THE DARK SHADOW OF THE PANDEMIC
Updated: May 18, 2021
By Harsh Kadara
2020 was marked with despair, gloom, and fear of the coronavirus looming large. Coronavirus has left nothing unscathed; be it people’s health, their jobs or their education. With most institutions shut down for more than a year now, people losing livelihoods and businesses hit hard, it has turned everything upside down. Considering the large-scale impact on our economy because of stringent lockdown imposed and a slew of protocols taken to contain the spread of the virus.
Even before the full force of this pandemic struck and wreaked havoc, our economy was facing its worst-ever deceleration. GDP was on a downward slope and this economic slowdown was worse than the one our economy underwent in 2011-12, post the depression. The economy grew by 3.1% in the last quarter of the Financial year 2019-2020, against the 5.7% at the same time, a year ago. This marked our country's slowest growth in the past eight years. The manufacturing sector grew a mere 0.03% in FY19 compared to 5.7% in the previous year. According to the National Statistical Office, the growth rate of the construction sector declined to 1.3% and is responsible for a spillover effect on similar industries like cement, steel among others. Gross capital formation too remained low in FY19.
The advent of this pandemic just added fuel to the fire and aggravated the whole situation of the already battered economy. We all know what the imposition of the unprecedented lockdown resulted in. Educational institutions were shut and with the economic activity coming to a standstill people were losing their livelihoods. And most notably, we saw mass exodus of migrant laborers who, with no means of transportation, risked their lives and walked back to their homes with their children. All this landed a big blow to our beleaguered economy and further derailed it. India went into a full lockdown towards the end of March 2020, with the supply of all non-essential goods and services screeching to a near halt for most of April and May 2020. GDP for the 1st quarter (April-June 2020) fell by a whopping 23.9% in comparison to the same quarter a year ago as per the data released by the Statistics Ministry. According to government data, gross value added (GVA) for the country declined by 22.8%. Sectoral data showed that construction was down by 50.3%, manufacturing by 39.3%, and mining by 23%. It was this quarter that primarily bore the brunt of a nationwide lockdown due to the Covid-19 pandemic.
If we were to look at the reasons that fueled this downward trend then understanding the primary engines of growth is imperative - consumption, government expenditure, investment, and the nation's current account deficit (imports – exports). Due to various imposed restrictions, especially on traveling, demand-side was hit hard, and as a result of this, consumption expenditure fell significantly. Investment also took a hit because of low or in some case nonexistent salaries and revenues. Despite this, however, Government expenditure rose specifically because of the relief measures provided to people. And India's current account deficit which has historically been negative, recorded positive rates. This implies that exports exceeded imports, essentially indicating selling more than buying. While this may be making additions to the GDP, it was, ultimately, a clear signal of muted demand with imports falling to grim levels because of lack of money to finance them.
As luck would have it though, the economy recovered to show a 7.5% contraction in the 2nd quarter as per National Statistics Office’s data. While this did bring some respite, critical employment generating sectors like construction, mining and services continued to stay weak. We mustn't, however, overlook the revisions made by the government to these figures, GDP contracted by 7.3% in the July-September quarter instead of the previous estimate of -7.5% and by a sharp 24.4% in the April-June quarter instead of the earlier reported -23.9%. Later, as the restrictions relaxed due to the receding number of Covid patients, our economy began healing and reviving itself as we saw the GDP in Q3 increasing by 0.4%, low as it may be, it indicated the path of recovery taken by the economy. Since then we have been registering a positive trend in the GDP growth rate.
On the other hand, if we look at China’s economy, there was a resounding GDP rebound. It swung sharply which was primarily driven by an increase in manufacturing output and public spending and made China the first country to brave the Covid storm. The packages introduced by China were relatively small but focused on maintaining demand by doling out money directly in the hands of people. They achieved this through initiatives like pre-paid vouchers for products, among others. But unlike China, most of the economic relief measures provided by the Indian government have been liquidity driven- pushing banks to extend credit on the back of government guarantees to small businesses, non-banking financial companies, microfinance institutions, housing finance companies and the like. Here is where our country seems to be lagging.
However, now the situation seems more grim and the future bleak because of the second wave of the infections that our country has been battling. Everyday states are registering new records of the cases with the total tally for the country going past 3,00,000 and much more. There are several factors combined that have driven the surge - people showing laziness in following pandemic appropriate behavior, the discovery of mutant strains of the virus, and vaccine administration to specific age groups. Given the increasing caseload of patients, states have started firming up their health infrastructure for providing timely treatment to patients scrambling for beds and life-saving oxygen. Some states like Maharashtra and Uttar Pradesh have already imposed stringent lockdowns and others are also following the suit, but will it be a correct decision to go forward with such policies? Arguably, yes.
On a closer look though, we’ll realize that it will be a calamitous decision for the already battered economy to undergo another lockdown, considering the fact that the same restrictions have, in the past, walloped the economy. If this stratospheric increase in the coronavirus cases continues, we will end up seeing intense pressure on health infrastructure which, as we witness around us with states complaining of vaccine shortages. This will leave the state governments with no option other than imposing yet another lockdown.
There is no doubt that these lockdowns will be far more benign and albeit people have now adopted the new normal, will undo all that our economy has achieved so far. Indeed this is a very complicated and serious issue that requires the government and states to join their hands together and work in a synchronized manner taking all the necessary steps that are helpful in this situation while at the same time taking into account the economic ramifications of the decisions they decide to go forward with.
Even if the lockdowns are imposed, which admittedly come across as the only logical step given the mounting number of cases, the government needs to make sure that consumption expenditure, which typically has the greatest impact on GDP, remains as close to normalcy as possible. While partial lockdowns may be effective, making good use of the different aid schemes will be extremely important for accelerating the recovery and establishing solid bases for future growth. The considerable resources that the country is making available through loans and grants must be used to finance projects and programs carefully so that inducement to invest increases. The government needs to spend more on ramping up health infrastructure which looks to be collapsing alongside encouraging foreign trade and exports, despite the prevailing conditions.
These are some of the overarching measures that government could consider to help us through this time of crisis and perhaps prevent the economy from getting into a similar cycle of bashing in the future.
6) National Statistics Office’s data