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The Cobra Effect

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When an attempted solution to a problem makes the problem worse

The citizens of Wuhan were locked down for 79 days to prevent the spread of the virus. The media flamed the fear and countries across the world taking cues from China started the process of lock down without even questioning the efficacy or the economic cost of the same. Nobody even thought of the process for exit from such rigorous lockdowns. Billions of healthy people were stopped from working and the world sunk into the worst level of unemployment since the great depression. Attempting to forecast the economic effect of the lockdown is absolutely impossible. Never before we have seen a man made recession of this scale as the world is heading towards the biggest peace time recession in almost 100 years.

The Groupthink on the issue of tackling COVID-2019 started with China clamping down on its citizens. The citizens of Wuhan were locked down for 79 days to prevent the spread of the virus. The media flamed the fear and the world panicked. Different countries across the world taking cues from China started the process of lock down without even questioning the efficacy or the economic cost of the same. Nobody even thought of the process for exit from such rigorous lockdowns.

Billions of healthy people were stopped from working and the world sunk into the worst level of unemployment since the great depression. The Cobra Effect is a term in economics. It refers to a situation when an attempted solution to a problem makes the problem worse. This name was coined based on an incident in old colonial India. By some reasons, there were too many venomous cobra snakes in Delhi. People were dying due to snake-bites and it became scary for almost everyone to step out of their houses. The government of the day had to get into action to stop this menace and it offered a silver coin for every dead cobra. The results were great; a large number of snakes were killed for the reward.

Eventually, however, it led to some serious unwanted consequences. After a short-term dip in cobra population, it started going up. This was because few people began to breed cobras for the income. When the news reached the government, the reward program was scrapped, causing the cobra breeders to set the now-worthless snakes free. As a result, the cobra population further increased. The solution for the problem made the situation even worse. The unintended consequence for a well-intentioned idea led to making the problem worst.

It’s important to think about how leaders should respond to a new idea that may sound great on paper especially the solutions that try to affect how people behave. Every solution has consequences and those consequences may lead to certain situations where rather than solving a current problem, one may end up with more complex problems. As it is said that the road to hell is paved with good intentions, the similar mistakes are happening around us every day when the decision makers fail to take a 360 degree view of all the possible outcomes of an action before implementation. It is not that mistakes happen only with the government run programs, there’re n numbers of examples in great private companies too where the best and brilliant people lose sight of certain negative outcomes due to the initial magic of seemingly great looking ideas .

While debate around the effectiveness of the lock down to prevent spread of Covid 2019, will continue, for economies like India with sub optimal health infrastructure, the lockdown provided the authorities the much needed window to create and strengthen the existing healthcare infrastructure, which otherwise would have been overwhelmed if the virus had spread rapidly.

Attempting to forecast the economic effect of the lockdown is absolutely impossible. Never before we have seen a man made recession of this scale nor have we seen policy responses of this magnitude to cushion the impact of the same on people’s livelihood. On the balance it is expected that still we are heading towards the biggest peace time recession in almost 100 years.

The collapse in economic activities appears to be coming to an end. The biggest risk is a flare up of new infections and a further round of lock downs. Economic data is frightful now and growth engines are sputtering. Current prediction regarding domestic growth in India during the current fiscal is not at all encouraging, with the first two quarters being almost a wash out. Government sources predict around 4% GDP growth in the next fiscal. A lot will depend on timely and appropriate intervention by the government to support the economy and of course no further escalation in the pandemic. The government rightly has been focused on supporting the weaker sections of the society as well as removing bottlenecks in different sectors for increased economic activity in the post Covid days. Long awaited structural reforms, particularly in the area of agriculture and related infrastructure has been announced.

Economists estimate that the supply side of the economy has been encouraged through these as well as other monetary measures announced by the RBI. However there will be a significant need to take measures for boosting demand and the same is still awaited. In the coming days this need for demand stimulation will become critical as India gets back to work. The fiscal constraints are well known but without adequate demand the supply side measures may fall flat.

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Sudip Bandyopadhyay is currently the Group Chairman of Inditrade (JRG) Group of Companies. He sits on the Boards of a number of listed and unlisted companies. His area of expertise includes equity, commodity and currency markets, wealth management, mutual fund, insurance, investment banking, remittance, forex and distribution of financial products. During Sudip’s 16 years stint with ITC as Head of Treasury and Strategic Investments, he managed investments in excess of $1.5 billion. He was responsible for the acquisition of strategic stakes in EIH, VST and several other companies, by ITC. Post ITC, he was the Managing Director of Reliance Securities (Reliance Money) and also on the Board of several Reliance ADA Group companies. He was instrumental in leading Reliance Anil Dhirubhai Ambani Group’s foray, amongst others, into Equity and Commodity Broking, Commodity Exchanges, Gold Coin Retailing, and Money Transfer. Afterwards Sudip was the Managing Director and CEO of Destimoney, promoted by New Silk Route, with over $1.4 billion under management. Sudip has significant presence in business media through his regular interaction on leading business channels, business newspapers and magazines.Author can be reached at sudip@inditrade.com