India’s second corona wave and the lessons learnt from last year

A man dresses up as Spiderman disinfect Ambulance amid Covid-19 pandemic, in Mumbai. (ANI)Premium
A man dresses up as Spiderman disinfect Ambulance amid Covid-19 pandemic, in Mumbai. (ANI)
 4 min read . Updated: 20 Apr 2021, 11:00 PM ISTNiranjan Rajadhyaksha

We must step up vaccinations and let fiscal rather than RBI policy lead our crisis response this time

The rapid spread of inflections during the second wave of the pandemic has overwhelmed the health system in many parts of India. State governments have been forced to impose restrictions so that the health crisis does not get worse. The wailing of ambulance sirens that pierce the silence of our cities is unmissable.

The growing number of lockdowns will hurt economic activity. Most high- frequency indicators point to a gradual decline in the movement of people and goods. However, a catastrophic repeat of what we saw last year is unlikely, unless there is a national lockdown of the same severity. The lockdown index from Oxford University shows that the current restrictions in India are nowhere as stringent as the national lockdown imposed last year. There are also some other differences.

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First, there are now vaccines in play. The Indian vaccination programme has run into temporary supply constraints, but around half the population can get two doses by the end of this year if the rate of daily vaccinations is increased from 3 million to 5 million doses. More important from an economic point of view is how many people get their two jabs by September, or before the festival season begins.

Last year’s experience shows that household savings spike during lockdowns, but then are quickly spent down once restrictions are lifted. It is important that enough people are vaccinated before India’s festival season, so that consumer demand gets back on track, though the risk of persistent precautionary savings after large income shocks shouldn’t be ignored. A measure of consumer confidence tracked by the Reserve Bank of India (RBI) had already weakened by March, when the second wave had just begun gathering pace.

Second, governments as well as the private sector now have experience of managing during lockdowns. The most important lesson is that the movement of goods should not be hindered even if the movement of people is. The government continues to make the ambiguous distinction between essential and non-essential goods. In a complex economy based on supply chains, what may seem non-essential to a government functionary may be absolutely essential to a producer. The simplest example is the delivery of laptops and their accessories for service-sector employees working from home.

Third, there may not be a synchronized global economic downturn this time around. The two largest economies in the world seem to be recovering well. Moody’s estimates that excess household savings in pandemic-hit countries is around 6% of global gross domestic product (GDP), or around $5.4 trillion. These could lift global demand once people are confident of spending, which in turn depends on widespread vaccination and strong job creation.

In India, the most recent data suggests that states such as Maharashtra and Punjab, which led the second wave, could be nearing their peak infections, while states that got hit by the second wave later have a longer battle ahead of them. The economic dislocations could be less than last year in case different states hit their peaks at different points of time. But the virus has shown that it can spring nasty surprises.

So the likelihood of moderate economic losses this time is contingent on getting the second wave under control. There are also concerns over the medium term. The Indian labour market has still not recovered from its covid shocks, especially if one looks beyond the unemployment rate to take into account the fact that many have dropped out of the labour force while others have moved back into disguised unemployment in agriculture. The other challenge is destruction of productive capacity in the Indian economy, especially in small and informal firms. Larger firms have done better, and perhaps even gained market share.

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The main policy response to the first wave a year ago was led by monetary policy. Fiscal policy was conservative, especially when we take out automatic stabilizers such as extra spending on the rural jobs scheme or lower tax revenues. The discretionary fiscal impulse was modest, at best.

RBI has kept policy rates below inflation for most of the past 12 months, and has also flooded the money market with liquidity through government bond purchases. It has also used unconventional methods to compress term premiums. However, with persistent inflationary pressures, it will have to withdraw its extraordinary monetary support at some point—though the decision should be considered only after the second wave subsides.

The smart recovery in tax collections in the second half of the previous financial year shows that a strong recovery in domestic demand can make a temporary fiscal expansion less risky than it may seem otherwise. Despite the necessary concerns about public debt sustainability, the main policy response to another economic dip should be led by fiscal rather than monetary policy.

Right now, vaccination is the policy response with the highest positive externalities. There is a strong case to prioritize vaccination above other containment policies, because these jabs will protect both the health of citizens as well as their incomes.

Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics

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