Indian policymakers consciously determined towards this recommendation, although a number of developed international locations opted for it. As a substitute, the Indian authorities prioritised saving lives whereas offering a cushion for essentially the most susceptible sections of society and the enterprise sector.

Given the uncertainty, the lockdown plus-cushion method was geared toward avoiding the worst doable outcomes quite than revival. That is the context wherein the federal government rolled out the world’s largest meals programme, quickly suspended the insolvency course of, offered 100% ensures to loans to small enterprise, and so forth.

Discretion vs Valour

The lockdown offered time to create testing and quarantine amenities, and study the easiest way to minimise fatalities. As time handed, policymakers had been capable of do a Bayesian updating of their responses primarily based on new data.

Because the lockdown was steadily unwound, financial exercise revived. With infections peaking in September, GoI ramped up capital expenditure on an unprecedented scale: up 129% y-o-y in October, 249% in November after which 62% in December. This coincided with a decompression in pent-up consumption. The result’s a pointy revival in financial exercise.

By avoiding spending treasured fiscal assets on a rushed headline grabbing stimulus, Indian policymakers had been capable of preserve assets for a sequence of focused and calibrated packages. Equally, by recognising that the pandemic was each a requirement and a provide shock, it intentionally timed the expenditure push for when the supply-side may reply. There would have been no level in urgent the accelerator with the opposite foot on the brake. As the traditional sage Thiruvalluvar put it, ‘Doing the best factor on the proper time is the rope that binds limitless wealth.’

The above mental framework primarily based on Uncertainty has functions even in routine administrative processes. This 12 months’s Survey devotes a full chapter to the necessity for easy and clear laws. It argues that Indian regulatory processes are affected by a misplaced perception within the human means to exactly work out future outcomes. Discover that that is precisely the identical mental fallacy that led sure consultants to confidently espouse a grand one-time response to Covid-19.

Each financial idea and proof unequivocally present that it’s not doable to write down full ex-ante laws for all doable conditions. Makes an attempt to write down full laws lead inevitably to excessively advanced processes. This is the reason it takes 1,570 days in India to do a routine exercise like voluntarily shut down an organization, even when there is no such thing as a dispute or litigation. That is an order of magnitude longer than in different international locations.

The Financial Survey argues that the inevitability of incomplete laws makes it unattainable to take away discretion from decision-making. Makes an attempt to cut back discretion with extra prescriptive guidelines leads, paradoxically, to extra discretion to decide on between guidelines and renders the processes opaque.

Timing is of the Essence

The one answer, in the end, is to maintain guidelines easy and permit for discretion, whereas investing in higher transparency. The lately launched Authorities e-Market (GeM) portal for routine authorities procurements is an instance of how simplicity and transparency might be mixed. The costs are brazenly seen and might be monitored by any involved citizen.

In the meantime, the sincere official could make purchases with out fear. The Covid-19 pandemic ought to have left nobody with a doubt in regards to the significance of accounting for radical uncertainty. This 12 months’s Survey lays out how this knowledgeable India’s response to the pandemic. Over the subsequent 12 months, readers can have a chance to guage who had the higher recommendation — Stiglitz or Thiruvalluvar.

The author is principal financial adviser, GoI. Views are private

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