Loss to Maharashtra’s Economy due to the COVID Lockdown

Mala Lalvani[i] and Ajit Karnik[ii]

As the global pandemic due to the COVID 19 inflicts enormous costs on countries of the world, efforts are being made to compute the loss to the economy so as to devise countervailing measures to mitigate the ill effects. Kapur and Subramanian[iii] (K&S henceforth), estimated that a two month lockdown would imply that about a month’s GDP would be lost due to the lockdown and that government expenditures to the extent of 5% of GDP would be required to make good this loss. CRISIL has estimated that India’s real GDP growth rate will collapse to 1.8%, which is quite similar to the forecasts of the IMF. ICRA expects the 2020-21Q1 GDP to fall by as much as 15% or more. While estimates are available for India as a whole, computations at the level of the states has been missing. This note makes an attempt to estimate the losses for Maharashtra.

We take the K&S approach as a starting point but add substantial detail to our computations. Specifically, where we differ from K&S is in the careful identification of sectors of the economy, which were exempt and not exempt during various phases of the lockdown. This allows us to take a more granular look at the losses as compared to the rather broad brush assumptions of K&S. Our computation is based on the Gross State Value Added (GSVA) which we employed to separate out the exempt and non-exempt activities. Once we had an estimate of the total contribution of exempted activities, we estimated the losses associated with activities that could not function (i.e. the non-exempt activities). It may be mentioned that we carried out these computation separately for the three phases of the lockdown.

Table 1 below provides a list of activities that were fully exempt and partially exempt during the various phases of the lockdown.

 

Table 1: Broad Categories of Fully Exempt and Partially Exempt Activities

While computing the GVSA of the fully exempt activities is straight forward, doing so for the partially exempt activities required some assumptions. We turn to these assumptions now:

(i) Manufacturing: As stated in Table 1, manufacturing related to food processing, medical instruments, and pharmaceuticals were exempt. The Annual Survey of Industries (ASI) data for 2017-18 was used to assess the share of such industries and it was observed that 42% of GSVA was attributable to these industries. The list of 3-digit industries in ASI which we considered as exempt included among others:  (i) support activities to agriculture and post-harvest crop activities; processing and preserving of meat, fish, fruit etc.; manufacture of vegetable and animal oils and fats, dairy products, starches, animal feeds, etc.; manufacture of textiles, refined petroleum products, basic chemicals, fertilizers, pharmaceuticals, medical and dental instruments; waste collection; waste treatment and disposal.

(ii) Hotel and Restaurants: We have seen that motels and Hotels which accommodated tourists who were stranded were exempt. Tourism is estimated to constitute 9.4% of GDP and, hence, this proportion of Hotels and Restaurants were seen to be exempt.

(iii) Public Administration: Police and Public Works together were found to constitute 72.6% of the budget of Home Department and General Admin Dept. This proportion of GSVA of Public Admin was considered as exempt.

Based on the above details, we obtained the aggregate amount of GSVA for ‘’fully exempted activities’’ and also GSVA of ‘’partially exempted activities’’.  Aggregating these gave us the GSVA associated with the ‘’totally exempted’’ industries.  We estimated this separately for Lockdown 1, Lockdown 2 and Lockdown 3. Using the proportions of exempt and non-exempt activities in the GVSA, we computed the losses as a percentage of GSDP. Table 2 gives these details.

Table 2: GSDP Losses during Various Phases of Lockdown

Having obtained the share of Non-exempt activities, the next step was to obtain the resources required, for which three scenarios were considered.  This would be a sum of two components: (a) share of the resources lost which could be compensated by way of support (we experimented with 25%, 33% and 50% levels of support) and (b) an additional 0.5% of GSDP which the state would need to spend on Public Health on account of the crisis situation.  K&S had assumed 2% of GDP being spent on Health. However, given that Maharashtra has been spending 0.5% of GSDP on Public Health and there are capacity constraints, we have been conservative and assumed that the State spending on health would be double the share of GSDP, hence we consider an additional 0.5% of GSDP when computing the resource requirement. The three scenarios we considered are as follows:

Scenario I: 25% of the losses of household income would have to be made good and an additional expenditure of 0.5% of GSDP was to be incurred on Public Health. In this case Rs. 83,533.52 crore would be required i.e. 2.9% of GSDP

Scenario II: 33% of the losses of household income would have to be made good and an additional expenditure of 0.5% of GSDP was to be incurred on Public Health. In this case Rs. 1,05,658.52 crore would be required i.e. 3.67% of GSDP

Scenario III: 50% of the losses of household income would have to be made good and an additional expenditure of 0.5% of GSDP was to be incurred on Public Health. In this case Rs. 1,52,674.13 crore would be required i.e. 5.3% of GSDP

Some of the options available to the State to make good the losses and raise resources are:

1. The Central government has permitted States to increase their borrowings up to 3.5% of GSDP without conditions and up to 5% with conditions. This will allow Maharashtra to borrow additional amounts, of course, bearing in mind the fact that future interest payments will rise and constrain future fiscal space. However, funds available through deficits are difficult to predict since revenue collections from taxes is likely to be adversely affected, which by itself will raise deficits.

2. Maharashtra's share in the State Disaster Response Fund will offer some resources.

3. Maharashtra can expect to get additional funding from the increased allocation of Rs. 40,000 crore to MGNREGA announced by the Central government. Earlier the allocation was Rs. 61,000 crores.

4.  Outlays on newly initiated capital projects, as announced in Maharashtra’s budget for 2020-21, can be postponed. For example, some of the new projects like the Konkan Marine Highway and the new metro line for Pune-Pimpri-Chinchwad could be shelved for the moment and resources re-directed to meet the crisis. 

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[i] Mala Lalvani, Professor, Mumbai School of Economics and Public Policy, University of Mumbai mala.lalvani@gmail.com

[ii] Ajit Karnik, Professor, Middlesex University, Dubai ajit.karnik@gmail.com

[iii] https://drive.google.com/file/d/1rYdoaJXVmh-IGilmPxnpS0qomucyFo_W/view