A looming economic crisis
If the health-economy trade off was difficult last year, it is even more challenging this year
Exactly a year ago, when India was in the middle of a complete lockdown to curb the spread of Covid-19 infections, most forecasters, institutional and private, had a bleak assessment of the Indian economy. A large number of them did not see the economy returning to 2019-20 levels of the Gross Domestic Product (GDP) even in 2021-22. These projections were revised favourably in late 2020, largely because of the fact that the easing of lockdown restrictions did not trigger a nation-wide second wave in India.
That is not the case anymore. The second wave has come with a lag, but it is here — and it is more severe than the first. Daily new cases have broken past records, and many states — including economic hubs such as Maharashtra — have imposed lockdown-like restrictions.
This is bound to have adverse consequences for the economy. The latest available economic indicator, which captures this, is the Nomura India Business Resumption Index (NIBRI), which fell to 90.4 in the week ending April 11, registering its biggest week-on-week fall. It will not be surprising if this downward trend continues. What is even more worrying is the fact that the sequential economic recovery was losing momentum even before the second wave hit India. This is best seen back-to-back, and growing, contraction in the Index of Industrial Production (IIP) in January and February. Indicators such as Purchasing Managers’ Index have been warning that employment levels have been going down even when production was increasing.
The point is, if the choice between flattening the Covid-19 curve and economic hardship was difficult last year, it will be even more difficult this year, as businesses and workers are still nursing the wounds of the first lockdown. That the second wave has coincided with the beginning of the new fiscal year also means that even the conservative revenue targets in the budget could be jeopardised. At a time when inflation is already on an upward trajectory, the petroleum tax route might not be an appropriate one to sustain government finances. The only difference between the first wave and the second wave is that India has vaccines now. The only effective way to safeguard the economy from another massive disruption is to relax both demand and supply for vaccines. The government has taken some steps towards both. It should do more.