Address inequity and demand
Fiscal year 2020-21 ended on a slightly better note than expected. The Gross Domestic Product (GDP) growth in the quarter ending March 2021 increased to 1.6%. Tailwinds from the last quarter have moderated annual GDP contraction to 7.3%, lower than the earlier projection of 8%. All of this would have been good news and laid the foundations for recovery in 2021-22, if the second wave of Covid-19 infections had not derailed economic activity.
And that is why the economic impact of the second wave, which peaked on May 9, will be key to assessing future prospects. Take some high- frequency indicators. The Manufacturing Purchasing Managers’ Index (PMI) did not go below the critical threshold of 50 — values above 50 signify expansion in economic activity — in April and May. This is reassuring news. The Nomura India Business Resumption Index (NIBRI) seems to have bottomed out after a sharp fall. It recovered to 63.6 in the week ending May 30. NIBRI reached 99.3 in the week ending February 23, but then fell continuously in all weeks except one to reach 60.3 in the week ending May 23. This indicates loss of economic momentum (followed by, hopefully, some stabilisation). But the index of eight core sector industries suffered a month-on-month contraction of 15% in April. This is bad news. Clearly, the outlook is neither completely positive nor completely negative. But with most states still under lockdown, and the shock of the second wave increasing risk aversion, both among governments and individuals, the economic headwinds of the second wave may be more prolonged and increase the likelihood of 2021-22 GDP growth being lower than expected.
What should the policy response be? The first priority is to minimise, if not prevent, the likelihood of a third wave. Vaccinations and vigilance are the only way to do this. However, there is another aspect which requires urgent attention. India’s post-pandemic recovery has bypassed the non-rich. Inequality and poverty have increased. Contact-intensive services have been badly hit by the second wave. Important sectors such as trade and hospitality remained in contraction zone even in the March quarter. Corporate profits have surged with companies cutting down on material and labour costs. All this will suppress mass incomes and, therefore, demand. This needs to change if India wants to preserve its long-term growth potential. Markets will not take care of this task. The government must step in.