Essential or non-essential?
It has been almost a month since we got into complete lock-down. The objective of this unprecedented exercise is to slow down the spread of the deadly Covid-19 virus by limiting human interactions to bare minimum. An extreme way to achieve this is to limit all possible transactions between human beings. Of course, this is not practical as human beings are not self-sufficient entities. We do not produce everything that we need to survive! Such a move has immense economic implications also. The option adopted by our government was to allow only ‘essential’ transactions to happen, both offline and online. Last week, Indian e-commerce companies were set to resume their full operations based on the revised guidelines issued by MHA which relaxed the previous criteria and allowed both essential and non-essential online transactions. But on Sunday, hours before the modifications were set to go live, the government inexplicably walked back its original decision. This was done to create a level playing field for offline traders who thanked the Indian PM for his personal intervention to make this happen.
From a policy perspective, there are 4 major reasons for considering this as a flawed approach. First is the classification of transactions as essential vs non-essential. This is not an objective classification which is universal; it is purely subjective. What is essential for me need not be essential for you and vice-versa. A headset, a toy, a pen, a knife, a chair — all these can become essential in different scenarios. Such ambiguous classification increases the need for State capacity to monitor continuously for any deviations. This also leads to imposition of self-interpretations of this classification by the enforcers on individuals and entities.
Second is the fact that the approach does not meet the policy objectives. The objective is to design a policy that maximizes social welfare restricting human interactions to a minimum. There are a lot of transactions that could have happened which could have made both the consumer and the supplier better off and thus increased the overall social welfare without compromising the required limitations on human interactions. By not allowing such transactions to happen, government has in effect reduced the overall economic surplus and welfare.
The latest policy change is aimed to protect the offline small retailers by creating a level playing field between offline and online players. But even this looks to be far-fetched. Such a level playing field cannot be created artificially through force. It is purely based on the preference of consumers. So even if we create a forced level playing field now, when both online and offline opens, it will become an unfair playing field naturally through market forces due to the evolving consumer preferences owing to the current pandemic. Reducing the overall economic pie for such a short-term temporary effect is myopic. Such protectionism has the unseen effect of giving a false sense of calm to the offline retailers that restricts the scope for innovation and emergence of new and efficient business models, much needed in the changed world post the pandemic.
The fourth reason is the effect of this policy in future when restrictions end. It is now nearly a month that 1.3 billion Indians are in one of the world’s strictest lock-downs. The extend of demand backlog triggered by this complete standstill will be huge. By restricting online transactions, we are allowing this demand backlog to pile up. When India re-opens its online and offline non-essential transactions, this pile up will lead to over-crowding on both offline and online platforms. Supply side will have to cater to this piled up demand released suddenly. A demand shock leads to increase in price. A better policy design would have been to approach the problem from a different angle. The decision of allowing or disallowing a transaction or interaction should not be based on whether it is essential or not, but purely based on the level of human interaction involved in the same. This could have maximized both consumer surplus and producer surplus within the constraints of maximizing social distancing.