Localised lockdowns
Big knock-on effect on national supply chains
India crossed the one-million mark of Covid-19 cases last week and the infection continues to spread rapidly. While things are somewhat improving in large cities like Delhi and Mumbai, the virus is spreading in many other areas. At national level, the Union government, in consultation with state governments, decided to open up the economy. However, lockdowns are now being re-imposed by state governments and local authorities at will. For example, the Bihar government has imposed a statewide lockdown till the end this month. Large cities like Pune and Bengaluru have also announced similar steps. In Uttar Pradesh, all markets need to close during weekends, and West Bengal has just extended a ban on all flights from six cities including Delhi till the month-end after allowing them to resume from July 15.
Such an abrupt re-imposition of lockdowns have a knock-on effect on business supply chains nationally as the dislocation of a single link can cause havoc in other places. Moreover, such intermittent closures and reopening in states lead to uncertainties as businesses often do not know when they will remain open, for how many hours, and on which days. Admittedly, such lockdown might help slow the spread to some extent. But it is certainly not the best response, especially at this stage. It is now clear that no city or state can remain in a situation of permanent lockdown. As and when restrictions are lifted, the risk will re-emerge. Thus, what is needed is a massive expansion in testing and medical facilities. Delhi has done well in this matter. Increased testing and a significant expansion in medical capacity have reduced the number of new cases to fewer than half in recent weeks. This has resulted in a decline in active cases with the recovery rate well over 80 per cent. The experience of Delhi also shows shutting down cites is not the solution.
At a broader level, it is disappointing that India has still not been able to get its act together to deal with the pandemic. It is still not testing enough. For instance, India has conducted fewer than 10,000 tests per million. Lockdowns not only affect consumption but also hits production because of restrictions on movement and disruption. The overall economic recovery has anyway started to moderate. For instance, the business resumption index maintained by Nomura, a weekly tracker of economic activity, moderated in July. Rating agency ICRA expects the Indian economy to contract by 9.5 per cent in the current fiscal year. Although this is much sharper than most forecasts, it remains to be seen if others also revise their projection downwards.
If the virus is not contained and more states decide to impose local lockdowns, the outlook will deteriorate for the Indian economy. Increasingly, the government would find it difficult to deal with the situation because of a lack of resources. Aggregate borrowing by state governments, for instance, is estimated to have doubled in the first quarter of the fiscal year and they would not be in a position to sustain expenditure in the absence of economic recovery. At this stage, the Union government should work with the states and increase testing and medical facilities. This is the only way out until a vaccine or proper medication is available for mass use.