Covid surge taking its toll on economic recovery

Sushma Ramachandran

Senior Financial Journalist

The International Monetary Fund’s upward revision of the India growth forecast for 2021 came at a singularly inauspicious moment last week. The surge of Covid-19 throughout the country, especially Maharashtra and Kerala, had just given the country the dubious distinction of having the second highest number of total cases in the world. Curbs on economic activity and movement were also imposed in Mumbai, not only the country’s financial capital but also one of its biggest industrial and commercial hubs.

In this backdrop, it seemed inexplicable that the IMF would be enhancing its original projections of 11.5 to 12.5 per cent growth for the year. The mystery was solved when IMF chief economist Gita Gopinath mentioned in a media interview that the assessment had been finalised in the first week of March when a Covid resurgence was just a blip on the horizon.

Even so, she maintained the forecast would remain unaltered in the face of regional lockdowns or restrictions. The projections would only change in case of a national lockdown, which looks unlikely for the time being.

It is clear, however, that the economic recovery process is getting derailed by the second wave of the pandemic. Apart from the strict measures being imposed in Maharashtra, several other states are now implementing night curfew. These have a direct impact on supply chains throughout the country as much of the work is done at night.

Numerous reports speak of migrant labour moving out of key industrial centres like Maharashtra and Delhi as commercial establishments are either closed or face restricted hours. Some migration is fear-based, on the assumption that a full lockdown would be imposed like last year and workers will be stranded without any means to return to their homes. The result is that manufacturing units are beginning to face labour shortage. This has, in turn, pushed up wages of temporary or contract workers but it cannot be viewed as a positive simply because it will inevitably be a temporary phenomena.

The experience of last year cannot be discounted in relation to migrant workers and unemployment. About nine million jobs are estimated to have been lost during the pandemic last year. A continuation of restrictions on factories and commercial establishments could mean a fresh wave of misery for those who had barely begun to recover from the wage losses of last year.

To get an inkling of the widespread nature of Covid curbs, one must point out that these have been extended in Punjab, Odisha, Gujarat, Haryana and Puducherry. Uttarakhand has imposed night curfew but, ironically, is also hosting the Maha Kumbh which could be turn out to be a super-spreader as thousands of pilgrims are arriving every day. As for the other states, industrial and commercial activity will be affected, especially in industrial hubs like Jodhpur and Ludhiana which are centres for the export of furniture and apparel, respectively.

The manufacturing sector already reached a seven-month low in March, according to the IHS Markit Purchasing Managers Index (PMI). The PMI is a survey-based indicator of business activity. Other indicators like power consumption, GST collections and freight revenues may continue to be positive, but the PMI shows that business and industry are witnessing a definite downward trend. The question is: will the economy be resilient in the coming months or will earlier expectations of a buoyant recovery be belied?

As of now, it looks as if the chances of a V-shaped recovery, seemingly visible, based on many green shoots just two months ago, are now receding into the background. It may be more realistic to expect a K- shaped recovery which can be described as a more uneven and much slower process. This is a likely scenario in light of the Covid surge that is now spreading throughout the country, even into the Hindi heartland states of UP and Bihar. Some elements of the economy may continue to grow rapidly such as agriculture and digital economy, as in 2020.The manufacturing sector, however, looks set to face constraints yet again.

The Index of Industrial Production has given a glimpse of the coming upheavals, recording a seven-month low of 3.6 per cent contraction for February 2021. The data continues the declining trend of the previous month. Simultaneously, inflation has reached a four-month high of 5.5 per cent while the Sensex remains volatile. The overall outlook for growth in 2021-22 continues to be pegged at double-digit levels by most agencies for the time being, but a clearer picture will emerge after the April-June quarter.

What is of most significance going forward is the impact on small industry and those at the bottom of the pyramid — the migrant workers. The budgetary stimulus did not provide enough for either of these two segments that have been the hardest hit during the pandemic. Investment in infrastructure was a notable element of the budget, but it failed to provide an adequate safety net for small business or those employed in the unorganised sector. The fresh wave of restrictions now can only serve to increase the inequality recorded by the Oxfam study that showed a 35 per cent increase in the wealth of Indian billionaires during the pandemic.

The outlook for the current fiscal in the midst of the raging wave of the pandemic, thus, remains fairly uncertain. Much will depend on the reaction of both the Central and state governments to the new situation. The Centre is urging the states to focus on containment zones rather than damaging lockdowns but has done nothing to prevent events like the Maha Kumbh or the massive rallies in all the state elections that are fuelling the present crisis.

The states, on their part, should have taken steps to curb Covid-inappropriate behaviour in public places and ramped up testing much earlier rather than clamping down at this late stage on trade and industry. Livelihoods are at stake ultimately. Health and pandemic policies in the coming days must be aligned with the needs of the economy, rather than moving on separate tracks.

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