As the second wave of the COVID-19 pandemic and the State-level lockdowns batter the economy, Reserve Bank of India governor Shaktikanta Das this week noted that the impact of the second wave is likely to be less severe than the first one. He said that businesses and people have started to adapt to lockdowns and that the hit to demand would be much lower this time. In a conversation moderated by Prashanth Perumal J. , Radhika Pandey and Vivek Kaul discuss the two COVID-19 waves and how they have impacted the economy. Edited excerpts:
How do you see the RBI governor’s assessment of the current economic situation compared to last year?
Radhika Pandey: The nationwide lockdown last year in response to the first wave of the pandemic resulted in a severe supply shock. What we are seeing now is not a severe supply shock but a demand shock. The second wave, because it is highly transmissible and ferocious as compared to the first wave, has created a lot of uncertainty, pessimism and loss of confidence among households and businesses. It will take time for people to start recovering because it has created a lot of uncertainty. So, that’s the key difference between the first and second waves. The second wave also affects supply to some extent, but it is primarily a demand shock. Last year, what we saw was that during the first quarter, savings increased as people were not able to spend because of the lockdown. But in the second quarter, we saw that savings declined and consumption spending picked up. It is difficult to say whether that will repeat this time. So, we might not see a steep V-shaped recovery that we saw last time.
How do you see the impact of the second wave in terms of the magnitude of the economic slowdown?
Radhika Pandey: Unlike last year, there won’t be economic contraction this year. In fact, there will be positive growth, but most forecasters agencies are paring down their growth forecast because nobody anticipated the severity of the second wave. If we look at the GDP level, we won’t be able to reach the pre-pandemic level this year, but as compared to last year, there will definitely be growth.
Vivek Kaul: The key difference is that growth this year will essentially be on a slow burner. We will not see a contraction because last year was really bad, but growth will be extremely slow. And economists will have to keep revising their numbers. One key thing is the fact that almost all governments in India missed the second wave and they had to hurriedly put lockdowns in place. I don’t see governments opening the economy up very quickly due to the fear of a third wave. Before the second wave, all economists were saying that FY 2021-22 GDP should cross the pre-pandemic 2019-20 GDP. I don’t think that will happen now.
Would you agree with the assessment that we are looking at a prolonged slowdown?
Radhika Pandey: Yes, if you look at the U.S. and the U.K., they have already vaccinated a considerable chunk of their population, and now they are opening up. That is not happening here in India as only 3-4% of our population is fully vaccinated. Even under the most optimistic scenario, it’s not possible to reach the pre-pandemic GDP level this year. We may see progress on vaccination only in the initial months of 2022. That’s why the economic recovery will be a protracted affair. In terms of magnitude, the decline won’t be too steep. But in terms of duration, it will take a lot of time because of all the uncertainty.
Vivek Kaul: A significant section of the population has spent a large amount of their savings to fight COVID-19. A lot of people have also ended up in debt. There is no agglomerated data on this, but there is enough evidence going around if you keep your eyes and ears open. These families will find it difficult to spend. Then there is this great fear of a third wave. Even if people have the money, whether they are in the psychological state to go out and spend is a question well worth asking.
Does the Indian state possess the capacity to effectively deal with pandemics through vaccination, testing, etc.?
Vivek Kaul: If you leave out the few southern States, much of India doesn’t really have a health system. And the inequality across States is simply mind-boggling. One example that I often use is a comparison between Kerala and Jharkhand. And I do that because the population of Jharkhand is slightly more than that of Kerala. Kerala has close to 60,000-65,000 doctors while Jharkhand has around 5,000-6,000. If you go into other numbers such as the number of nurses and beds, you will realise that there is a great deal of inequality across the country. This is not something that can be set right overnight. It’s not just about spending more money. There is a whole host of other supply-side issues and this obviously cannot be set right overnight.
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There are two issues here. One is whether the Indian state has the capacity to fight the spread of the COVID-19 pandemic. No, it doesn’t and that has become very obvious by now. The second question is whether it has the capacity to give vaccines. The situation is not as bad on that front. The vaccination problem can be taken care of even in the short term, as long as the vaccine supply becomes available.
How have the monetary and fiscal responses been this time as compared to last year?
Radhika Pandey: I don’t see any response, especially from the monetary side. They don’t have much space given that we are seeing bouts of inflation as well as growth slowdown and we are out of the global business cycle. In advanced economies, growth is picking up and as a result, inflation is picking up as demand comes back on track. As a result, we are seeing global commodity prices surge and we are seeing the impact of that on India’s domestic inflation. Last time the RBI cut the repo rate by 115 basis points, but today it is hard for the RBI to cut interest rates because inflation is going to rise even though there is a demand slowdown. It will be mostly cost push inflation where inflation is driven by crude oil prices and input costs. What the RBI can do is incentivise banks to lend to sectors which have been hard hit. But again, it all depends on whether banks are willing to lend because if we see the credit growth over the last few months, it has not actually been picking up as banks have become risk averse. There is greater scope for fiscal policy. Apart from free foodgrains distribution as was the case last year, one can allocate more funds for MGNREGS [Mahatma Gandhi National Rural Employment Guarantee Scheme] given that there has been an increase in the demand for work. But given that India’s debt-to-GDP ratio has risen to somewhere around 90% and there has been a collapse in revenues, the ability of the government to spend is limited.
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Vivek Kaul: If you look at the monetary policy, it hasn’t been able to do much over the last five to six years. They talk about cutting interest rates and people borrowing and all that. All that works in theory, but if you look at numbers, it doesn’t work. One of the things that the RBI has been talking about is how lending to small and medium enterprises needs to go up. Now, if you look at the lending to micro and small enterprises, it has not moved and the overall lending has been the same for the last six years. This is despite offering all kinds of incentives, lower interest rates, so on and so forth. Secondly, it also tells you about the state of the small and medium enterprises in the country. They have been struggling over the years. They have faced everything from demonetisation to the Goods and Services Tax. And now the lockdown. Also, the main purpose of the bank is not to revive the Indian economy, which is why monetary policy has not worked for quite some time now.
How do you see the migration of workers during the second wave when compared to the mass migration that happened during the first wave?
Radhika Pandey: What we saw during the first wave was an abrupt lockdown. This time it’s not so. Workers this time are taking a conscious decision to go back [to their homes]; it’s not just an abrupt response. That’s a key difference. The other point is that as compared to the first wave, this time the rural sector has been affected much more severely. That’s visible in the employment numbers. What we see from CMIE data if we look at the April numbers is that total job loss was somewhere around 7.35 million and out of that, 2.35 million people lost jobs in the rural sector. Last time, rural employment was in a much better position as compared to urban unemployment.
Also, urban workers are moving back to their villages. That has caused the increase in unemployment and MGNREGA is not able to absorb workers, which has resulted in a huge mismatch between demand and supply. In some cases, we also find that, even though work is offered, people are not taking it up because of fear surrounding the virus.
Vivek Kaul: Also, a lot of people who went back last year never really came back. That has probably also added to the unemployment pressure in the rural areas. Obviously there is no way to measure this. But I think that is another factor at play. And, as Radhika pointed that, the question is even if you increase the allocation to MGNREGA, and create more jobs, will people turn up because the chances of infection go up? This is a tricky situation. Last year we were able to spend our way out of trouble by spending to create economic activity. This time around it is a little difficult to implement.
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What should the government do to put a permanent end to the pandemic and help the economy recover fully?
Radhika Pandey: There are some short-term measures to be taken and then there are some medium-term and long-term measures that are within current state capacity. One is to ramp up the supply of vaccines and ensure that more people get vaccinated. We should increase the daily pace of vaccination which has recently slowed down due to shortage. Unless that is done, the recovery will be protracted. The other thing is to seriously think about structural reforms, especially in healthcare. The pandemic has exposed the limitations of the healthcare system. There has to be some way of building medical infrastructure, which is not going to happen overnight. But there has to be careful and serious thinking.
Vivek Kaul: I think the only way to prevent another lockdown is to concentrate on providing the number of vaccines that the nation needs. You have a lot of these influencers going around who have all kinds of opinions on the disease. It has to be ensured that this kind of rubbish doesn’t go around. It is also important to ensure that the right messaging goes to the country. Another big fear is that even though there is huge demand for vaccines, this is largely from the cities. Once that demand is exhausted, one needs to ensure that vaccination continues. It might make sense to incentivise people who come and get vaccinated with rice and wheat or by depositing some money into their Jan Dhan account. These issues need to be thought about, and right now, nobody is thinking about them.
Radhika Pandey is an economist and consultant at the National Institute of Public Finance and Policy; Vivek Kaul is a business journalist and author of India’s Big Government: The Intrusive State & How It’s Hurting Us
