THE LONG SHADOW OF COVID
The Centre has ruled out a national lockdown to contain the second wave of Covid-19 cases, but businesses are already seeing red in many states that have imposed severe restrictions
Covid-19 has been compared to the Spanish Flu, which killed an estimated 50 million people between 1918 and 1920. A grim feature of the Flu was the devastating multiple waves of infections, similar to what is being seen with the coronavirus. In February this year, even as a massive second wave of Covid-19 cases arrived in Europe, India was in self-congratulatory mode, believing the virus had been controlled and that an economic recovery was underway following the recession in the first half of 2020-21. By mid-March, that sunny optimism was proved false, as cases in India began soaring once more. On April 20, India recorded 259,000 new cases, with 1,761 fatalities in just 24 hours.
With several state governments now reimposing restrictions on public movement (though Prime Minister Narendra Modi, on
THE CENTRE does not appear keen on another national lockdown, fearful of the economic repercussions
April 20, ruled out another national lockdown), many ask what the consequences will be for India’s fragile economic recovery. There is no question that health is paramount. Hospital workers are fighting to save lives, still hobbled by weak infrastructure. At the same time, the now-understood cost of lockdowns makes implementing them a stark choice.
Last year, India imposed one of the strictest lockdowns anywhere in the world, to prevent medical infrastructure from being overwhelmed, to buy time for the state and private sector to beef up medical capacity. It also led to India plunging into its first recession in 40 years, with GDP growth in the first and second quarters of fiscal 2021 crashing to -23.9 and -7.5 per cent, respectively. The human cost included millions of lost jobs. A Pew Research Center analysis from March 18 estimates that India’s middle class—those with incomes of $10-20 (Rs 750-1,500) per day—shrank by 33 million in 2020 from a projected 99 million to 66 million, while India’s poor (incomes of $2 (Rs 150) or less per day) increased by 75 million, from a projected 59 million. The Centre for Monitoring Indian Economy (CMIE) says 19 million salaried people lost their jobs between April and September last year,
while a survey by management consultancy SKOCH Group estimates that 25-30 million jobs were lost in the MSME (micro, small and medium scale enterprises) sector by end-June 2020. Data from ActionAid India, an NGO working with marginalised groups, says 80 per cent of workers in the informal sector lost their jobs to the lockdown last year.
Chastened by the economic consequences of an unplanned national lockdown, policymakers are reluctant to even consider another one except as a means of last resort. On April 20, Prime Minister Narendra Modi ruled out a national lockdown, saying it should be a ‘last option’, and urged state governments to adopt micro-containment strategies in their worst-affected districts. The Centre has also reached out to industrial groups to assure them that a national lockdown is not under consideration—meeting with owners of MSMEs on April 18, Union finance minister Nirmala Sitharaman said that the government was thinking containment zones as opposed to lockdowns.
Industry by and large is also against lockdowns.
A recent survey by CII (the Confederation of Indian Industry) of 710 CEOs had 93 per cent of them against even partial lockdowns, with three-quarters saying industrial output would be impacted, arguing instead for stricter implementation of safety norms. Industry body FICCI has written to the chief ministers of 25 states urging them to avoid lockdowns of any kind, asking them to break the Covid chain with more testing, enforcement and public awareness campaigns. Carmen Reinhart, chief economist of the World Bank Group, said in a recent interview that severe lockdowns are not
“Since 50-60 PER CENT of our workers can now stay in our FACTORIES, production hasn’t stopped” —RAKESH CHHABRA , President, Rai Industrial Area, Sonepat and board member, FISME
an answer for developing nations like India, suggesting “less extreme [policies] that allow for some flexibility”.
Maharashtra, which contributes nearly 15 per cent to India’s GDP and has the highest number of new Covid cases in the country, has implemented the strictest measures so far. At first, non-essential services were ordered to close till end-April, with weekend lockdowns and night curfews in place. From April 14, Maharashtra went into total curfew, with only essential services and export units exempted, until May 1. After a weekend curfew on April 17-18, Delhi began a week-long curfew on the evening of April 19, while neighbouring Uttar Pradesh announced a 35-hour curfew beginning April 17. Local administrations in many urban centres like Bhopal, Indore and Bengaluru have also imposed curfews.
This time, curfews allow targeted exemptions. Construction, one of the largest employers in the informal sector, continues in Maharashtra (if workers live on-site and are vaccinated on priority). Truck movement in and out of Maharashtra has dropped by half following the state curfew, hitting the movement of essentials such as fruits, vegetables and raw materials. Transport companies also report driver shortages, with people leaving the state for fear of Covid.
Economists say it’s too early to put numbers on fiscal year 2021-22 but point out that the next weeks are crucial. Brokerages have downgraded their projections for India’s GDP growth in the current fiscal year, estimating a roughly 1 per cent hit. “Growth could fall to less than 10 per cent [if restrictions continue],” says Madan Sabnavis, chief economist at Care Ratings. (GDP growth is estimated as the change over last year’s figure. The nominally high rate—10 per cent—is a result of last year’s low base, not strong growth.) Stock markets already seem panicked—on April 12, the benchmark Sensex crashed 1,707.94 points, its biggest fall since February 26. IIP (Index of Industrial Production) numbers for February also highlight the fragility of India’s economic rally, falling to a six-month low of -3.6 per cent in February.
“If the closure of all non-essential services in Maharashtra continues only till May 1, it won’t be too damaging,” Naushad Forbes, chairman of Forbes Marshall, said in a recent interview. “Consumers will only be delaying buying that shirt or that TV for three weeks. If it continues beyond May 1, the consequences will be much greater.” Aditi Nayar, chief economist at ICRA, says, “There may be some loss of demand in the first half of FY2022 and some shifting of demand from the first half to the second half of the year.” ICRA expects India’s GDP to grow by around 10-10.5 per cent in FY2022, down from its earlier 10-11 per cent. Expectations of economic pain come from many analysts and economists. D.K. Srivastava, policy advisor at EY India, says first-quarter growth estimates may have to be revised downward, which will lower the forecast for FY2021-22 as a whole. “India’s [national] distribution of vaccines is proving to be highly sub-optimal,” he says. “We expect the need for vaccines will continue for five years. Getting this right is critical.” Former finance secretary Subhash Chandra Garg predicts this fiscal’s first quarter growth will be lower than that in FY 2019-20, saying, “We should be prepared for 400,000 cases a day.” While extreme high frequency indicators are not immediately alarming, some have picked up the drop in retail mobility (consumer footfall at various locations; see Receding Footfall). Agriculture is once again expected to be the sole bright economic spot, with estimates of growth in 2021-22 at 3.5 per cent.
The truth is that authorities were caught off guard by the second wave of cases. The Indian economy opened up fairly swiftly from its complete shutdown of last year, with curbs being lifted on high-risk areas, like malls and gyms, and on high-risk activities, like melas and political rallies. The enforcement of
“If Covid is CONTROLLED QUICKLY, the economy will SCRAPE through. If not, we could see a repeat of the June 2020 business quarter” —NILESH SHAH, Managing Director, Kotak Mahindra Asset Management
Covid-appropriate public behaviour was lax, to put it mildly, and the vaccine policy of centralising distribution and prioritising groups considered most vulnerable slowed the rollout.. The New York Times estimates that Israel’s population is near 56 per cent completely vaccinated, with India at 1.3 per cent. Vaccinations are crucial to preventing a new medical and economic panic.
“So far, economic activity has not been badly hit,” says Nilesh Shah, MD of Kotak Mahindra Asset Management. “Everything depends on vaccines and regional lockdowns. If Covid is controlled quickly, the economy will scrape through. If there are longer lockdowns, we will see a repeat of the June 2020 quarter. We need to [clamp down on new cases] by the end of April.” Government sources say vaccine shortages will ease by May or June. With the Serum Institute of India producing 70 million doses a month and Bharat Biotech at 10 million—and Russia’s Sputnik adding 50 million—that’s 130 million doses a month, or close to 300 million doses by June. With the Centre saying that all aged 18 years and above will be eligible for vaccinations from May 1, everything depends on how fast a majority of the population can be vaccinated.
In terms of a fiscal response, the Centre currently has an improved ability to spend. India’s collections last year were better than expected, with Goods and Services Tax (GST) revenues in March 2021 at Rs 1.23 lakh crore, the highest since the GST was introduced. However, few expect a central relief package anytime soon. “Unless there is a full lockdown by the Centre, there is no question of central relief,” says Sabnavis, adding that state government capacities to pay for relief spending vary. “A state like Maharashtra has a larger budget, so spending Rs 5,500 crore is not a big problem. Other states could find it difficult.” Most states are already borrowing heavily—according to Care Ratings, in FY2021, 28 states and two Union territories cumulatively raised Rs 7.98 lakh crore, 26 per cent more than the Rs 6.35 lakh crore in FY2020. Maharashtra is believed to have the largest borrowings in the first quarter of 2021-22, at Rs 25,000 crore.
One sector to benefit from lockdowns is e-commerce, which saw major growth last year. But with states like Maharashtra imposing curbs on the transport of non-essential goods, even online sales are pressured. Some manufacturers are better prepared, with factory workers staying on the premises. Rakesh Chhabra, board member of the Federation of Indian Micro and Small & Medium Enterprises (FISME) and president of the Rai Industrial Area in Sonepat, Haryana, says, “We have ensured that 50-60 per cent of our workers can stay in our factories, so production hasn’t stopped. We are also testing and holding vaccination camps. Most workers have been vaccinated.”
In the weeks to come, everything will depend on how quickly India ramps up medical infrastructure and how effectively vaccines are rolled out. The Centre will also have to build employment safety nets with the states. India can ill-afford another economic body blow. ■