After the second wave, decoding the government’s economic plan

RBI governor said that the dent to aggregate demand was moderate and disruptions in manufacturing units were minimal compared to the first wave because of localised containment measures. Private forecasters have, however, made assessments of the damaged caused by the second wave, which is still unfolding

The second wave of Covid-19 pandemic has hit India’s nascent economic recovery. Till now, there is no official estimate of its impact on the economy.

Reserve Bank of India Governor Shaktikanta Das during his addresses in Mumbai on May 5. (PTI)

On Wednesday, Reserve Bank of India (RBI) governor Shaktikanta Das said that the dent to aggregate demand was moderate and disruptions in manufacturing units, so far, were minimal compared to the first wave about a year ago because of localised containment measures. Private forecasters have, however, made assessments of the damaged caused by the second wave, which is still unfolding.

S&P Global Ratings expects the second wave to knock off as much as 2.8 percentage points from gross domestic product (GDP) growth in severe scenario. It slashed its earlier growth forecast of 11% to 9.8% for FY-22 under a moderate scenario.

The International Monetary Fund (IMF), on Thursday, said that the recent upsurge in Covid-19 cases implied “downside risks”, which it would assess and that would be reflected in its World Economic Outlook forthcoming in July. Its April outlook had projected 12.5% growth in the current fiscal year. Its growth projection was 2 percentage points higher than RBI’s estimate. According to the central bank’s projection on April 7, the economy was expected to grow at 10.5% in 2021-22 with a quarterly path of 26.2% in Q1, 8.3% in Q2, 5.4% in Q3, and 6.2% in Q4.

“An immediate threat to India’s FY22 growth prospects would arise if the current but sharp upsurge in the incidence of Covid due to the second wave is not brought under control quickly,” said EY India chief policy advisor DK Srivastava.

Since the situation is rapidly evolving, policymakers believe a comprehensive economic stimulus package at this stage would be premature. The government is, however, responding to every emerging situation to ensure lives and livelihood are saved, at least four Union government officials said requesting anonymity.

“The first wave taught some lessons to the government, and that has been handy this time. The Centre had invited sharp criticisms for imposing a 68-day nationwide hard lockdown instead of leaving containment decisions on respective state governments. That is why states are taking containment decisions depending on area-wise severity of cases. Anyway, health is a state subject,” said an official. States were also involved in Covid vaccination programme because they wanted it to be decentralised, the official added.

The lockdown dilemma

The first wave of Covid-19 pandemic hit India in March last year. The Union government on March 25, 2020 shut the nation to protect its citizens from an unknown threat. But even as it helped India build up its health infrastructure to a certain extent and slow down the chain of transmission, its economic cost was high as growth contracted for two consecutive quarters. The economy saw a sharp contraction of 24.4% in the first quarter of 2020-2021.

Although some recovery took place, the economy still shrank by 7.3% in the second quarter of FY-2021 before expanding by 0.4% in the three months ended December 31, 2020. Overall, the economy was expected to contract by 8% in 2020-21, thanks to a series of fiscal and monetary policy measures involving over ₹21 lakh crore.

Just when the economy exhibited rapid economic recovery with buoyant collections of direct and indirect taxes, and amid the launch of Covid-19 vaccines, the deadly virus returned with vengeance.

This time around, the Union government, which was vehemently criticised for imposing the nationwide lockdown with devastating consequences on migrant labourers, played safe and left it to states to determine their strategy.

Wait and watch

Last month, on April 13, Union finance minister Nirmala Sitharaman had ruled out another nationwide lockdown. In a virtual meeting with World Bank Group president David Malpass, Sitharaman said that the government would control the second wave of the pandemic through test-track-treat-vaccination, Covid-19 appropriate behaviour, and local-level containment without going in for lockdowns in a big way. “We don’t want to totally arrest the economy,” she had said.

Sitharaman, on April 21, asked industry to wait and watch for next few days to correctly assess the situation while the government took several measures to protect lives of people and to reduce compliance burden of businesses.

“I would request the industry to watch the next few days a bit more carefully, and then assess for yourself what this quarter is going to be like,” she had said, while addressing the national executive committee members of Federation of Indian Chambers of Commerce and Industry (FICCI). Addressing another virtual gathering of over 150 businessmen at Confederation of Indian Industry (CII) that day, Sitharaman emphasised the need is to adopt micro containment strategy in dealing with the second surge of the pandemic as the country has important tools such as vaccines and medicines.

India Inc is cooperating with the Centre and states to minimise adverse impact of the second wave on both lives and livelihood.

CII president Uday Kotak, on May 3, urged the industry “to curtail all non-essential economic activity requiring physical presence of employees at the workplace, for the next two weeks” and asked corporates to “ensure that their employee balance sheet remains healthy”. Several auto companies such as Maruti Suzuki, Hero MotoCorp, JCB India, MG Motor, Honda Motocycle and Scooter India have either stopped production temporarily or advanced their maintenance schedules. Service sector firms such as Kotak Mahindra Bank, TCS, and Infosys adopted work from home, according to a CII statement.

The provision of relief

In order to provide immediate relief to 800 million poor, the government on April 23 decided to allocate free-of-cost food grains at five kilogram per person per month. The Union cabinet, chaired by Prime Minister Narendra Modi, has also approved the proposal of allocating additional foodgrain under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) phase III for the months of May and June. The cost of additional food grain would entail an estimated food subsidy of ₹25,332.92 crore, according to an official statement.

The government also waived off customs duty and Integrated Goods and Services Tax (IGST) on pharmaceutical raw materials essential in manufacturing of vaccines and medicines to treat Covid-19. Levies have been also removed on import of oxygen concentrators, key medicines, equipment and medical oxygen essential for patients suffering from Coronavirus disease. To reduce compliance burdens on individuals as well as businesses, the government also relaxed deadlines for various regulatory requirements for both direct and indirect taxes. It also reduced interests on late payment of GST dues for small businesses and waived off late fees for them.

Work in progress

Officials claim that all ministries and departments are vigilant and assessing the situation, and any urgent need will be addressed immediately.

“The finance ministry is in constant touch with the industry and other stakeholders assessing the situation. Based on inputs, policy measures would be announced at the right time. There is no point in pressing the accelerator when the brakes are on,” a second official said. A beginning has already been made by RBI on May 5, when it announced several relief measures for small businesses, individuals, and micro, small and medium enterprises (MSMEs), he said.

Governor Shaktikanta Das, on Wednesday, had taken a slew of measures to inject liquidity in the system, including a ₹50,000 crore “on-tap liquidity window” to ramp up Covid-related healthcare infrastructure and services in the country with tenors of up to three years at the repo rate. The window will be open till March 31, 2022.

“Under the scheme, banks can provide fresh lending support to a wide range of entities including vaccine manufactures; importers/suppliers of vaccines and priority medical devices; hospitals/dispensaries; pathology labs; manufactures and suppliers of oxygen and ventilators; importers of vaccines and Covid related drugs; logistics firms and also patients for treatment,” Das said.

RBI also announced several measures to provide relief and liquidity to stressed businesses, including allowing restructuring of loans to small businesses and retail borrowers up to ₹25 crore without being classified as non-performing assets (NPAs).

While announcing the measures, Das said that it was not all. “At the RBI, we stand in battle readiness to ensure that financial conditions remain congenial and markets continue to work efficiently. We will work in close coordination with the government to ameliorate the extreme travails that our citizens are undergoing in this hour of distress. We are committed to go unconventional and devise new responses as and when the situation demands,” he said.

A third official, who works in the finance ministry said, that the RBI governor had made it amply clear that the government and the central bank would take timely and appropriate actions for faster and equitable growth of all sectors of the economy. On Wednesday, Das said: “Today, we have taken some steps and we will continue to be proactive throughout the year – taking small and big steps – to deal with the evolving situation. We must remain resolutely focused on a post pandemic future of strong and sustainable growth with macroeconomic and financial stability.”

“A series of fiscal and monetary measures will be announced in coming days and months to boost the economy and save lives and livelihood of the people,” the official said.