Lockdown! Now the Bailout...

25 MARCH 2020

Prime Minister Modi has never hosted a press conference in his nearly 6 years as the Prime Minister of India - the largest democracy in the world. But he has made a few important speeches which have shaped the course of India's economic and social history. His starting word of "Mitron" tends to conjure up images of watching a horror film as one munches aggressively into the popcorn. But the two recent speeches in the past week in response to the threat of the COVID-19 have brought to light the horrow before us. As Prime Minister Modi said, "if we do not win over the next 21 days, we will put India back by 21 years".

On March 21, Prime Minister Modi asked the nation to observe a one-day curfew on Sunday, March 22 and, at 5 pm, to clap and bang metal thalis to honour those in the medical and other fields who are on the frontline of the fight against the chaos and death created by COVID-19.

The curfew was a success. But the 5 pm salutation was a disaster with crowds of people marching on the streets across India - in close proximity to each other - clapping and banging away. The coronavirus must have enjoyed that evening and spread its poison. This display of chaotic movement probably forced Prime Minister Modi to make a second speech on the night of March 24. This time, he devoted much of his speech to explain to India's largely less educated and independent-mined people the importance of staying at home. He pleaded that people should not cross a "Lakshman Rekha" in the hope that most Indians have heard the Ramayana and will understand the evil that can occur if they do cross the line.

It's not easy being the leader of a disjointed, naturally rebellious, carefree nation (now polarized by perceptions that the BJP is converting secular India into a Hindutva nation) and asking them to stay at home for 3 weeks. To put this in perspective, the number of business working days is 13 as there are 8 holidays during this period. Still, it is 21 days cooped up at home.

Prime Minister Modi deserves the opportunity to lead us through with his policy. The trajectory of the virus in Italy and Iran has frightened many health experts in India. With noisy, social societies and a fragile health system the "What-if" scenario for India could be frightening. From a medical perspective, the "lockdown" is important to stunt the spread of the virus and avoid an Italy or Iran scenario.

Table 1: India needed a lockdown to limit the spread of COVID-19

Week / CountryItalyIranIndia
31,036245258 (as of March 21)
As of March 2469,17624,811536 (Week 4 for India)
Total Death / Million113230.01
Source: Worldometers, India

There is, for the record, an alternative view. The "flatten the curve" theme that has spread across the world has a simple thesis behind it: If too many people fall ill at the same time (a spiked peak), there is not enough hospital beds and personnel capacity to help the critically ill. Therefore, more people will die in a short time - some of them who do not make it could have been saved if there were more hospital beds and doctors.

Hence, the medical experts who now guide economic policy say we need to "flatten the curve" - have less people fall ill at the same time and spread out the illness over a longer time. One way of doing that is:

  1. If people are slightly ill, they should stay at home and don't come for a medical test. Visiting a medical facility for a test takes time and potentially makes the health care workers and other patients waiting there a vulnerable target for the spread of the virus. Therefore, self-quarantine;
  2. If the people don't listen and still wander in parks, beaches, or bars - the government imposes a "lockdown". A total shut down of all economic activity.

Given the unknown impact of the extreme action of a lockdown, the bean-counters and number-crunchers have a different view. At the outset, they do confess that they may not all be epidemiologists. Notably, John Ioannidis of Stanford University is a Professor of Epidemiology and Aaron Ginn is not a medical man but knows how to crunch data. In separate papers, they argue that the self-quarantine and lockdown may "flatten the curve" but may not be the right policy objective as it may have extreme costs.

My reading of their arguments suggest that a flat curve could potentially give the health care companies a larger and longer stream of revenues (dead patients don't pay bills, so a spike when people die too early is a loss of revenue for the medical industry!). But this benefit of a flattened curve from a lockdown approach to the health care companies and addition to GDP is offset by the significant loss to many other sectors that make up the economy.

Table 2: The Killing Field


The immediate pain from a lockdown will be to the travel, tourism, and recreation / entertainment industry. No travel by planes, cruise ships, buses, trains; no hotel or Airbnb rooms booked; no restaurants no AMC no Disney parks. On a global basis, business conference travel accounts for about 1.4% of global GDP and leisure travel accounts for another 3% of global GDP. The loss to small and large businesses from people not showing up to work - or not showing up in shopping malls - is basically a knock to 85% of the GDP of USA. So, in economic terms in the USA, the flattening of the curve only benefits health care sector along with some other allied sectors but is less than 15% of the GDP of the USA. There is the somewhat quantifiable number of lives saved due to a lockdown and the flattening of the curve.

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The impact of a lockdown in India.

The dissenters of a lockdown approach in an economy like the US, for example, suggest that there is no data to show what happens when 85% of the economy is hit. Will more people die from depression, starvation, depravation from the impact of loss of jobs and salaries to the 85% of the economy of the USA?

One can resonate with that unknown and apply it in an Indian context. The Demonetisation of November 8, 2016 was aimed at sucking out the undeclared, "black" money from the wealthy individuals and politicians. The sudden impact of the removal of 87% of all currency notes in circulation was a death knell for the economic life for hundreds of millions across India. How many died from the impact of not having a job or legitimate currency to spend is not documented - and probably will never be. But people did die because of demonetisation.

Similarly, as a lockdown is imposed in India the people who are likely to get hit the hardest are:

  1. The urban poor, probably about 25% of India's population lives in poor housing conditions in urbanized areas and many of them rely on daily wages or work for small companies. A shut down of economic activity will give them zero income and leave them vulnerable to the health hazards of a virus breakout. If they leave for their villages in search of a lower cost of living given that they have no daily wages, the country risks the virus spreading to rural India where medical facilities may be closer to what exists in Iran that what exists in Italy;
  2. Small businesses have already been hit by demonetization in November 2016 and the introduction of a unified Goods & Services Tax (GST) in July 2017. They have lost market share to the "organized" larger companies and also suffered from a freeze of loans to smaller companies due to a banking crises;
  3. Rural India: as incomes and spend dry up in urban India the cascading impact of a loss of a urban wage earner remitting money back to rural India will be a blow to a community that accounts for 60% of India's population but only generates maybe 35% of its economic activity. Already hurting from a ban on the slaughter of cows and the related leather trade - and having just recovered from the impact of demonetization - rural India cannot afford another blow.
  4. Larger, leveraged companies wo have built large capacities that have gone on stream in 2012 and have been fighting an anemic economy for the past 4 years as many stand on the edge of financial solvency;
  5. The banking and financial system has been knocked by years of bad loans due to theft or due to a poor economy. With weak balance sheets, the banks cannot afford to see their non-performing loans surge either because companies cannot service their debt or because individuals - now unemployed in a lockdown - cannot service their home, auto, or credit card loans.

The Indian financial markets are already in a freefall.

Table 3: I'm free, freefalling now...

BSE-30 Index40,72326,674-34.50%
BSE MidCap Index15,4629,863-36.20%
USD to INR71.3676.1-6.60%
Quantum Long Term Eq Value Fund52.9234.56-34.70%
Quantum Equity Fund of Funds37.2725.13 (est)-32.60%
Quantum Multi Asset Fund19.3716.92 (est)-12.70%
Quantum Gold Savings Fund16.5917.042.70%
Quantum Liquid Fund26.7126.880.60%
Source: Bloomberg, my estimates*

A lockout of the Indian economy poses many risks and brings to mind the conflict in the USA. New York Governor, Andrew Cuomo is very clear that lives matter more than the economy.

Prime Minister Modi is, similarly, very clear: the most important objective is to save lives.

President Trump, ironically on the same day that his "good friend" Prime Minister Modi announced a lockdown is tilting towards the thought that the economy must be ready for business by April 12, Easter Sunday. His critics suggest that this is dangerous to the lives and health of many Americans.

It is not easy to choose a policy response. The data is not available to study the likely impact of a lockdown on the population - including death rates.

Every decision-maker deserves our support - irrespective of the decision for there is no right decision.

However, having made a decision, one should and must expect decision-makers to set out clearly what they are doing to address the risks of the path chosen.

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Where is my bail out?

With the stock markets falling to levels last seen when Prime Minister Modi was first elected in May 2014, Indian businessmen are clamouring for a bail out. While the US is close to a agreeing on a USD 2 trillion deal - including a possible USD 500 billion bail-out for the aviation / travel sector which employs about 5 million people (about 3% of total employment) so far there is little activity in India.

Last week, the Finance Minister admitted she was setting up a committee to help decide what to do. On March 24 there was news that a government agency, NITI Aayog, and the Finance Ministry would work on some package shortly. Meanwhile, in a talk a few hours prior to the Prime Minister Modi's lockdown speech, the Finance Minister gave a speech which largely focused on compliance - such as extension of filing dates - and some revised definitions of default on personal loans. Fed up, the market surrendered half the gains achieved prior to her beginning her talk.

The large companies, shocked at the free fall in their wealth and share prices, have asked for:

  1. Some sort of loan repayment and interest waiver for a few months which is sensible and fair; one idea being mooted is for the government to grant them an automatic interest-free loan based on how much indirect or direct tax they have paid in the previous financial year;
  2. A reduction in tax rates on share-buy backs - a selfish request given that asset prices are the last thing one needs to interfere with at this stage!
  3. The large companies have also indicated that they will not lay off any staff, which is a good sign.

Their fear is not misplaced.

Years of a poor economy have hurt their performance and they are not in the best of health.

Agreeing to continue paying salaries for a long time with no sign of any revenue due to a lockdown could hurt their financial position. So they need a bail out!

Table 4: On the edge: Financials of Indian companies...

No of companies180180-
Net Sales (INR billion)19,91659,049196.50%
Net Profit After Tax (INR billion)1,9444,006106.10%
Net Profit Margin9.80%6.80%-30.60%
Debt (INR billion)4,99615,262205.50%
Interest payments (INR billion)3561,556337.10%
Interest / Sales, %1.80%2.60%47.40%
Source: Equitymaster Database; Note the 180 companies need not be the same companies

Greedy Capitalists: need for a Reserve Allocation!

There is one problem though. This smells so much like the stink from the Lehman bankruptcy. Over the last decade, Indian companies have made money - why did they not keep aside a reserve fund for such contingency? The short term financial engineering game of share buy backs and rewarding investors has led to a situation where there is no significant pool of contingency money in the companies. The "efficient" balance sheet hypothesis that rules academia - and ruins long term economic buffers - states that if a company has no use of capital, it should return the money back to shareholders in the form of dividends. That is precisely why balance sheets are razor thin and Return on Capital Employed (ROCE) is a metric to reward a company with a higher stock valuation. In the (good) old days, HSBC plc used to have a hidden reserve. The cooperative insurance companies used to have unrealized gains and undervalued investments.

Today's corporate balance sheets, in contrast, are products of imaginative financial engineering geared to paying out profits as obscene bonuses to overpaid CEOs and outsized dividends to short-term investors with no reserves to fight a coronavirus event. The bill for this is now being paid by the government as the capitalists flee for the hills and try to trim costs or seek money to continue their obligation to their staff.

The empty talk of corporate governance and stakeholder focus stands naked and exposed. The false gods of corporate governance are now standing in line for government money. The empty words of Planet - People - Profit, the new "triple bottom line", needs to be practiced and the "Reserve Allocation" can be a mechanism to take care of problems that companies may run into in the course of their business as they stumble on "Planet" or "People" issues.

Maybe there should be a new law to include a "Reserve Allocation" similar to building societies that may have a sinking fund for that rainy day when the building has a structural fault; for ensuring that a company can survive on a zero revenue basis for, say, 24 or 36 months. Every year 30% of profits must be kept aside for a Reserve Allocation. Boards reward senior staff with an ESOP, why can't they protect society (Planet and People) with a Reserve Allocation? This is something we have inculcated at Quantum Advisors as our financial discipline and our commitment to our team members and we keep adding to this reserve every year to get to that goal of "we must have enough cash in the bank to last us for 36 months on a zero revenue basis". We will remain an inefficient company when measured by the ROCE metrics because we have this lumpy cash sitting in the balance sheet doing nothing - but we hope we measure highly in the eyes of our team members at Quantum and the community.

If we already had such a practice in place across corporate India, the government would be free to focus its limited resources on worrying about those in dire need of help. Now, the government is saddled with a Too Big To Fail private sector problem which has become a public debt headache and a unnecessary distraction!

Fighting for India.

While we await the details of how the government will support an economy that was struggling for years and left rudderless to find its own catalyst, and is now battered by the possible impact of a lockdown to save lives given the dangerous COVID-19, the key asks will be:

  1. Reorient public expenditure. To ensure that there are sufficient medical kits and hospital facilities to treat those infected; the announcement of a spend on hardware of Rs 15,000 crore (0.01% of GDP) for a country with 130 crore people will just about buy every family member one bar of soap to scrub one's hands and kill the virus which is a great preventive measure - or build maybe 15,000 hospital beds! This is woefully inadequate. Meanwhile, Rs 25,000 crore is being earmarked for a new Parliament building to replace the Nehruvian era heritage buildings which the BJP wants to eliminate from India's consciousness - this is wasteful in today's environment and must be scrapped for now and can be undertaken later when we have the resources; a coastal road in Mumbai that serves no legitimate transportation objective and is branded by many as a Machiavellian land grab in Mumbai is another white elephant project costing Rs 15,000 crore that can be axed immediately; statues honouring great leaders can wait and, instead, in their honour hospitals can be built;
  2. Ensuring that the urban poor continue to get a daily wage and stay on within urban areas and resist the temptation to migrate to the villages;
  3. Ensuring that rural India is not hit by the virus or by the fallout of the lockdown;
  4. Ensure that small businesses get loans to survive.
  5. Large companies also need their cash injection since they did not keep a Sinking Fund and focused on ROCE;
  6. Banks and financial firms need funds to ensure that lack of liquidity does not lead to insolvency.

Saving lives or saving the economy - or saving both.

It is a testing time for our country.

I wish our economy was in stronger shape to face this epic battle.

It is not.

But the fabric of India is far greater than the legitimate eruptions of divisiveness.

May our leaders in government lead with fortitude and courage - and may data and compassion guide them as they make these very difficult decisions.

We have to succeed.

We wish you all the best, Prime Minister Modi.


As our contribution to the effort to fight the impact of the COVID-19, Quantum Advisors and Quantum AMC have decided to set aside a pool of money which is being distributed to NGOs who will ensure that the money we give them reaches the urban poor and the daily wage earners. HelpYourNGO has reviewed the programs these identified NGOs are implementing and will look for more NGOs over time. For more information on these NGOs and to see how you can give money, please email Info@HelpYourNGO.com

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5 Responses to "Lockdown! Now the Bailout..."


Jun 21, 2020

The competitive edge Chinese companies have are cheap & risk free government finance, and government protection to be opaque, fudge books etc. This has rendered most of the global economy uncompetitive, with the subsequent problems.

Huawei is a Chinese government company in the garb of a private company - just like most of the global 'Chinese MNCs' are. They get infinite risk free seed & growth capital from the government for both – business and R & D. And they fudge the books. China can use prison labor but no verification is possible.

The world has been deceived by China. Chinese govt has used WTO loopholes to gain a competitive edge for their ‘private companies'.

Firms like GE, Nokia, Unilever etc have to raise private capital. They cannot use prison or child labor. And their accounts / books can be checked by any nation. But it is theit structure that is the problem for creating the Chinese economic frankenstein – the MNCs & their CEOs will transfer technology, even if it is China, to save his / her job, by showing shareholders that the company will grow for the next quarter.

The WTO should be reoriented to address this moral hazard China has exploited no end. Let reciprocity be the ground rule – benchmark standard for book keeping, human rights, environmental emissions etc. Any Chinese company not conforming to the standards cannot sell in in the target market.



Apr 5, 2020

The article is good, but missed out on bail-ins.

The 'developed' countries have followed the concept of 'economy'. 'Economy' grows due to industry, so do what is good for industry. And an 'economy' based on printed paper / currency is a mirage that will crash. What happens to the USD if exporters to the US demand payment in physical gold?

But has the concept of 'economy' led to the decline in the developed countries populations? And is this lockdown an attempt by the governments to save manpower for the 'economy' - including our government? Without a social network network, this initiative is bound to fail in India. The developed countries, even though having social security networks, have failed to stem population decline. Applying concept of 'economy' to the family, I tell my kids to avoid having kids, that family and kids are long term liabilities, whilst jobs are hire & fire - family and 'economy' are mutually exclusive over time, sustainability is a meaningless word.

All developed countries have negative population growth, increasing average age of citizens and pension funds heading for bankruptcies. NIRP - negative interest rate policies, have become standard in the developed countries after pandering to the industry for reducing interest rates.

The next generation 'economics', beyond bail-outs & bail-ins is the need of the hour. Only thing, every day is not a Sunday - governments cannot fool all the people all the time.


Dharmendra Kapur

Mar 27, 2020

Very true if the businesses keep a reserve fund to tide over the bad times then they do not have to run to the government for a dole everytime there is a crisis.
The CEA Mr Krishnamurthy Subramanian highlighted this very well sometime ago with his comments that every time there is a crisis the companies cannot run to the government and beg, "Papa mujhe bacha lo".



Mar 25, 2020




Mar 25, 2020

While I appreciate some of your arguments, I am surprised by your reading of the arguments for flattening the curve. The high death rate scenario does not result in keeping the economy humming. More recent studies are making clear arguments that the number of fatalities without flattening the curve is too high to ignore and are advocating it as the preferred policy option (Please refer to the paper by Imperial College on 16 Mar 2020, Impact of non-pharmaceutical interventions (NPIs) to reduce COVID19 mortality and healthcare demand)

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