Economic Perspectives

The economic crisis is real; the picture of economic resilience is an illusion

Print edition : June 18, 2021

A garment factory in Bengaluru shut owing to the lockdown, on May 21. While industry was languishing even before the second wave of COVID-19, the adverse economic fallout has further deepened since April and projections of a V-shaped recovery in GDP growth are now unlikely to be realised. Photo: The Hindu

While two official reports on the economic fallout of the second wave of COVID-19 in India suggest that it has been less severe than the first, the fact remains that the ongoing economic emergency has not received the attention it deserves.

As the ongoing second wave of coronavirus infections in India peaks, there is little clarity on what its economic fallout is and will be. Two assessments from official sources—one from the Reserve Bank of India (RBI), titled The State of the Economy (SoE) and the other from the Ministry of Finance, titled Month Economic Report (MER) for May—seem to suggest that economic trends are not as bad as a year before, despite the severity of the second wave of the pandemic in India. That is the view within.

The assessments concur on two points. First, that the health crisis in the second wave, as measured by positivity rates, caseloads, regional and rural spread, and fatality, was far more severe than in the first wave that India experienced between March and September last year. The shortage of hospital beds, oxygen and critical medicines, and images of gasping, bed-deprived patients, crowded crematoria and rows of funeral pyres were visible corroboration of this reality. This, however, is treated purely as an exogenous shock, and the various arms of the government are reportedly rising to the challenge. Not all in the outside would agree.

The second assessment is that the economic fallout of this second wave is far less severe than in the first. Figures on production trends, unemployment, indirect tax collections, exports and foreign exchange reserves are cited to back this assessment.

Four sets of numbers in particular are invoked to justify optimism. Agriculture has performed extremely well in terms of output for a second year in succession, facilitated by two good monsoons, imparting some buoyancy to the economy. The goods and services tax (GST) collections in April were, at Rs.1.41 lakh crore, at a record high since the introduction of the new tax regime. Electricity generation was 8.1 per cent higher than the pre-pandemic level of April 2019. And the unemployment rate, as estimated by the Centre for Monitoring the Indian Economy, though rising to a four-month high of 8 per cent in April 2021, is way below the 20-plus per cent levels they had touched in April and May last year.

Languishing industry

But the authors of the two reports have to admit that the picture is mixed. Industrial growth is faltering. Even before the second COVID-19 wave, industry was still languishing. Values of the Index of Industrial Production in January and February were 3.6 and 3.9 per cent lower than in the corresponding months of 2020. And leading indicators for April point to a further downturn.

Manufacturers in the passenger vehicles (PVs) industry reported a fall in sales in April 2021 compared with the same month of the previous year, and dispatches of two-wheelers contracted by 33.5 per cent. In March 2021, on the other hand, riding on a low base, the sales of passenger vehicles and two- and three-wheelers had risen by 115 and 71 per cent relative to March 2020. Tractor sales which, driven by improved agricultural performance, had risen in March 2021 by 172 per cent relative to March 2020 and 36 per cent compared with March 2019, was stalling in April.

There are other sources of concern. While the MER notes with satisfaction that “in terms of value e-way bills generated (an indicator of the volume of trade) reached Rs.17.36 lakh crore in April 2021 compared to Rs.3.9 lakh crore in April 2020 and Rs. 14.8 lakh crore in April 2019”, the SoE tells us that they “recorded double digit contraction at 17.5 per cent month-on-month (m-o-m) in April 2021, with intrastate and inter-state e-way bills declining by (-) 16.5 per cent and (-) 19 per cent”. That suggests that GST collections are likely to fall as well, reversing their recent rise.

What all this evidence points to is that the adverse economic fallout of the second wave had only begun to be felt in April, and arriving at judgments on the intensity of that fallout based on early figures may be completely misplaced. Even if not totally shut down as during last year’s total national lockdown, the economy, and especially the most vulnerable, have been badly hit. Clearly, recent projections of the likelihood of a V-shaped recovery in GDP growth are now unlikely to be realised, with performance in 2021-22, especially its first half, expected to be way below optimistic forecasts.

Besides the doubts raised by this mixed evidence, the reasoning in the two reports as to why, as they believe, the second wave has been less damaging economically speaking, is also unconvincing. To start with, even though the sudden and brutal lockdown imposed in March 2020 was not repeated this time, State governments, left by the Centre to handle the fallout of a second crisis that it was partly responsible for, and unable to handle the health emergency given its scale, had no choice but to impose lockdowns, not just in the metropolitan centres and cities but also in district headquarters and rural divisions. But these have often been identified as containment measures or curfews rather than lockdowns.

However, for informal sector workers (including migrant workers) who constitute the overwhelming bulk of India’s workforce, this play with language hardly helps. It is true that this time around, workers thrown out of work and living spaces and with no earnings to feed themselves were not forced to walk home, braving violent attacks from state functionaries. Buses and trains were mercifully allowed to run. But that did not mean that they did not lose their jobs, or that many of them did not return home once again.

Rural pandemic

Moreover, this time, the towns and villages that they returned to were not relatively coronavirus-free, which last time around helped them eke out some kind of a livelihood back home without being swamped by physical distancing requirements. As widely acknowledged, in this wave the virus had reached their villages even before they did. The net result is that there is no doubt that the figures on caseload, positivity and fatality are hugely underestimated. But that must mean that they were hit economically by the rural pandemic as well, including through reduced availability of some employment in the projects created under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)—perhaps the most effective component of the state response to the economic fallout of the first wave. More importantly, many of them had to spend large sums trying to save those in the family who were infected by the virus and needed hospitalisation. Indebtedness must have surged.

Finally, other than extending access to 5 kilograms of free cereal a month to those covered under the National Food Security Act (NFSA) during May and June, there has been no real support extended by the government to those displaced from work or who have lost their means of livelihood. Many had made a case for a cash transfer of at least Rs.7,500 a month to those adversely affected by the pandemic, larger provision of free cereal given the evidence of hunger, and an enhanced food distribution effort to ensure that those excluded from the NFSA would be covered, both at the time of the earlier first wave of infections and when the current wave began.

Given the fact that those hit by this wave are likely to be already burdened with debt incurred last year because of the damage suffered in the lockdown at the time of the first wave, the need for such measures is even greater now. However, the government does not appear to be willing to advance any such assistance. The Finance Ministry’s MER still harps on the measures adopted over 2020-21, which was before the second wave, with no indication of the additional and enhanced support it intends to provide to address this wave.

In fact, it is the RBI’s SoE report that delves in detail on the “new” measures being adopted to handle the economic fallout of the second wave. But given its remit, the central bank’s intervention can only be monetary, involving in particular measures to persuade banks and non-banking financial companies (NBFCs) to extend credit to entities that are still solvent and capable of revival, sustaining in the process the livelihoods of those dependent on them.

Principal among those measures was liquidity injection through purchases of government securities in two tranches of Rs.25,000 crore and Rs.35,000 crore respectively. Minor concessions, such as waiver of cash reserve ratio (CRR) requirements for lending to micro, small and medium enterprises (MSMEs), are being used to persuade banks to direct credit to vulnerable borrowers.

Monetary policy, rather than hugely increased state spending or expenditure from the PM-CARES Fund, is being leveraged even to address the health emergency, with the central bank providing “liquidity of Rs.50,000 crore for a period of up to three years to banks ‘on tap’ so that they, in turn, can on-lend and support vaccine manufactures, importers/suppliers of vaccines, priority medical devices and COVID-related drugs, hospitals/dispensaries, pathology labs and diagnostic centres, manufactures and suppliers of oxygen and ventilators, logistics firms and patients for treatment”. Banks can also treat these loans as priority sector lending until repayment or maturity.

It hardly bears emphasising that measures such as these are no substitute for the fiscal push needed not just to address the health emergency, but also to provide a safety net to those who, already beleaguered by a year of crisis, have now been hit by another round of near-stop in economic activity. But the Central government, having failed on many fronts in the effort to address the crisis and aggravated it by many acts of omission and commission, has virtually devolved all responsibility to the State governments, restricting itself to providing periodic sermons on what needs to be done. As one Chief Minister ruefully put it, the Prime Minister in a call spoke his mind, but did not touch on what is actually being done or listen to suggestions on what needs to be done.

Cash-strapped State governments, having to foot the bill, address the medical emergency and even procure vaccines for those in the 18-44 age group, have little left to provide the needed safety net. The result cannot but be extreme misery for the vulnerable, which is sought to be downplayed by pointing to the economically less damaging effects of the second wave based on the selective use of numbers.

It is true that the economic emergency has not received the attention it deserves. The reasons are many. First, the sheer intensity of the second wave of infections and its devastating impact focusses attention on the health rather than economic emergency. Second, given the need to deal with the health emergency, the population is willing to accept the suffering associated with a fragmented lockdown, which is being seen as the unavoidable cost of addressing debilitation and death. Finally, since a lot of the suffering is now located outside the metropolitan centres, in semi-urban and rural areas where a substantial proportion of the poor reside or to which the poor have returned, the visibility of what is transpiring is low, especially for a media obsessed with the impact of the pandemic on the rich and the middle classes. The economic crisis is real. The picture of economic resilience is an illusion.

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