The Barbell Strategy

• It is important, firstly, to explicitly layout the intellectual framework of India's response to both the health and economic challenges caused by the pandemic.
• The central problem in both cases related to making major decisions under conditions of extreme uncertainty and paucity of information; what can be dubbed "the fog of war".
• The World Health Organization, however, was far from clear in its recommendation and changed its stance repeatedly.
• Epidemic experts consulted by governments around the world provided wide-ranging assessments.
• Some advocated herd immunity, while others predicted millions of deaths unless something drastic was done.
• Whatever strategy was adapted was a one-way street and would have to be held to the end. It was also recognised that it was probably a marathon rather than a sprint.
• Given these constraints, the Central Government opted for what is known in financial markets as a "barbell" strategy - i.e. hedge first for the worst-possible outcome while progressing step-by-step with a Bayesian updating of information.
  • The initial total lockdown, therefore, should be seen as a hedge against the worst possible outcomes.
  • It was bolstered by advice from some experts who argued that a strong initial lockdown could stall the epidemic at an early stage (this was not an unreasonable idea given the available information)
  • It should be noted that this initial lockdown also gave the space to arrange a large-scale medical response in terms of equipment, quarantine and testing capacity.
• As time has passed, the central government then unlocked the economy step-by-step as information as well as medical capacity both improved.
• Lockdowns and other responses were increasingly left to local governments.
• Meanwhile, better information meant that it was possible to make sensible tradeoffs between health and economic needs.
• This explains why the government was later willing to keep opening up despite there being any Covid-19 infected people whereas it had done an Initial lockdown when there were very few patients.

Economic response

• The same barbell strategy was used in the economic response.
• The Indian economic response during the lockdown phase was oriented more towards providing a cushion to the most vulnerable segments of society and of the business sector (such as medium and small enterprises).
• This explains the emphasis on food availability, cash transfers to Jan Dhan accounts, government guarantees on loans to small enterprises, moratoria and postponement of financial deadlines.
• Every effort was made to avert a cascade of defaults in the banking system.
• Unlike many other countries that front-loaded large stimulus packages, Indian policy-makers decided that trying to pump demand during a lockdown was like pressing the accelerator when the foot was firmly on the brake.
• It was better to save the ammunition for later as the cycle of demand simply would not take-off in a lockdown.
• Instead, the time was used to put in place long-term structural reforms in anticipation of the post-Covid world.
• Both monetary and fiscal space exists for this push despite the widening of the fiscal deficit.
• Demand-driven inflation is not a major issue as almost all price increases are due to supply disruptions.
• Every financing avenue will be explored including foreign and domestic capital, asset monetisation and even deficit monetisation.