Covid’s economic toll on Maharashtra

As the Covid-19 pandemic inflicts enormous costs on countries globally, efforts are being made to compute the loss to the economy so as to devise countervailing measures to mitigate its ill-effects.

Kapur and Subramanian1 (K&S henceforth), estimated that an extended lockdown in India would imply that about a month’s gross domestic product (GDP) would be lost and that government expenditures to the extent of 5 per cent 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 per cent, which is quite similar to the forecasts of the International Monetary Fund. ICRA expects the 202021Q1 GDP to fall by as much as 15 per cent or more. While estimates are available for India as a whole, computations at the level of the states have been missing. This column makes an attempt to estimate the losses for Maharashtra.

We take the K&S approach as a starting point and 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. Our computation is based on gross state value added (GSVA), which we employed to separate 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.

Computing GSVA of the fully exempt activities is straight forward and the list of such activities is wellknow. These activities include, among others, crops, livestock, mining and quarrying, public utilities, storage, movement of cargo, mandis and medical clinics, among others. However, computing the GSVA from partially exempt activities required some assumptions. The “partially exempt” categories that we consider are the manufacturing sector; hotels and restaurants and public administration.

For the manufacturing sector, we used the Annual Survey of Industries (ASI) data for 2017-18 to assess the share of exempt industries. The list of three-digit industries in ASI, which we considered as exempt included: Support activities to agriculture, processing and preserving of meat, fish, fruit, manufacture of vegetable and animal oils, manufacture of textiles, refined petroleum products, basic chemicals, fertilisers, pharmaceuticals, medical and dental instruments, waste collection and waste treatment and disposal. We estimated that 42 per cent of GSVA from this sector was attributable to these industries.

In addition, we considered the share of hotels and restaurants and public administration that were exempt. Motels and hotels that accommodated tourists who were stranded were exempt.

In the public administration category, police and public works were considered exempt. About 9.4 per cent of GSVA from hotels and restaurants and 72.6 per cent from public administration were estimated to be exempt.

Based on the above details, we obtained the aggregate GSVA for “fully exempted activities’’ and also of “partially exempted activities’’. Aggregating these gave us the GSVA associated with the “totally exempted’’ activities. We estimated this separately for Lockdown 1, 2 and 3. Using the proportions of exempt and non-exempt activities in the GSVA, we computed the losses as a percentage of gross state domestic product (GSDP). The share of non-exempt activities which could not function were thus estimated to be 66.4 per cent, 66.2 per cet and 61.1 per cent during Lockdowns 1, 2 and 3, respectively yielding a total of almost 65 per cent over the entire lockdown period of 54 days. The loss from closure of these activities was finally estimated to be 3.8 per cent, 3.4 per cent and 2.4 per cent of GSDP over the three lockdowns, yielding a total loss of ~2,76,562.42 crore, i.e. 9.6 per cent of GSDP.

Having obtained the share of non-exempt activities, the next step was to obtain the resources required to compensate for the losses. This would be a sum of two components— (a) share of the resources lost which could be compensated by way of support and (b) an additional 0.5 per cent of GSDP that the state would need to spend on public health on account of the crisis situation, this being over and above 0.5 per cent of GSDP already being spent by the state. The three scenarios we considered are as follows:

Scenario I: 25 per cent of the losses in household income would have to be made good and an additional expenditure of 0.5 per cent of GSDP was to be incurred on public health. In this case, ~83,533.52 crore would be required, i.e. 2.9 per cent of GSDP

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

Scenario III: 50 per cent of the losses of household income would have to be made good and an additional expenditure of 0.5 per cent of GSDP was to be incurred on public health. In this case, ~1,52,674.13 crore would be required, i.e. 5.3 per cent 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 the states to increase their borrowings up to 3.5 per cent of GSDP without conditions and up to 5 per cent 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 ~40,000 crore to the Mahatma Gandhi National Rural Employment Guarantee Act announced by the Centre. Earlier the allocation was ~61,000 crore.

4. Outlays on new capital projects, as announced in Maharashtra’s Budget for 2020-21, can be postponed. For example, the Konkan Marine Highway and the metro line for Pune-pimpri-chinchwad could be shelved and resources re-directed to meet the crisis.