The de-lockdown needs a better institutional foundation

Business Standard, 4 May 2020

There was considerable concern when India began one of the most extreme lockdowns in the world. Significant progress on a pragmatic process of de-lockdown is now visible. There are weaknesses in the legal and institutional apparatus through which economic policy is being done, in this environment. It is likely that the pandemic will be with us for a while. Hence, there is merit in establishing a better legal and institutional foundation for economic policy for the pandemic.

Elsewhere in the world, the restrictions associated with Covid-19 employ softer terms like `shelter in place'. In India, the more muscular term `lockdown' has become prominent. Researchers at the University of Oxford have classified the Indian actions as the most restrictive in the whole world. Similarly, Amazon operates in many countries, and their decline of activity in India was the sharpest.

As the Indian economy had started out in early 2020 in reasonably poor shape, there was a lot of concern about this combination, of extreme measures impacting upon a weak economy. We now see that a pragmatic process of removing restrictions has begun. The restrictions were eased from 18 April, and the announcements of 1 May have carried this further.

India is comparable to the European Union in size and heterogeneity; it makes sense to have highly differentiated approaches that reflect local conditions. Rather than a single policy framework for the whole country, we have gone to an approach that respects three different kinds of districts.

It would make sense to go further down this route. There is value in a more decentralised approach. The tradeoffs between lives and livelihoods vary with each 10 kilometres of distance. The sun sets in Assam at 6 PM and it sets in Gujarat at 720 PM, so one single rule about vehicles being forced to only travel from 7 AM to 7 PM, for the whole country, is inappropriate. Similarly, the public health tradeoffs, about whether night time travel is an issue in fighting Covid-19, vary sharply across the country, and any rule that is appropriate for one place will be inappropriate for another. Hence, there is great value in local information, local problem solving, and local control of the social distancing restrictions.

The key problem in the present situation is: the MHA Order No. 40-3/2020-DM-I(A) of 1 May 2020 constitutes economic policy. The words in this order have an enormous impact upon livelihoods all across the country. The Disaster Management Act, 2005, was envisioned for dealing with an earthquake or a cyclone: it is a poor vehicle for the conduct of economic policy on a nationwide scale.

Economic policy works well when the liabilities for violating rules are of a civil nature. All economic actions are conducted in the pursuit of financial gain, and the threat of a fine which is three times the ill-gotten gain suffices in removing the incentive to violate the law. But the Disaster Management Act imposes criminal liabilities. This will create a strange dynamic between officials vs. the people.

For an analogy, we have seen the adverse consequences of criminal liabilities in FERA (1973), and the adverse consequences of bringing criminal offences back into FEMA in recent years. More generally, we have seen the fear induced by the expansion of criminal offences in numerous laws, e.g. the Companies Act, in the last decade, and its adverse impact on the morale of private persons. With the Disaster Management Act as the main economic law in motion today, firms will be risk averse out of the threat of incarceration.

Economic policy works well when there is the slow, intellectual, consultative process of understanding problems, undertaking cost benefit analysis, finding the least coercive intervention, and making small moves. Such institutionalised application of mind is born of provisions in laws that establish formal processes for wielding coercive power. The Disaster Management Act, 2005, does not have these checks and balances, as it was never intended to be a key economic law.

Wielding the coercive power of the state is a complex process involving legislators, the executive, jurisprudence, and many checks and balances. There are a thousand questions about every element of coercion that need to be clarified through explicit drafting of law, through subordinate legislation and through jurisprudence. That process has not taken place around the Disaster Management Act or the Order of 1 May 2020. As a consequence, there are numerous grey areas about what can be done and what cannot be done. There is considerable discretion with millions of officials, all across the country, in deciding who to permit and who to ban.

All too often, in the Indian bureaucratic culture, there is low accountability for good outcomes, and there is a great fear of getting into trouble when something goes wrong. This gives officials the incentive to be biased in favour of bans. As an example, all the major countries of the world are signatories to the Financial Action Task Force (FATF), but there is no country where its translation into ground reality (KYC and Aadhaar) is more unfriendly to the people. This problem affects the drafting and the implementation of rules about social distancing. All across the country, individuals face demeaning experiences with officials throwing their weight around. This saps the morale, optimism and self-respect which is of essence in achieving economic dynamism.

The market economy is an exquisitely complex ecosystem of myriad voluntary interactions between self-interested people. The use of coercive power of the state has major consequences for the market economy. While the much needed restoration of normalcy began on April 18 and has gone forward on 1 May, the problem of Covid-19 is not an earthquake or a flood; it is not localised and it will not end quickly. Policy makers need to recognise the complexities associated with major economic policy actions that are implemented at the level of the union government through the Disaster Management Act, and find solutions for these problems.

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