How can the Indian economy recover and stabilise from the challenges of the second wave of COVID-19?

There is rising inflation and lower economic growth. Representative Image

By Dr Hiranmoy Roy and Dr T Bangar Raju

The International Monetary Fund’s growth forecast for India in 2021 is 12.5 percent compared to a negative 8.8 percent in 2020 and will settle at 6.9 percent in 2022. India’s growth prospects in the midst of a Covid-19 pandemic compared to China seems better. Since there are more mutations on a daily basis now and a huge surge in the number of positive cases, we need to have a strong assessment of the trade-off between lockdown, economic activity, and livelihood. Economic activities need to be quickly adapted to the pandemic.

Strong containment measures like testing, vaccination, etc, need to be fast-tracked and quicker progress in vaccination may raise the growth forecast. Vaccine production needs to be ramped up considerably to provide mass access and stop export controls.

The most worrying factor at present is rising poverty globally as well as in India for the first time in the last 20 years due to disruption by the pandemic. The number of people below the poverty line (BPL) increased to 50 million in India and 95 million globally. A two-decade-long trend of poverty reduction has reversed. As per the World Bank’s estimates, global poverty is expected to rise to 150 million by the end of 2021 depending on overall economic contraction. Extreme poverty, which is defined as living on less than $1.90 a day, is likely to affect between 9.1 percent and 9.4 percent of the world population.

There is an urgent need for targeted and localised lockdowns only. Revenue expenditure needs to be increased in India to target income support measures, which is extremely important now to maintain livelihood and contain poverty. Growth is expected in certain sectors whereas poverty is a reality. As per the IMF’s forecast, there will be a 9 percent hit to per capita income from 2020 to 2022.

In India, a little bit of complacency due to fewer Covid positive cases during January to March and not highlighting to the public the spread of the United Kingdom, Brazil, and South Africa mutant virus variants has resulted in the present situation. There is evidence in history that a hundred years ago during the 1918 Spanish Flu pandemic a similar more dangerous second wave was witnessed due to similar complacency at that point of time. It is time to implement the learnings from history. Therefore, the needs of the hour are – all steps to be taken to control infection, strict containment in localities having a large number of positive cases, following Covid appropriate behaviors, no crowding, increasing the vaccination drive, and strengthening the hospital infrastructure such as providing more number of hospital beds and ensuring the supply of oxygen. These are the panacea needed urgently to bring the economy back on track for higher growth.

According to the second advance estimates, 2020-21 is expected to suffer a GDP contraction of 7.96 percent. The weekly moving average of daily new cases has increased 14 times since February 11, when it started rising again after declining for five months. The effects of any significant economic disruption, if it were to happen, will not be limited to the first quarter itself. 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 the demand is bound to be squeezed. Similarly, any cutback in economic activity, especially in sectors that are being forced to do so because of social distancing requirements, will adversely affect incomes and hence demand.

Many migrant workers, who returned to cities for work after months of staying home from a curfew-style lockdown, are now crowding trains and buses to return to their native towns and villages yet again. The paranoia, fear of another nation-wide lockdown being imposed, and the horrifying experiences in memory for those who suffered last summer, is making more workers anxious, uncertain about their own well-being, which may subsequently impact labour-intensive businesses and construction work (where most migrant workers tend to find employment) for months ahead.

However, there is hope for economic recovery and stabilization. Because, unlike the first wave, we have vaccines this time. It is reasonable to expect that the pace of new infections will slow down as vaccinations pick up. Whether or not India’s favourable GDP revisions undergo a downgrade will depend on how fast vaccinations pick up, which will determine the time it will take to flatten the second wave. Fiscal support through an institutional mechanism – for instance through the creation of special-purpose vehicles, is required to support stages of vaccine production; its distribution through a decentralised supply-chain process for all demographic groups, and a fund to provide money to those in the private sector who can produce vaccines on a large scale.

The surging debt burden is leading to increased debt servicing. In addition, there is rising inflation and lower economic growth. Comparative growth figures of China and India are higher than other regions like Euro zones. The current global and Indian trends point toward an urgent need for policy support with a mid-term framework to ensure more support mechanisms. This may lead to a higher deficit. Once the pandemic is over the deficit can be reduced and interest rate easing can be done. Actions are needed in this direction.

During the pandemic as massive digitalization happened, cautious digitalization is suggested otherwise it may end up reducing jobs. Moreover, many jobs are unlikely to return. There are requirements for additional resources to be spent on learning losses to children for future growth prospects. So increasing spending by 0.5 percent of GDP on education is a viable option.

In a situation like this, India’s economic policy response to both, the crisis at hand and the crisis to come, may benefit from an urgent “3-6-9 month” action plan. A plan, whose execution and implementation would need to be scaled on a war footing and for which urgent fiscal support shall need to be prioritised, if the government is serious about addressing the catastrophic impact of a surging pandemic.

Covid-19 may be a breather for the environment as the impact of climate change on economic growth is 4 percent lower. To maintain this trend, there is a requirement of $600 billion investment on green growth globally. In addition, implementation of carbon pricing in all sectors is needed, followed by optimization of energy consumption.

(The authors are professors at School of Business, UPES, Dehradun. The views expressed are their own and not necessarily that of Financial Express Online.)