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These 4 factors will shape how Indian economy rebounds from shock of Covid second wave

Current lockdowns, fear & uncertainty are driving down growth, but with second wave slowing, there’s hope that economic activity will improve in next quarter.

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The intensity of the second wave of Covid-19 has taken all of us by surprise, and has been the cause of much distress and grief. In the last few days, the number of new cases has started falling, giving new reasons for hope.

Though the second wave has not ended yet, with active cases now falling at -2.4 per cent, there is reason to hope that the economy will get back to improved activity in the next quarter.

As a consequence of the second wave, we still expect a reduction in the annual GDP growth rate, though that does not necessarily mean a recession. The economy will still expand, compared to last year, when it contracted. However, it will not expand as fast as we had forecast.

The interesting question is what role the current lockdowns will play, and how big a role will fear and uncertainty play in driving down growth?

Also read: How this Covid wave has hurt Indian economy — falling indicators, lower growth expectations

Fear of disease vs fear of lack of healthcare

There is the fear of the disease, which is separate from the fear of the lack of healthcare. What has happened in Delhi and other parts of the country is the failure in healthcare. Several deaths could possibly have been prevented had we managed to deliver healthcare in time.

Once we reach a situation where medicines, hospital beds and oxygen cylinders are available once again, then the fear that has set in will come down. Depending on how the healthcare situation plays out in other cities, we will see varying levels of fear and uncertainty.

Of the 2.55 crore people who contracted Covid, 2.8 lakh have died. Many of these were when the country was scrambling for oxygen and hospital beds. As oxygen supplies and health care facilities improve, we should see greater recoveries.

Most Indians can’t afford to stay home

As cases start falling, people will step out of their homes. There is not much choice — most people in India cannot afford to continue staying at home for long periods of time.

The vaccine supply constraints should also ease over the next few months. After the 19 April decision, whereby the government allowed private companies and institutions to procure and administer vaccines, there is a much greater energy being focussed on the question. This would also help in the longer run, when booster doses need to be given, as the entire population will no longer be dependent on the capacity of the central government for administering vaccine doses.

Over 18.76 crore vaccines have been given. Of the 2.55 crore people who have tested positive for Covid so far, 2.2 crore people have already recovered. Most of them will be able to come back to normal life. In recent days, the positivity rate has started to decline and will go down further as a consequence of both the vaccines and post-Covid immunity.

Data from Maharashtra, for example shows, that one-in-five people are already protected, either because of contracting the disease or because of vaccines. This should further improve people’s willingness to engage in transactions outside of their homes.

The CMIE Index of Consumer Sentiments, measured every week, shows an improvement in urban India from a low of 40.83 on 2 May 2021, to 48.17 on 16 May 2021. While consumer sentiments remain low in rural India, an improvement in urban India is a good indicator of people’s response as the case incidence begins to plateau.

Also read: Good start by RBI. Now, banks need to step up & do their bit to help Covid-hit economy

Impact of deaths

There is a significant difference economically when older people in the family die versus when younger people die. If a bread-winner dies, there is an income shock that will have an effect on demand. The consequences on the balance sheet of the households, and hence on the economy, differ depending on the age of the person.

As a larger number of young people have died in this wave, it will have a bigger effect on demand than the first wave. The death of the old does not impair household balance sheets in the same way.

In terms of the actual numbers that will determine the economic impact, this data is not yet entirely clear.

Consumption and demand inside and outside India

At present, there is a fall in consumption for several reasons. First is a fall in income. According to the latest CMIE data, employment in urban India has fallen from 33.56 per cent on 9 May 2021 to 31.55 per cent on 16 May 2021. The fall in rural India in the same period is similar, from 39.84 per cent to 36.26 per cent.

To the extent unemployment (or the death of the breadwinner) leads to an income shock, we will see a fall in demand. But it is important to remember that this is a result of both disease as well as lockdowns in most parts of the country. A sharp impact of local lockdowns can be seen, as mobility trends for places of work show a decline of 56 per cent. Once the local lockdowns go away, people will come back to work.

The second reason for a decline in consumption is the lockdown itself. Those who have not seen an income shock are seeing a fall in consumption because the usual avenues of spending — tourism, restaurants etc. are no longer available. This may continue for some more months, but equally likely such households may substitute towards other goods.

Even if Indian domestic demand remains muted, the global economy and trade are picking up. Exports showed 80 per cent growth in the first week of May. It is also likely that we will see consolidation in the industry — smaller firms without reserves, or firms with poorer management practices will die, which implies that firms that survive will be more robust. Once lockdowns are eased, we expect that economic activity will resume, fear may be reduced and uncertainty may play a smaller role, as is happening post-vaccination in other countries.

In addition, a growing world economy will help India navigate out of the despair from the second wave.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Renuka Sane is an associate professor at NIPFP.

Views are personal.

Also read: Why higher inflation could be India’s next big worry amid worsening Covid crisis


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