The third wave of the Covid-19 pandemic is here. The seven-day average of daily new cases in India has increased every day from December 26. If the Omicron trajectory in other countries is any indication, the caseload will increase sharply. The evidence on hand suggests that symptoms will be milder compared to the Delta-driven second wave, and fewer people will require hospitalisation and critical care. And it is likely fatalities will be significantly lower.
With a rise in cases, states have started imposing restrictions on mobility and activities. (Bloomberg)
But, this is of little comfort
GDP numbers for the quarter ended September surprised analysts by exceeding estimates by both the Reserve Bank of India and private forecasters.
This is not to say that there were no concerns about growth
While the economy reaching pre-pandemic levels is a critical threshold, it is not the ultimate goal. The latest monetary policy resolution of RBI, published on December 8, makes a clear admission of the fact. “The domestic recovery is gaining traction, but activity is just about catching up with pre-pandemic levels and will have to be assiduously nurtured by conducive policy settings till it takes root and becomes self-sustaining,” the monetary policy committee of RBI said. The biggest concern is that private final consumption expenditure (PFCE) had still not reached pre-pandemic levels in the September quarter. PFCE is the largest component of India’s GDP, and its continuing weakness suggests the recovery is still not broad-based enough and is being driven by the rich.
PFCE is the largest component of India’s GDP
Even this moderate recovery is likely to suffer with the third wave
With a rise in cases, states have started imposing restrictions on mobility and activities. As of January 4, 18 states have imposed night curfews, and Delhi has imposed a weekend curfew as well. If cases continue to rise (as they are expected to), such restrictions could become more prevalent and intensive. But these restrictions entail economic disruption. This is best seen from a comparison of daily case count and the Nomura India Business Resumption Index (NIBRI). NIBRI comprises Google mobility indices, Apple driving index, power demand, and the labour force participation rate. Mobility indices are based on a seven-day moving average. While the lowest NIBRI value was seen during the first 68-day hard lockdown imposed on March 25, 2020, a direct relation between a rise in cases and fall in NIBRI can be seen during the second wave of the pandemic, which peaked on May 9, 2021.
NIBRI comprises Google mobility indices, Apple driving index, power demand, and the labour force participation rate.
The damage to economic sentiment could be even bigger
Modern economies do not work on a hand-to-mouth principle. Expectations about the future and comparisons with the past levels of well-being play a role in key economic decisions. It is here that the third wave of the pandemic may inflict the biggest damage. As mobility restrictions and squeeze on incomes disrupt businesses again, economic sentiment may take a beating from what are already low levels compared to pre-pandemic values. The most crucial piece of evidence in this regard is RBI’s consumer confidence survey. An HT analysis published on December 27 showed that consumer confidence was weaker among low-income groups. If the third wave and associated mobility restrictions driven disruptions persist, despite the adverse health effect being milder than the second wave, even the tepid recovery in sentiment is likely to see a reversal.
An HT analysis published on December 27 showed that consumer confidence was weaker among low-income groups.
What does all this mean for the Union budget’s trajectory?
Even without the third wave, there is an ongoing debate on the forthcoming budget’s ability to maintain a balance between fiscal consolidation and the much-needed fiscal boost to growth. With the third wave bound to disrupt economic activity and sentiment, it is important that the balance now shifts in favour of a fiscal boost rather than achieving a sharp reduction in the fiscal deficit. While it is true that the government needs to keep its borrowing costs in check because a bigger deficit entails more borrowing, which means larger interest payments, it needs to be underlined that unless GDP growth picks up sustainably, India’s debt-GDP ratio is not going to improve anytime soon.
Of course, things would be a lot clearer if we had information about some key statistics such as the magnitude and timing of the peak of the third wave, the economy’s departure from projected growth in the ongoing March quarter, and the impact on consumer confidence in the next few months. But this would mean deferring the budget, which is too drastic a move. A more appropriate strategy at this juncture would be convert what is a crisis (the third wave) into an opportunity (assuage hawkish concerns about a higher fiscal deficit) to guard against further long-term damage to the economy.
