The year began with a bright outlook for the economy, but now, halfway into 2021, the situation has changed dramatically. In January, there were widespread projections of a V-shaped recovery from the trough of the pandemic year, even as most economic indicators were looking upwards. Six months on, the scenario is gloomy and there are predictions of yet another growth contraction during the second Covid wave.
Recovery now only looks possible from July onwards. The earlier upbeat growth forecasts made by ratings agencies, multilateral bodies and even the Reserve Bank of India have lately been watered down considerably.
Barclays, for instance, downgraded its growth projection for fiscal 2021-22 down to 9.2 per cent from 11 per cent earlier. Moody’s also revised its predictions for growth from 13.7 per cent to 9.3 per cent. The World Bank now expects India to grow by only 8.3 per cent during the year against the earlier estimate of 10.1 per cent. The RBI, in its turn, has revised expectations down to 9.5 per cent from 10.5 per cent, while the State Bank of India is the most pessimistic with a growth forecast of 7.9 per cent from 10.4 per cent previously.
The second Covid surge in April and May has been the villain of the piece and regional lockdowns have stalled business and commercial operations. Unlocking is taking place in most parts of the country in a phased way, but normalcy is likely to return only in mid/late July.
In other words, the first quarter of the current fiscal will have a dismal outcome and the prospects for recovery hinge on the rest of the year. The only plus point is that compared to last year’s total economic shutdown, this time there have been relaxations for essential activities and transport movement. Even so, recovery will be vastly slower than envisaged six months ago.
Inflationary pressures have also built up in the economy, unlike after the initial Covid wave. Wholesale price inflation touched 12.94 per cent in May, the highest in decades. Retail inflation reached 6.3 per cent year-on-year in the same month, breaching the RBI’s upper tolerance band of 6 per cent. This is a sharp rise from 4.29 per cent recorded in April.
The data raises questions over whether the central bank’s accommodative policy can continue in the coming months. For the time being, it is clear that most members of the MPC feel that there is a greater need to focus on recovery in the economy, but even this outlook could change if inflation continues to gallop at this pace.
The culprits driving this scenario are food and fuel. The pass-through effect of hardening international crude oil prices is having a cascading effect at the retail level. As far as oil is concerned, rapid price hikes over the past few months indicate that the government’s urgency of ensuring higher revenue inflows outweighs the repercussions of the inflationary impact.
Food prices are also part of the problem, with the biggest role played by edible oils. The shortfall in domestic availability of these oils has led to a reliance on the increasingly costly imports.
Recovery will also be halting till there is a revival of the worst-affected micro, small and medium enterprises (MSME) segment as well as the services economy, including the hospitality sector and aviation. Here too, the story is the same: that the upswing in the early part of 2021 was negated by the second Covid surge rising to a peak in April and May in most parts of the country.
Nearly 60 per cent of the NPAs in these two months are reported to have come from the MSME sector. Retail associations are also asserting that there was a decline of nearly 80 per cent in normal business during May. These sectors are also the biggest employers. No wonder then that data is showing job losses doubling from 7.4 million in April to over 15 million in May, indicating the mounting impact of the pandemic.
The worry now is that a third Covid wave may be on the horizon. Medical experts are already making predictions that the lack of Covid-appropriate behaviour could bring it on sooner rather than later. It is abundantly clear that any amount of fiscal stimulus is not going to fix the immediate problem which is to ensure that further lockdowns of the economy, even if regional in nature, are averted as far as possible. More curbs will bring more distress and yet more loss of livelihoods, whether in the urban or rural economies.
The solution to the impending crisis is clearly two-fold. The first is to ensure that vaccinations are on track and that the country is able to achieve the highly ambitious target of covering the entire population by December this year. And the second is to ensure that the basics of Covid-appropriate behaviour, like wearing masks, are enforced in public places.
For the first, the outlook is not bright as vaccine shortages have yet to be fully overcome. On the plus side, the government seems to have recognised flaws in its earlier planning and begun making advance payments to vaccine manufacturers and become more liberal on imports. Epidemiologists claim that even this will only enable 70 per cent of the population to get one dose by December. Whether the government will achieve its target of 100 per cent by this date will have to be seen in the coming months, as similar confidence on vaccine availability in the beginning of the year proved to be a mirage.
On the second, state governments must play a bigger role in ensuring careful implementation of unlocking measures. Mumbai (Maharashtra) is widely considered to be a model in this regard and could, perhaps, be used as a template by other states in this regard.
The fact is that there is a critical link between Covid surges and economic recovery. Industry association chiefs are now talking about the need for being very watchful before unlocking to avoid a second Covid wave. It is also recognised by all that there is no path towards revival without a widespread vaccination of the population. Unless this becomes a reality, there is little hope of achieving even the revised projections of economic growth for the current fiscal.
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