Another economic shadow
After the Indian economy contracted by a massive 7.7 per cent last year, much official hope was reposed in a V-shaped recovery with forecast of a rebound in growth in the current year (2021-22) to 11 per cent. But the second wave of the pandemic has already led to local lockdowns in severely affected areas.
The economic disruption and fear that this has generated (migrant workers have again started to journey back home) have cast a massive cloud over the recovery hopes. Analysts’ projections for the current year’s growth are already being scaled down from as high as 13.5 per cent to as low as 10 per cent.
The course that the pandemic will take is unknown. So sectors and policy makers have to make contingency plans — hoping for the best while preparing for the worst. The foremost concern of the government must be to try and ensure that the entire economy does not grind to anything like a near-total halt. Within this, different economic sectors will look for policy signals while preparing their own plans.
The best way to prevent a total halt to economic activity is to keep away from a total and extended lockdown of the kind that was imposed last year. Thankfully, the union government is aware of this, and any kind of total lockdown is not on the official list of choices. What we are likely to see instead is partial lockdowns and night curfews, particularly during weekends, that will keep the economy ticking up to a point while sentiment plunges.
But even this partial negative is taking its toll. Small businesses are scaling down operations without fully closing down. This is leading to partial staff layoffs (for example, if a shopkeeper has three helpers, one is being asked to go home), which, in turn, are going to lead to cuts in consumption expenditure. We are thus likely to see a contraction in demand from levels expected earlier, the only redeeming feature being that the bottom will not entirely fall out of purchasing power.
The slowdown at the bottom of the economic pyramid will transmit signals upward, with the energy sector likely to be one of the first to be hit. Demand for electricity (and in consequence coal) and diesel and petrol is likely to be partially hit.
A similar impact is likely to be transmitted to entities engaged in the manufacture of industrial raw materials. Some of the impact will come from the pandemic itself. To meet the sudden rise in medical demand for oxygen and the government’s guidance to industries consuming it step back, Tata Steel, for example, is diverting oxygen supplies away from steel making to the healthcare sector. Hence, there is likely to be a negative impact on the country’s steel output. Another major user of steel, the automobile industry, is already seeing the demand recovery that it was preparing for lose steam.
While the producers and users of industrial raw materials will be tangentially hit, two sectors which are already on the way to taking direct hits are hospitality and airlines. Bars and restaurants, already hit by people being asked to stay away from crowded places, have begun to see a fall even in people’s basic desire to spend. (As for cinema halls, which had begun to open up, the less said the better.) Discretionary spending has already begun to take a hit, affecting employment. This, in turn, will affect consumption expenditure.
The other industry likely to be severely hit is air travel. Trans-border travel has already been hit as countries not yet seriously affected by the virus are locking themselves in to avoid travellers bringing it in with them. Bubble arrangements between countries which are not seriously affected will be able to save only a small part of the global travel demand.
Against this gathering gloom, two sectors stand out. The software and services industry is going great guns as firms redouble efforts to go digital and shift as much of their data-related activity onto the cloud as possible, and this is creating renewed demand for the IT industry.
The other sector which sees bright prospects ahead of itself is e-commerce. Right now, under newly introduced restrictions in severely affected areas, only grocery and medicine stores are being allowed to operate during non-curfew hours. This, plus people’s desire to go out as little as possible, is creating good additional demand for e-commerce firms.
This has given rise to a lively debate as to what is essential and so allowed to move and what is not, with e-commerce firms claiming that the laptop and the mobile phone be declared as essential items which people need to use when they are advised not to go out.
The impact of all this is sure to affect the government’s tax collection. There will be renewed demand among sections of experts to put some buying power into the hands of poor people so that they do not starve. Demand under the rural employment guarantee programme is already seeing a rise and there will be acute pressure on the government to up direct benefit transfers.
Overall, the second wave is likely to seriously affect the economy and the hope earlier in the year that things will go back to normal soon will be belied. A huge amount of hope is being reposed on speeding up vaccination levels and the government has just announced major policy changes to facilitate this. But much time has already been lost, and with vaccination till now covering only under 8 per cent of the population, the year will be out before anything like herd immunity can be achieved. Thus the second wave is set to negate at least another year of our lives.
