Economic impact of Covid-19 second wave is worse than what government wants you to believe

Outside the Eco-Chamber

The central government thinks that the negative economic impact of the second wave of the covid pandemic is likely to be limited. As KV Subramanian, the Chief Economic Adviser to the Ministry of Finance, recently said: “We do think that the overall economic impact of the second wave is not likely to be very large.” In the same breath, he added: “Given the uncertainty about the pandemic, it will be very hard to give you actual numbers.”

In a way, the two statements contradict each other. If Subramanian can’t come up with numbers and there’s uncertainty about the pandemic, how does he know that the economic impact of the second wave is “not likely be very large.”

Finance Minister Nirmala Sitharaman in a statement in late April had tried to assure the country: “2020 was about Covid, but 2021 shall not be about Covid, in spite of the second wave.” Where does this confidence come from?

A major part of it comes from the fact that the period between April and September 2020 was so bad that it will make the numbers of this year look good. Take the case of GDP for the periods April to June 2020 and July to September 2020. The GDP contracted by 24.4% and 7.4% respectively in those two quarters.

So, comparisons for the first two quarters of this financial year will be with a vastly contracted base from last year. Given also that there isn’t a total lockdown of the kind there was last year, the economy, on the whole, is a lot more open, and hence, the volume of economic activity is going to be better than last year. This allows the government to project confidence about the state of the economy.

Nevertheless, what the government doesn’t seem to be taking into account is the fact that the second wave of the covid pandemic, which is much bigger than the first one, seems to have impacted millions of households negatively on the financial front. It has left many of them in debt. Even households that haven’t themselves been badly impacted have seen others around them get impacted mentally, physically and financially.

Further, during the first wave, rural India had remained largely unscathed. The same is not true this time around. On top of this, there is the fear of a third wave, in a scenario where only 4.43 crore individuals, or less than 5% of the country’s adult population, have been fully vaccinated so far.

Achieving herd immunity by vaccinating enough people – estimated to be about 70% of the population -- is the fastest way to get economic activity going again. But that’s going to take time, given that the central government was busy fighting state assembly elections and it forgot to order and stock vaccines. And given that vaccines for a country as large as India cannot be just ordered today and picked up tomorrow, there is an ongoing supply problem.

This is reflected in the fact that the total number of vaccine doses given peaked in the week from April 3 to April 9, at 2.47 crore. In the week from May 22 to May 28, the latest data available, 1.47 crore vaccine doses were given. This is around 41% lower.

In this scenario, expecting people to come out and spend money as they had after the first wave and that pent-up demand would push the economy up is a farfetched idea. Assuming that enough vaccines become available during the course of the year, the issue of vaccine hesitancy in rural and small-town India still remains. The fact that businessman Ram Kishan Yadav, better known as Baba Ramdev, who has a huge following among people, has raised questions about the efficacy of the vaccine, isn’t really helping. Other than ensuring that enough vaccines are available in the weeks and months to come, the government also needs to tackle vaccine hesitancy on a war footing, which it doesn’t seem to be doing currently.

In the past, whenever the economy slowed down or contracted, as it did last year, the way out suggested by economists was a massive increase in government spending. Last year, an increased allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) helped create paid work in the rural areas.

Suggestions that allocation to MGNREGS be increased have been made this time around as well, including by yours truly in this newspaper. The trouble is that when a bulk of the population is unvaccinated, any worksite where more than a few people need to work together can lead to the spread of the Covid virus all over again. The same stands true for the government spending more money on building public infrastructure and pump-priming the economy.

The idea of the government spending its way out of trouble, by getting the Reserve Bank of India to print more money, or by more borrowing, has its limitations this time around. Given this, the economic recovery this year will be very slow, and one really doesn’t know what will happen if the third wave of Covid does strike.

India’s GDP fell to Rs 135.1 lakh crore in 2020-21. It was at Rs 145.7 lakh crore in 2019-20. It was widely hoped that the GDP in 2021-22 will be at least back to where it was in 2019-20. But from the looks of it, that is unlikely to happen now. All because the government was asleep and forgot to order enough vaccines.

Of course, Nirmala Sitharaman, K V Subramanian and Co., will not tell you that.

(Vivek Kaul lives to read crime fiction, and unlike his honest ancestors, makes a living writing on economics.)