How to turn the tide now on both COVID and the Economy

June 22, 2021 7:12 PM

In many cases, the households as well as the businesses have exhausted their savings and capital buffers, leaving them vulnerable to any future economic or health-related shock.

While the average recovery from toxic assets was to the tune of 39% of creditors’ claims until March 2021, in some cases, the haircuts were as high as 95%.While the average recovery from toxic assets was to the tune of 39% of creditors’ claims until March 2021, in some cases, the haircuts were as high as 95%.

By Anil K Sood
The pace of second wave COVID infections has been slowing down during the last few weeks, but unfortunately it has already caused unprecedented loss of life and has imposed large healthcare costs on tens of thousands of households. It has resulted in a large-scale loss of employment across the country. Many Indian households and businesses continue to experience significant losses in their earnings. In many cases, the households as well as the businesses have exhausted their savings and capital buffers, leaving them vulnerable to any future economic or health-related shock.

It is therefore, important that we create large-scale, low-risk opportunities for growth that allow us to deal with social and economic costs caused by the pandemic. As some of the scientists have warned us about the possibility of a third wave, it is critical that we do not allow the possible 3 rd wave to inflict the same level of economic and social costs that the second wave has inflicted.

The most valuable approach to achieving higher economic growth and minimizing the cost of pandemic for households is to invest in building healthcare infrastructure that helps us deal with the 3 rd or later waves. With God’s grace, if the 3 rd wave does not materialize, the same infrastructure can be repurposed to serve the long-term healthcare needs of the country. In any case, we have woefully inadequate healthcare facilities in the country. Investment in these services has the potential to accelerate growth in matter of weeks, as we have had some of the private and public sector organisations build COVID-Care facilities in matter of weeks during the current wave.

As we know, the healthcare investment is relatively higher value-adding and employment intensive activity in India. A healthcare sector job creates a nominal value-added of ~Rs. 5.8 lakhs 1 per year, compared with ~4.40 lakhs for an average job in the Indian economy. In addition, it has backward linkages with much higher value-adding jobs in the pharmaceutical and medical equipment manufacturing businesses. For example, a job in the chemical and chemical products business (of which pharmaceutical is one segment) creates a value-addition of ~24.0 lakhs per job. Any
investment in healthcare also helps create greater employment in low value-adding, but employment intensive, sectors like construction and trade.

Given that the households and the businesses have been struggling even before the pandemic and will, therefore, not be able to absorb the increasing healthcare costs, it is absolutely necessary that the government invests in creating the emergency healthcare infrastructure. I do not expect the Indian private sector hospitals to take the risk of building additional capacity at this stage, as some of the large hospital chains are either highly indebted or have private equity investors among their shareholders whose return expectations are much higher (~25-30%) than the cost of capital for the government (6-8% per annum). An investment by the government will help reduce the long-term cost of living for an average citizen.

We also know that the capital intensity of healthcare jobs is not as much as that of an average job. That is, a healthcare job requires an investment of ~ Rs. 9.1 lakh, compared to Rs. 10.1 lakh for an average Indian job. In other words, a healthcare job is a low capital intensity and high value-adding job.

1 The estimate of value-addition and investment requirement are based on KLEMS Database, 2019, available at the Reserve Bank of India’s website @ Reserve Bank of India – KLEMS (rbi.org.in. The numbers quoted have
been extrapolated from the data for 2017-18, using the last 10-year CAGR.

An investment in healthcare would also help build confidence among the Indian households and businesses, improving our mental and physical health and thereby willingness to take risk. At this stage, the consumer confidence is at the lowest level in nearly a decade. At this stage of India’s development, we cannot afford to have weak confidence turn into hopelessness.

The temporary facilities created during the next quarter to deal with the possible next wave can be repurposed or converted into permanent facilities, as India does not have required hospital infrastructure in any case.

Anil K Sood is Professor and Co-founder at the Institute for Advanced Studies in Complex Choices and was Professor of Finance at the Administrative Staff College of India.

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