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This too shall pass! Why CEA Subramanian pegs GDP growth at 2%

CEA Krishnamurthy Subramanian's optimism over recovery of Indian economy in the wake of COVID-19 outbreak stems from the bounce back after Spanish Flu even though the RBI agrees to disagree

twitter-logoDipak Mondal | May 22, 2020 | Updated 22:22 IST
This too shall pass! Why CEA Subramanian pegs GDP growth at 2%
CEA Krishnamurthy Subramanian is hopeful of India making a V-shape recovery in coronavirus times

Days after the Chief Economic Advisor (CEA) to the Government of India, Krishnamurthy Subramanian had estimated a 2 per cent GDP growth in 2020-21, Reserve Bank of India (RBI) Governor Shaktikanta Das in his statement predicted a negative economic growth in the current financial year.

The RBI Governor said in a statement while releasing the Monetary Policy Statement on Friday: "Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from second half of 2020-21 onwards."

With the RBI's latest assessment on India's GDP growth rate in 2020-21, many experts are now questioning if the government's estimates of 2 per cent growth is over-optimistic.

Business Today had spoken to the CEA some time back and had asked the same question as to why the government believed GDP would grow at 2 per cent while many others were predicting a contraction, and if the government was over-optimistic in its assessment. The CEA had then explained why he was more optimistic than the others.

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"What you have to recognise is there is significant uncertainty. While you may think I am over-optimistic, I may think others are excessively pessimistic. Both are possible because of the significant uncertainty," he started out with a bit of a caveat.

He said that people who are excessively pessimistic about the situation could be suffering from what is known as Salience Bias.

"Research in behavioural economics clearly shows that we all suffer from what is called Salience Bias. When we are in normal time, we do not factor in the possibility of black swan event as we keep thinking normal times will go on. And when we get into black swan event, we basically think that the black swan event will continue and we will not get back to the normal times. This is what Salience Bias is about," he explained.

He says because we are going through troubled times, others are overweighting the gloomy times and therefore thinking that he is being over optimistic. But he says that he does not want to be the subject of Salience Bias.

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Subramanian has his reasons to believe why things might change for better faster than others might be thinking.

"I would rather say it with careful evidence that if you look at the Spanish Flu episode of 1918, and if you look at the parameter called R-naught (R0), the R0 for Spanish Flu was about 2.3-2.4. It is same for coronavirus too. In contrast, common influenza has an R0 of 1.3, Ebola and smallpox have an R0 of 3.5," he explained.

R-naught is a measure of how contagious an infectious disease can be. An R0 of less than one means each infection will cause less than one infection, and the infection will eventually die down without spreading. An R0 of equal to one means, one infection causes one more, and while the disease may spread, it won't turnout to be a pandemic. An R0 of more than one means, an outbreak.

Subramanian explains why Spanish Flu is a good proxy for a pandemic perspective.

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"If you look at Spanish Flu, it is far more devastating pandemic, and I will give you some statistic to support that. One-third of the global population was infected by the Spanish Flu. In contrast, now less than 1 per cent of the population is infected. The mortality rate was 10 per cent in the case of Spanish Flu and the global average of coronavirus is 3.5 per cent," he cited.

He says that despite Spanish Flu being much more devastating than the coronavirus, the recovery then was V-shaped one. "If you put some weightage on that evidence, then you can say that - because the coronavirus is not as devastating as Spanish Flu - we can expect a V-shaped recovery now as well," he argues.

He then went on to say that he can argue that others are not putting the weightage on that (evidence) and that they are suffering from Salience Bias. However, he ends with a caveat: "Given the uncertainty, neither of us can be sure who is right."

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