RECOVERY AT RISK
CALIBRATED LOCKDOWNS, DETERMINED BY THE STATES, MAY HAVE RESTRICTED THE ECONOMIC DAMAGE IN THIS SECOND WAVE, BUT CONSUMER DEMAND FOR ALL BUT ESSENTIALS IS LIKELY TO TAKE A HARD HIT
With most of India under lockdown, the economic costs are quickly rising
With about 366,000 new cases and 3,745 deaths in the previous 24 hours on May 10, the second wave of the Covid-19 pandemic has taken a vicious toll on India’s health. Predictably, the economic toll has also been heavy, though nothing like the carnage seen in the first quarter of the last fiscal year, when GDP growth crashed -23.9 per cent in response to the Centre’s no-notice lockdown.
A major concern of the second wave is that the virus has spread into India’s hinterland and could wreak havoc in villages, towns and small cities. Lockdowns might help break the chain of transmission, but they will only postpone another surge unless the period is used to urgently vaccinate the population. The economic cost will depend on how quickly this happens—and the news on that front is not too promising (see Shots in the Dark, page 32)—and how quickly economic activity can return to an uninhibited normal.
It has been clear for some time now—at least since Prime Minister Narendra Modi announced on April 20 that national lockdowns should be a “last resort”—that it was being left to state governments to manage their own Covid-containment strategies. In April, Finance Minister Nirmala
Sitharaman also reached out to business leaders to assure them that there would be no repeat of 2020’s national shutdown, but that’s what it is willy-nilly, with most states forced to impose restrictions on movement and non-essential economic activity. What distinguishes this year from the last is that key businesses are being permitted to operate in several states, with state and national highways open for the uninterrupted transport of essential goods. Industry leaders also seem in favour of the current system, arguing for strict restrictions on the movement of people to contain the virus, but not a lockdown directed by the Centre. “State-level decisions are better than a one-size-fits-all approach,” argues an industrialist.
KEY INDUSTRIALISED STATES have implemented severe restrictions. These include Maharashtra, which accounts for over 14 per cent of India’s GDP. With the highest number of cases in both the first and second waves of the pandemic, the state currently has lockdown-like conditions on weekdays and a complete shutdown on weekends. These are currently in force till May 31. They are both supported by business leaders and seem to be working—new cases were down to 37,236 on May 11 from 67,468 cases on April 22. “The restrictions in Mahatrashtra have been appropriate for the conditions we have had,” Naushad Forbes, chairman of Forbes Marshall, tells india today. “They were practical and correctly targeted.”
In Maharashtra, most industries remain operational, adhering to strict Covid protocols and with lower employee headcounts. The problem is the fall in demand—one of the reasons for smaller workforces—as a result of markets, malls, cinemas and theatres and shops selling non-essential goods being closed. Even those selling essential
goods face restrictions, permitted to operate only between 7 am and 11 am on weekdays. Kumar Rajagopalan, CEO of the Retailers Association of India, says large retailers have adapted, investing in digital infrastructure to facilitate online ordering and delivery. However, given that e-commerce is only permitted for essential goods and that hundreds of thousands of small entrepreneurs do not have online delivery models, the restrictions have had a lethal impact on business.
Further south, in Karnataka, Tamil Nadu and Kerala (the last two of which recently concluded assembly elections with no Covid protocols in sight), complete lockdowns are currently in force—in Kerala till May 16 and in Karnataka and Tamil Nadu till May 24. In the north, Delhi has extended its lockdown till May 17, while Rajasthan is closed till May 25. While cases surge, state governments have no choice but to maintain these restrictions—lifting them would cause much worse damage. “Health outcomes will determine India’s economic outcomes,” says Forbes, highlighting that quickly vaccinating the public is essential to even protect the economy from the pandemic.
WHEN SAVING LIVES IS PARAMOUNT, it is natural for economic matters to take a back seat. But a situation in which jobs or other livelihoods are vulnerable cannot but affect the economy. The toll is already rising swiftly. A study by research firm CMIE (the Centre for Monitoring Indian Economy) says India lost 3.4 million salaried jobs in April this year, with almost nine million salaried jobs lost over two months from February. Employment dropped from 82.2 million in February to 76.7 million in March and 73.3 million in April. Total employment is currently about 12.5 million below the average for 2019-20 (85.9 million), before Covid-19 first hit, and just above the average for 2020-21 (72.5 million), the first year of the pandemic. This means the Covid restrictions this year may already have wiped out the gains the job market saw at the end of last year. “While there initially was a recovery from the sharp job losses in categories like daily wage earners, farmers and the self-employed, the count of salaried employees has been falling,” Mahesh Vyas, MD & CEO of CMIE, told india today.
Various agencies have already begun lowering their forecasts for India’s GDP growth in the current fiscal. Global brokerage firm Barclays cut its estimate to 10 per cent from the earlier projection of 11 per cent, saying the slow pace of vaccinations and the uncertainty around the true number of cases and deaths in the second wave were triggers. India’s losses, it estimates, could be $38.4 billion if lockdowns continued till June; if restrictions are in place till August, GDP growth could fall to as low as 8.8 per cent.
Although RBI governor Shaktikanta Das said, on May 5, that people and businesses have learnt to live with localised lockdowns and that the impact on demand would not be as severe as last year, reports from the ground show a drop in demand for FMCG products (fast moving consumer goods), consumer durables, automobiles and so on. Reflecting India Inc’s worries over lockdowns, a Dun & Bradstreet survey says business optimism for the second quarter of calendar year 2021 fell 23 per cent compared to the first quarter.
Ratings firm Crisil, which had earlier forecast 11 per cent GDP growth in the current fiscal year, now talks of two probable scenarios. The first assumes the second wave of Covid cases peaks by end-May, with lockdowns having a moderate impact on business, leaving the economy growing at about 9.8 per cent. In the second scenario, the second wave peaks only by end-June, with lockdowns having a severe impact and GDP growth falling to 8.2 per cent. In either case, Crisil believes that economic activity in the first half of this fiscal year will be clouded by the pandemic, but that the second half should see growth, led by increased vaccinations and the public adapting better
to lockdowns. It adds that global growth in the second half of the year could support India’s exports. Among corporate sectors, those most impacted will be airlines, hotels, media & entertainment, organised retail and firms dealing with discretionary products such as cars and two-wheelers (see The Covid Impact on Corporate Revenues). Overall, revenues in corporate India are expected to grow by about 15 per cent in 2021-22, compared to -8 per cent in 2020-21.
Meanwhile, S&P Global Ratings has slashed India’s GDP growth forecast for this year to 9.8 per cent, saying the second wave of Covid-19 cases could derail a nascent recovery and worsen credit conditions. “India’s second wave has prompted us to reconsider our forecast of 11 per cent GDP growth this fiscal year,”said Shaun Roache, S&P Global Ratings chief economist for the Asia-Pacific region. “The timing of the peak in cases, and subsequent rate of decline, drives our considerations.” The firm’s earlier estimate had GDP growing at 11 per cent on account of the quick re-opening of the economy after the first wave and the Centre’s fiscal stimulus. However, the second wave, hitting young potential earners, will impact both urban and rural demand. “This time, the middle class is worried [about making it through the pandemic],” says an economist, not wanting to be named. “That has a very deep impact on consumption patterns. I always say that there are only 250 million real consumers in India, despite the total population. The first wave spared the 250 million, but the second wave has hit them hard.”
“INDIA’S HEALTH OUTCOMES WILL DETERMINE THE COUNTRY’S ECONOMIC OUTCOMES. LEAVE IT TO THE STATES TO DO THE RIGHT THING” — Naushad Forbes, chairman, Forbes Marshall