Recovery blues

The economic fallout of India’s second Covid surge cannot be underestimated. This is despite the fact that an extended national lockdown like last year’s, when Q1 GDP tanked 23.9 per cent, is virtually off the table. Localised lockdowns, night curfews, and curbs on assembly and movement will leave their mark, more so if they are implemented in the 10 Covid intensive States which happen to account for 65 per cent of GDP, as analysts have pointed out. The Monetary Policy Committee in its latest meeting has observed: “The renewed jump in Covid-19 infections... could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy.” While the Reserve Bank has not revised its growth forecast of 10.5 per cent for this fiscal, other observers have done so. In its latest assessment, SBI has shaved off 0.6 percentage points from its earlier estimate of 11 per cent. A lot would depend on how quickly Maharashtra, India’s key industrial State as well as the worst affected by the pandemic (it accounts for 13.9 per cent of India’s GDP and 10.3 per cent of the workforce, according to SBI Research), bounces back. But the Chief Economic Advisor as well as other analysts have observed that the second waves everywhere have been ‘sharp but short’. Exports could look up as the rest of the world recovers, provided India’s supply chains are not disrupted by the pandemic.

The situation presents many intriguing possibilities. Amidst a rise in unemployment in April, indicated by the CMIE, a fall or deceleration in consumption seems likely in the first quarter. Reports of a drop in petrol and diesel consumption mirror a decline in mobility. For those whose jobs are intact, as in the high end service sectors, precautionary savings could rise. Risk aversion may creep into investment. In times of tepid domestic demand, India should push exports which have been rising sequentially since November 2020.

Meanwhile, budgetary outlays may have to be revised to deal with welfare needs, even as the revenue buoyancy of recent months is likely to take a hit. In view of the exodus of migrants from cities, the Centre has, like last year, set aside an additional five kilograms of foodgrain for 80 crore ration card holders under the PM Garib Kalyan Ann Yojana. A sum of ₹26,000 crore (₹40,000 crore last year) has been earmarked for 2021-22. Last year, grain transfer as well as implementation of MGNREGS works did contain rural distress. However, States may need more fiscal space than the permissible deficit of 4 per cent of the GDP to deal with the newly imposed cost of Covid vaccination. An additional elbow room of 0.5 per cent should be allowed without conditions. With a focus on welfare spending, vaccinations and health infra, India’s consumer and business confidence can be restored in a few months.

COMMENT NOW