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COVID 2.0 will have a lesser economic cost, but may hurt govt more

·4-min read

The coronavirus situation in India is worsening day by day. We have crossed 3.5 lakh new cases and 2,500 deaths per day.

To put this in context, the number of cases is 3.5 times and the number of deaths twice the peak recorded during the first wave last year.

Niti Ayog fears the worst is yet to come with new cases likely to peak at 5 lakh levels per day and then slide thereafter.

The crisis has put an unprecedented pressure on our healthcare system with shortage of beds, ventilators, oxygen, medicines and injections reported from around the country.

Many cities and states are under varying degrees of restrictions ranging from lockdowns to night curfews to curbs on free movement (excluding essential services).

The Indian economy had started recovering from the first wave which gripped the country for most part of last year.

After recording negative GDP growth in Q1 (Apr-Jun) and Q2 (July-Sep) of FY 2020-21, India’s GDP turned positive in Q3 (Oct-Dec) registering a growth of 0.4%.

There is a broader consensus among economists that the impact of the second wave on the economy would be lesser due to:

(i) better preparedness in terms of availability of vaccines

(ii) lot more knowledge about how to handle the virus, and

(iii) an unlikely event of a national lockdown

However, there is disagreement as well as uncertainty on the quantum of impact.

Chief Economic Adviser K V Subramanian has recently said the impact of the second wave may not be "very large". He cautioned that predicting the second wave was a real problem for researchers across the globe.

Rating agency Moody’s has also said that given the focus on “micro-containment zones" to deal with the current wave of infections, as opposed to a nationwide lockdown, it expects that the impact on economic activity will be less severe than that seen in 2020.

The Monetary Policy Committee minutes show that even as the RBI kept its growth forecast for the fiscal year unchanged at 10.5%, RBI Governor Shaktikanta Das added, “Rapidly rising cases is the single biggest challenge to ongoing recovery in the Indian economy.”

A recent survey by RBI indicates that consumer confidence has taken a massive hit, falling to 53.1 in March 2021 from 55.5 in January 2021.

Low consumer confidence impacts spending decisions of households directly impacting the demand curve and ultimately affect business operations and economic recovery.

The second wave has disrupted hiring plans of corporates, increased business uncertainty, crippled operations and led to reverse migration in key industrial states.

The curbs placed have led to business activity plummeting since the second week of April as per a Nomura report and the economic situation could get worse due to stricter lockdowns.

The Nomura India Business Resumption Index, which tracks a set of high-frequency economic indicators including mobility, has fallen nearly 16 percentage points below the pre-pandemic level.

The index slipped to 83.8 for the week ended April 18 compared to 88.4 a week ago.

The effects of any significant economic disruption, if it were to happen, will not be limited to the first quarter itself as per Dr Hiranmoy Roy and Dr T Bangar Raju. It can have a cascading effect through both demand and supply channels.

If supply chains get hit and inflation starts rising — it has already been on an upward trajectory — purchasing power and therefore demand is bound to come under squeeze, they add.

The travel, tourism and hospitality sectors are the first ones to feel the heat of prolonged Covid-19 restrictions. Other sectors like trade, construction, real estate and retail could start facing losses if the situation does not improve within the first quarter.

The economic research wing of State Bank of India has cut India's real GDP growth forecast to 10.4% from 11% for FY 2021-22. It estimates that the total monetary impact (total loss) of the current lockdown in various states is Rs 1.5 lakh crore.

Similarly, India Ratings and Research now forecasts India’s GDP growth rate to be 10.1% as against 10.4% earlier.

While the impact is still evolving and depends upon which states impose lockdowns and for what tenor, the loss to the economy could be catastrophic.

Karnataka has joined the bandwagon, including Maharashtra and Delhi which have already imposed lockdown, these three states account for 26% of India’s GDP.

Neither the central bank nor the central government are in a position to match the relief measures announced last year during the first wave.

The Prime Minister has announced a two months free ration for 80 crore individuals. With inflation inching upwards, RBI doesn’t have the flexibility to cut interest rates.

To sum up, the economic impact of the second wave on the economy would be lesser than the first wave.

However, there is growing concern that the degree of impact could be higher than earlier envisaged as witnessed by the recent GDP downgrades.

From here on, the pace of vaccination will be a crucial factor, along with imposition of a nationwide lockdown.


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