OPEN APP
Home / Economy / Indian economy is going to be on a ‘slow burn’ in 2021

In the monthly economic report for April, the Reserve Bank of India points out that the economic impact of the second wave of the pandemic was disproportionately felt by individuals eking out a daily livelihood and small businesses, both organized as well as unorganized.

This isn’t surprising, given that state governments across the country have resorted to lockdowns and curfews to control the spread of the pandemic, impacting economic activity in a big way.

With a lockdown in place, street vendors can’t sell their wares, taxi and auto drivers can’t make as much money as they used to, and small shops selling non-essential items can’t do business. Over and above this, it has become clear that the large corporates have driven up their profits to record levels during the pandemic by trimming costs. The cost savings were done by renegotiating contracts with their suppliers and contractors, which happen to be smaller businesses.

Of course, the negative impact of the lockdowns this year has not been as bad as the one last year. As the RBI report puts it: “Organized and automated manufacturing… services that can be delivered remotely and do not require producers and consumers to move… these activities continue to function under pandemic protocols."

And this has happened primarily because of “localized lockdowns rather than nation-wide lockdowns have been preferred in order to balance the spread of infections versus the loss of economic activity".

Hence, unlike last year, the economic activity hasn’t collapsed this time around. And that is visible in different kinds of data that present the state of the Indian economy.

However, one factor that the RBI report in particular and economists in the business of predicting GDP (gross domestic product) growth don’t seem to be taking into account. GDP is the measure of the economic size of a country.

By February, the central government and most state governments thought that the covid pandemic in India was more or less over. Given this, they missed the rise of the second wave. When they did realize that a second wave was on, lockdowns were hurriedly put in place.

Hence, it will be tough for them to do away with the lockdowns that are in place quickly. First, there will be the fear that the number of covid cases will rise once the lockdowns are lifted. And second, there is the fear of the third wave. Further, with many governments suppressing data about infections and deaths, public health authorities won’t get an accurate picture of the pandemic.

The health systems in states are already extremely stretched. Hence, state governments are likely to continue with lockdowns or open up at a much slower pace.

In this scenario, daily wagers and small businesses are likely to continue feeling financial pain. Unlike last year, when the economy contracted sharply and unemployment soared, this year will be a slow burn, where things will get worse, but gradually.

Data from the Centre for Monitoring Indian Economy tells us that as of 18 May, the 30-day moving average of unemployment was at 9.46%. It was at 6.81% as of 1 April. The unemployment rate had risen to 24.08% from 9.84% in the same period last year.

What will add to the slow burn of the economy is that this time around, many families have ended up in debt to pay for covid treatment, and many more families have exhausted their financial savings to pay for the treatment. Plus, there is the fear of the third wave, which could also involve substantial expenditure.

Over and above this, incomes have been stagnant over the past year. As Mahesh Vyas, managing director of the Centre for Monitoring Indian Economy, said in a recent column: “It is safe to assume that well over 97% of Indian households have suffered a fall in real income."

In this mix, significantly higher fuel prices are creating more problems. In April, petrol and diesel prices surged 42.4% and 33.8%, respectively, from a year earlier. As Soumya Kanti Ghosh, chief economist of the State Bank of India points out in his latest research note: “The increase in fuel prices… is having a direct impact on squeeze in consumer spending on discretionary items, other than on health, which is currently unavoidable."

The point is that consumer demand is going to stagnate in the months to come.

The only way to come out of this would have been to vaccinate India’s masses at a very rapid pace, so that herd immunity developed and the economy could have been opened up, leading to economic activity and creation (or at least restoration) of jobs. But as is evident by now, the vaccination programme is in a mess, with the supply of vaccines unlikely to pick up at least for the next couple of months.

Up until now, 40.9 million people, or 4.34% of the country’s adult population, have got both vaccine doses. Hence, a large part of India’s population continues to remain vulnerable to covid. By the time there is adequate vaccine supply and herd immunity, much of this year would have passed.

This means that we will see economists cutting their GDP forecasts for 2021-22 more often than they used to. One round is currently on. The second round will come a few months later. As always, they will move in a herd.

In this scenario, other than working actively towards ensuring vaccine supply, the government needs to do a few more things. Like it had done last year, it needs to put some money into Jan Dhan accounts.

Of course, this isn’t going to be a large amount. But then something is better than nothing. Even if the account holders don’t spend this money, some money in the bank will give them peace of mind.

Further, as it had done last year, the government needs to increase the allocation to the rural jobs guarantee programme. This should be done in states with slightly better health systems and where the spread of the virus in rural areas has been slow.

With the state capacity being what it is, this is the bare minimum that should be done as the health system can’t be set right overnight.

Vivek Kaul is the author of Bad Money.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Close
Recommended For You
×
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout