Macroeconomic fallout of the second wave

The official economic data for the first quarter will be published by the end of May. Last year from October onwards the mood was upbeat and anticipating a sharp V-shaped recovery. This was accompanied by a sharp drop in the official count of Covid infections, so much so that by the end of January a victory was declared. In a speech to the World Economic Forum on January 28, describing India’s success in its fight against the virus, Prime Minister Modi said “In a country which is home to 18 percent of the world population, that country has saved humanity from a big disaster by containing corona effectively.”. Unfortunately, the celebration proved to be premature as the second wave of the pandemic hit India viciously.

The virus has spread to remote villages, even distant hilly areas of Uttarakhand, the deep forests of Chhattisgarh, and small towns across India.

In just a couple of months the country’s unpreparedness was starkly exposed, as the daily number of infections rose about forty times, to reach nearly half a million per day. Fatalities mounted caused by lack of oxygen, ICU beds, ventilators, medicines and emergency facilities. Even space in cremation and burial grounds ran out as dead bodies waited sometimes for days for the final rites. Topping it all has been the spectre of corpses hastily buried in the sandy banks of the holy river Ganga, or thrown into the water.  Based on ground reports the number of these unclaimed, unacknowledged, uncounted dead bodies are estimated to be several thousand.

One of the reasons for the furtive dumping of bodies is that the poor cannot even afford to buy the expensive firewood required for the funeral pyre, the other is the fear of the disease. Or perhaps there is the stigma associated with it. The fact is that the virus has spread to remote villages, even distant hilly areas of Uttarakhand, the deep forests of Chhattisgarh, and small towns across India. Since many rural areas are utterly lacking even in basic healthcare facilities, the illness and deaths are often not even attributed to Covid. So, the official count of infections and fatalities may be severely underestimated.

Thankfully the second wave which rose steeply in the past two months, seems to be also coming down rapidly. At least in the major metro cities, the panic cries for oxygen, beds and ventilators are fewer. But the situation in the rural areas is still precarious, at least in some States. Hence many States are persisting with lockdowns, which curtail economic activity.

Since tax collection is related to economic growth, lower growth this year, would mean a further shortfall in tax revenue to the tune of around 1 to 1.5 lakh crore. This would make the fiscal deficit wider than projected in the Union Budget in February.

Which brings us to an assessment of the impact on the economy. Back in November many analysts believed that the growth rate for fiscal year 2021-22 could be as high as 12 or 13 percent. This was mainly due to a V-shaped recovery from the economic contraction last year. But now that assessment is being pared down, and the most optimistic estimate for the current fiscal year is around 8 percent. This would mean that after two years, the Indian economy’s size would be still a bit smaller than it was in 2019. Also, since tax collection is related to economic growth, lower growth this year, would mean a further shortfall in tax revenue to the tune of around 1 to 1.5 lakh crore. This would make the fiscal deficit wider than projected in the Union Budget in February. That would mean an increase in borrowing by the Central government, making it difficult to keep the interest rates (i.e. the cost of borrowing) low.

The latest data on inflation shows wholesale price index (WPI) based inflation to be at a 11-year high of 10.5 percent. Of that the fuel and power subcomponent is at 20 percent. This high inflation is predicted to continue for the next few months. The non-food inflation captured in WPI is at 15.6 percent. These are alarmingly high numbers. The WPI inflation mainly reflects the input cost escalation experienced by producers. Sooner or later this input cost pressure will be passed on to consumers. In that case even the consumer price index (CPI) based inflation will start going up.

Policy makers and administrators have their work cut out as we struggle to make our way out of the health and economic crisis.

Right now, the consumer inflation is below 6 percent which is the upper limit of the tolerable bond. CPI inflation has a very big food component. With a normal monsoon and a bumper crop expected later, the foodgrain inflation may not spike up. But meat, poultry, milk, pulses and other sources of proteins might become costlier. Ironically some tomato farmers have chosen to destroy their current bumper crop, since prices have crashed much below their cost of production. The input costs like electricity, fertiliser, labour etc have gone up significantly. Maybe that is the reason why the Prime Minister chose to keep fertiliser prices low and unchanged despite a big increase internationally, and hence allowed a bigger subsidy to farmers this year. Internationally the Food and Agricultural Association says that the food price index is at a seven-year high. Edible oil prices have doubled from last year, and even sugar has gone up by sixty percent. In India at the retail pump petrol prices have crossed 100 rupees, which will hurt transportation costs, including that of food.

Coupled with inflation is the worrying trend in unemployment. In April unemployment shot up to 8 percent as per CMIE data. The labour force participation rate (i.e. that portion of workers who are either employed or looking for a job) is down to just 40 percent. That means 60 percent of the able-bodied workforce between the ages of 16 and 60 are out. They have either given up on the prospects of finding a job, or are tending to homes or are in school, college or training. It is well known that the pandemic has caused a very large proportion of women to drop out of the workforce altogether. India’s female labour force participation rates are among the lowest in the world.

There must be a substantial fiscal injection in the form of enhanced foodgrain allocation to households from the PDS, free and universal rapid vaccination, much higher allotment to the rural employment guarantee (MNREGA), quick ramp up of infrastructure projects already sanctioned by the national infrastructure pipeline, and filling up of all vacancies in government and government-owned bodies.

With such grim unemployment and inflation prospects, the government has its work cut out. There must be a substantial fiscal injection in the form of enhanced foodgrain allocation to households from the PDS, free and universal rapid vaccination, much higher allotment to the rural employment guarantee (MNREGA), quick ramp up of infrastructure projects already sanctioned by the national infrastructure pipeline, and filling up of all vacancies in government and government-owned bodies to the extent possible. Such fiscal action will of course be aided by the accommodative monetary policy of cheap money, and support for the government’s borrowing program. Policy makers and administrators have their work cut out as we struggle to make our way out of the health and economic crisis.

(Dr.Ajit Ranade is an economist and Senior Fellow, Takshashila Institution)