A lesson for the State and markets

The National Statistical Office released the Index of Industrial Production (IIP) numbers for March 2021 on May 12. While the 22.4% headline growth number has a strong base effect — IIP contracted by 18.7% in March 2020 — it suggests a strong revival in economic activity in March. The fact that other high frequency indicators such as Goods and Services Tax (GST) collections for April crossed ₹1.4 lakh crore also supports such a view.

To be sure, tailwinds from the festive season might have had a role in this pick-up. But it will not be farfetched to assume that both the State and the markets were beginning to believe that the economy had left the pandemic behind it. Nomura India Business Resumption Index (NIBRI) touched 99.3 in the last week of February. The weekly average of daily new cases reached its lowest levels since June 2020 in the first half of February. Everybody pressed on the throttle in March. And indeed, if all had been well, India’s economic recovery may have sustained.

But as India battles the second wave, it is clear that the optimism wasn’t warranted — and indeed, the spike in economic activity may well have exacerbated the health crisis. Had preventive and vigilance measures been put in place earlier, even if it had slowed down the transient economic recovery in March, the second wave may well have been muted. There is a lesson from this self-inflicted irrational exuberance — now that the government itself recognises the possibility of future waves. Markets are driven by self-interest and cannot be expected to mitigate risks from lowered vigilance against the pandemic. It is the State’s responsibility to cover for this rather than becoming a cheerleader.