Saving the economy from the second wave
India imposed one of the strictest lockdowns in the world when the Covid-19 pandemic struck last year. This took a heavy toll on the economy. Gross Domestic Product (GDP) contracted by a massive 24.4% — the largest among major economies in the world — in the quarter ending June 2020. The 2020-21 GDP is expected to contract by 8%. The economy started to improve once restrictions were eased. GDP growth returned to positive territory in the quarter ending December 2020. The sequential recovery prompted claims of a V-shaped recovery in the economy. Most forecasts, institutional and private, expect the economy to grow in double digits in 2020-21 and surpass the 2019-20 GDP.
All these forecasts were based on the crucial premise that India would not experience a second wave of Covid-19 infections. That assumption does not hold anymore. Not only do we have a second wave, it is more severe than the first.
The economic impact is already showing. Nomura India Business Resumption Index (NIBRI) dropped to 90.4 in the week ending April 11, where 100 is the pre-pandemic value of economic activity. It reached 99.3 in February. Private forecasters are already making downward revisions to growth. A research note by Samiran Chakraborty from Citibank has already reduced 2021-22 GDP estimates by 50 basis points — one basis point is one hundredth of a percentage point — to 12%. Pranjul Bhandari from HSBC has kept her GDP projection unchanged at 11.2%, but warns of downside risks if “lockdowns intensify or spill over well into May”.
The surge in new infections has resulted in states and cities imposing localised partial lockdowns, which will hurt the economic recovery that was underway. Things will only get worse if and when panic-driven migrant workers seek to return to the poor migrant-exporting states, where health and monitoring facilities are grossly under-equipped to deal with the pandemic. Reports and anecdotal accounts suggest that medical infrastructure, even in the large cities, is already strained.
What should be the economic policy approach at the moment? First, it is important to underline what it cannot be. Neither a business-as-usual policy stance nor a repeat of the strategy adopted in the first lockdown is an option. Here is why.
Business as usual will result in infections spreading at a faster pace across the country. Not only will this overwhelm the medical infrastructure, it can also compromise the supply chain of essential commodities including food. Agricultural production or supply of other essentials did not suffer during the first lockdown last year. This cannot be taken for granted at the moment. At a time when inflation is already on an upward trajectory, any scarcity, or even a perception of it, in essential supplies can throw things out of kilter rapidly.
This means that governments, the Centre and states together, must take immediate steps to impose restrictions, including on mobility, to control the spread of the virus, even as it allows essential activities (including those critical to the economy) and movement of goods, intra- and inter-state.
Any such move must learn from the experience of the last year’s lockdown. Here are two things which should be taken into consideration while deciding what is to be done.
When the pandemic first erupted, nobody had any idea how long it would last and the time it would take to develop a vaccine. This created a dilemma when it came to economic support. Fiscal measures such as direct cash transfers could not have continued indefinitely. Perhaps, this was the biggest reason why the government’s response tilted more towards the liquidity/credit guarantee route rather than a fiscal push.
There is reasonable clarity on these two pandemic-related questions now. First the good news — vaccines are here, and India has the wherewithal to produce them in bulk at affordable rates. The bad news is that it will take a long time to vaccinate the adult population of the country and the pandemic has the ability to keep coming back in intermittent waves, where the next wave can be bigger than the previous one.
This clarity needs to be incorporated into policymaking. The economic response to the second lockdown (or whatever the necessary restrictions are called) needs to give a heavy boost to supply-side infrastructure on the health front — from testing and contact tracing to vaccine production and delivery. The quicker this can be done, the lower will be the quantity of the demand-side support (which too will be absolutely critical during the lockdown) required.
Which brings us to the second issue. Who needs support, how much, and for how long?
The pandemic has exposed fault lines in India’s fiscal federalism structure like never before. State governments did most of the heavy lifting during the pandemic. It is déjà vu for them as cases are surging. Unlike the Centre, which has been able to compensate for its revenue loss through routes such as increased taxes on petrol-diesel, states have taken a beating in terms of revenue.
For the next few months, at least until the second wave recedes, states need to be incentivised to adopt a proactive approach in dealing with the pandemic. This can include additional grants tied to better testing and contact tracing or some sort of support for sectors which are likely to be the worst-hit by the pandemic. For instance, Bihar being offered funds in return for exhaustive testing of migrants returning in trains, or Goa being assured of critical minimum support for its hospitality industry, could help.
The government could also consider targeted hand-outs to sectors worst affected by the lockdown and wage support to companies to ensure last year’s large-scale layoffs are not repeated. This need not be indefinite. The government hopes to vaccinate 300 million people (two doses) by the end of August. Even if it were to take till September, this is a substantial number which, along with non-pharmaceutical interventions, will crush the curve of infections. But for these five or six months, both companies and individuals will need help — and preferably direct fiscal help.
Chanakya understands that the choice between lockdown and allowing infections to spread is not an easy one. Both hurt the economy and cause human distress. But ignoring the pandemic will not help in any way, and will only make the foundations of future recovery weak. What is needed right now is a meticulously planned surgical strike of containment and vaccinations with a clear time horizon. What is also needed is a targeted stimulus.
This approach, if it has to succeed, will require a considerable amount of political capital to be invested. The health and economic crises are inextricably linked — and it is only by battling the former can there be progress on the latter.