Impact of second wave on Indian economy

Impact of second wave on Indian economy

Second wave has caught us unprepared

Fast spreading reported daily covid-positive cases, in excess of 3 lakhs a day, made India clock one million cases in last three days only. Health infrastructure has been stretched to its limits. Oxygen, beds, drugs, vaccines, faith and confidence all seemed to have broken down in many parts of the country. India is in a very disturbed state.

Not so long back in January-February, situation was looking quite comfortable. For a day, Delhi had recorded only one death with national death count falling to less than 100. While Covid was still raging in the US and UK, India seemed to have got over the Covid with much less damage. The self-inflicted damage to economic growth in QI of 2020-21 had also been put behind by rationale approach adopted in Q3 and Q4. Indian economy seemed to be convincingly headed for a healthy growth of about 11-12% in the year 2021-22.

Production and industry friendly policies of PLI, auction of commercial coal mining, termination of off-budget borrowings and clearance of FCI subsidy arrears exceeding Rs. 3 lakh crores, healthy budgeting for health, drinking water and vaccines and bold privatisation initiatives had brought good confidence in businesses and markets.

In this euphoria, however, India became negligent. There was aggressive opening of contact intensive services, witnessed at its worst in assembly elections and Kumbh and virtual abandoning of mask and other sanitary measures. The vaccine programme rolled out slowly. The inability to read dangerous signals emanating from the surge of cases in Maharashtra, Gujarat, Delhi etc., with the entry of an Indian mutant has contributed to the unprecedented surge which we are witnessing today. There is no end in sight at this moment though it would certainly wain in due course. 

Our response

The Government has realised the enormity of what has hit India and has mounted a forceful response. I am sure soon we would get over the shortages of oxygen and drugs. Vaccine supply would also improve. What, however, looks ominous is the spread of Covid-19 to poor and poorly equipped states like UP, Bihar and Madhya Pradesh. Huge deficiency of good medical infrastructure in these States in terms of hospitals, doctors, nursing staff, beds etc. might prove overwhelming.

Governance response on lockdown has been quite calibrated. The central government has declared unambiguously that national lockdown is no answer and has not ordered closing of any industry or businesses, despite massive upsurge in caseload. It has proactively prevented closure of railways, buses or other modes of transportation. The states to whom decision-making has been delegated this year have also not panicked and have applied restrictions with much better consideration and discretion.

Sensing probably that there is no major political advantage from roll out of vaccination programme, the central government has transferred responsibility of vaccinating those below 45 years to the States and private sector. The Government made provision of Rs. 35000 crore for meeting the 100% cost of vaccinating 60 crore Indians, which might remain underutilised in the new arrangement. States’ fiscal woes would worse in the bargain.

Economic impact

From the economic viewpoint, complete lockdown approach of last year was disastrous. It wielded a sledge-hammer which battered the economy in the first quarter when India contracted massively by 24%. It is good that approach has been junked.

The type of restrictions imposed in parts of country this year will not impact primary sector economic activities (agriculture, mining etc.) more or less. Secondary sector economic activities (manufacturing, utilities, construction etc.) will also have only a minor bruising.

The restrictions imposed are concentrated on the tertiary sector (retail, hotel, personal services, financial services, education etc.). Amongst these services, the economic activities which have got digitalised like IT services, telecom, financial services and retail and distribution which can be organised and delivered through e-commerce types of platforms will remain by and large unaffected; some might actually see healthy growth. The rest of services would certainly witness contraction and might collapse in some cases for some period.

One can only make a broad brush assessment of the economic impact of surging covid-19 and the restrictions imposed. My assessment suggests that production/value added is only marginally negatively impacted in the primary, secondary, government  and digitalised tertiary sectors, which makes up about 75% of GDP. Remaining 25% of GDP, by and large in the non-digitalised contact intensive services, will have more serious impact.

My earlier assessment for the Q1 2021-22 growth was for 25-30% growth year on year which would have brought back the economy to Q1 2019-20 level. My assessment at the current stage is that Q1 growth would get tempered to 15-20%. The labour force is likely to shrink by 2-3% as well. Unemployment will also rise for many weeks.

A carefully crafted and calibrated strategy only can make India end three year dollar GDP growth draught

India grew by 7.5% only in nominal terms in 2019-20 (4% real). However, rupee depreciated against the dollar by more than 8% that year. Consequently, dollar GDP of India in 2019-20 was lower than the dollar GDP of 2018-19. India has most likely contracted by 5-6% in nominal terms (8-10% real) in 2020-21. Though rupee appreciated against dollar by about 3-4% during this year, India’s dollar GDP for 2020-21 would remain about 2-3% lower than the dollar GDP of 2018-19. For two years, India’s dollar GDP has been stationary.

India was expected to grow by about 15% (11-12% real) in nominal terms in 2021-22. As the depreciation of rupee cannot be by stretch of imagination be anywhere close to this level, the dollar GDP of India was expected to grow by a good margin over the dollar GDP of 2018-19.

Covid-19 surge in second wave and flurry of restrictions imposed have dented the growth impulse for the year. It is difficult to estimate the intensity and length of surge and virus case load. How the Government handles its response to this unfolding tragedy, the kind of restrictions which the governments might put in place  and how the people respond will determine the impact on both demand and supply. The type of lockdowns used in April last year makes India’s GDP contract by about 4% a month. The nuanced approach used so far is likely to limit the monthly damage to less than .5%.

At this point of time, 2021-22 growth going down to a little below 10% looks quite real.