Of second waves and new beginnings

New Delhi, India - April 21, 2021: A medical professional in PPE coveralls sorts oxygen cylinders (Raj K Raj/HT PHOTO)Premium
New Delhi, India - April 21, 2021: A medical professional in PPE coveralls sorts oxygen cylinders (Raj K Raj/HT PHOTO)
 4 min read . Updated: 26 Apr 2021, 11:25 PM IST V. Anantha Nageswaran,Rahul Bajoria

Last week, less than 100 days into India’s vaccination drive, the government made important changes to the process

Last week, less than 100 days into India’s vaccination drive, the government made important changes to the process. In a single stroke, it removed restrictions on eligibility, pricing and distribution, opening it up more broadly to states and the private sector as well, freeing up the inoculation effort. While some have reservations over the timing of the move, especially since near-term supply constraints appear somewhat binding, it is still a very welcome step.

India’s earlier success in containing covid infections in 2020 was not based on rationing. One of the primary reasons why India was able to contain the earlier covid wave and reopen its economy was its liberal testing policy. This helped to reduce the fear of contracting covid, improved treatment protocols, and encouraged wider testing, thereby promoting early detection.

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Similarly, the government needs to do all it can to address vaccine hesitancy, which has been obscured amid the noise around evolving vaccine protocols. While the absolute number of doses given in India is high, the percentage of the population vaccinated is low. Only slightly over 8% of the population has received one dose of the vaccine, and just 1.3% has been fully vaccinated. Even within priority groups, so far only about 50% of all frontline and healthcare workers have been vaccinated fully, and only about half of those aged 60 and above have received at least one dose.

Even with such a large segment of the vulnerable population not yet vaccinated, the decision to liberalize eligibility was the right one. The government did well throughout 2020, managing the economy by responding flexibly to evolving circumstances. To manage the economic fallout, given the unknowns surrounding the virus (its spread and effects), it made sense to wait and respond appropriately with fiscal measures. Recently, the government reintroduced free food rations that will be made available to over 800 million people, for two months, to mitigate their pain.

However, with vaccinations, the opposite response is needed. High levels of vaccination are the way to open up the economy sustainably. The government has provided resources in its annual budget for vaccinations, setting aside about ₹35,000 crore for the drive. According to some estimates, the total burden on states to vaccinate those aged between 18 and 44 will be ₹46,300 crore, or 0.2% of gross domestic product (GDP). Together this amounts to ₹81,300 crore, just 0.36% of India’s projected nominal GDP. In contrast, the estimate of one of the authors of the cost of local lockdowns in the current wave is at least ₹80,000 crore and rising, which makes recurring lockdowns and mobility restrictions far costlier than the vaccination drive itself.

A major constraint in this regard is the supply of vaccines. Raw material shortages, low pricing, and export commitments are limiting India’s ability to increase domestic coverage. Infrastructure has been prepared to do over 7 million jabs a day, but in recent days, several states have had to halt vaccine distribution or have rationed supplies, especially for the first dose. Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council, recently noted that India will only be able to scale up vaccinations to around 5 million per day by September.

The new vaccine procurement rules also introduce an element on one-upmanship between states and the Centre on providing free doses. Ultimately, the Union and state governments lose revenues when high-contact services are restricted. This is especially true with cities being the worst affected by covid. As such, the most logical strategy here would be to channel all resources towards securing as many doses as fast as possible, without worrying too much about burden sharing, since the deadweight loss from containment, testing and treatment of covid-19 is several times the cost of vaccines.

The government’s assumptions on economic growth, tax and non-tax revenues, and expenditures for 2021-22 are likely to withstand the second wave of infections, in our view. The current three-tier pricing of vaccines—one for the Centre, another for states and yet another for the private sector—has the potential to cause confusion, arbitrage, diversion and leakage. The country could have just two prices: one for the government and another for the private sector. This would allow the Centre to procure and distribute vaccines to states, actively supporting their efforts. It will be a good gesture of federalism in these times. Nationwide vaccination, facilitated and financed by the Union government, would be the equivalent of its stimulatory fiscal response to the first wave. States would continue to be responsible for making sure vaccines are not diverted to the black market.

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More importantly, with the US apparently leaning towards higher taxes and with a realignment of supply chains away from Asia, India has an opportunity to attract global capital with its political stability, reasonable tax rates and structural reforms. For that to materialize, India must get its second covid wave under control, and this will require the combined and cooperative efforts of the Union and state governments.

V. Anantha Nageswaran & Rahul Bajoria are, respectively, a member of the Economic Advisory Council to the Prime Minister and chief India economist at Barclays.

These are the authors’ personal views

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