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Home >Opinion >Columns >Let us not succumb to a second wave of jitters over the economy

Before covid struck, many analysts had questions not only about the reliability of India’s gross domestic product (GDP) growth numbers, but also the intention behind them. When the same statistical agency that had put them out announced a 25% contraction in the first quarter of 2020-21, the agency passed their test of reliability because it fed their narrative of India performing poorly. Similarly, when the country’s infection rate declined dramatically last year, there were dark mutterings of data suppression. Now that India’s daily infection numbers have crossed 100,000 again, these numbers are not unreliable anymore.

These commentators ought to be reminded of what Ronald Reagan told Jimmy Carter. Nobody wants to be told over and over again what’s wrong with their country and its people, especially when much of it is untrue. Nobody wants to hear about what ails us. They want to be inspired and led to the sunlit uplands. They want their leaders to believe in the country as much as they do (‘Why Keir Starmer is Doomed’, Unherd.com, April 2021).

At a more mundane level, as Ishwar Gilada, an infectious diseases specialist, recently told Govindraj Ethiraj of Indiaspend.com, “A country of the size of India, 140 crore people, is bound to be in the top two or three countries in terms of health and many other problems. So rather than ranking based on numbers, we should rank based on cases per million and deaths per million. Among 210 countries, India ranks 120 in deaths per million and 125 in cases per million. The moment you start putting it like that, then the economic impact and projection that India is [in a very bad state] will stop automatically." (‘We Are Better Equipped to Deal With Covid’s Second Wave’, 9 April 2021). He may be right about everything in these remarks except the last sentence. Critics did not see their predictions of the Indian economy sinking into a bottomless pit and bad debts spiralling out of control come true. So, they are licking their chops again.

In the same conversation, economist Dharmakriti Joshi pointed out that the economic impact might be less severe than the first time around, and he cited the example of manufacturing activity in the US and Europe holding up despite their strong second wave. He is right. We have one year of learning behind us. That is why deaths are not the same as they were last year and India does not have a hospital-bed shortage everywhere. Localized lockdowns will hurt, but might shave no more than a few basis points off the economy’s growth rate. The government’s assumptions on economic growth and tax buoyancy when it presented its budget for 2021-22 were far more conservative than those of the private sector. This means it has scope for some stimulus without jeopardizing those numbers. Note that vaccination is proceeding apace. Therefore, there is a good case to be made that this wave’s economic impact would be confined to the first quarter of fiscal 2021-22.

There are two caveats. The downside risk is non-trivial and commercial disruptions will likely have an asymmetric impact on different segments of India’s population. The personal incomes and wealth of the country’s ‘zoomer’ class are not affected by lockdowns and other movement restrictions. However, contact services and even manufacturing and construction will be affected. Outside the farm sector, construction employs the most number of people. The vaccine, as John Cochrane of the Hoover Institution has pointed out in a podcast, is a ‘Leave Home and Go to Work’ pass. Therefore, those who have to go out to work should get vaccinated first. In India, it would mean prioritizing vaccine shots for construction workers, most of whom are migrants, apart from workers in the manufacturing sector and those in contact services such as tourism, hotels, restaurants and home delivery. Capacity utilization in the manufacturing sector, as per Reserve Bank of India surveys, had dropped 7.5 percentage points between March and December 2020. Every effort to nudge it back higher would be worth it.

For the long-term, the government is dedicating resources for the creation of public infrastructure. It has granted a very low tax rate for new manufacturing units set up before 2023. But, since we will have lost 12-18 months to the pandemic, there is a case to be made for extending it till end-March 2025. Apart from that, the micro, small and medium enterprises (MSME) classification recast done last year has been unhelpful. To encourage growth, firms must be allowed to remain in the same category until both sales turnover and investment criteria are exceeded. Further, if both manufacturing and service enterprises are now thinking more in terms of replacing workers with contact-less automation, that is not good news. Hence, we should brainstorm on whether anything more can be done to incentivize hiring and discourage automation. Finally, to the extent that educational institutions are shut or unable to provide education, long-term damage would be unavoidable.

I doubt if there is any one silver bullet. But a combination of many bullets should limit the damage and, with some luck, put us back on a high-growth path.

These are the author’s personal views.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister.

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