Ukraine, virus threaten economic recovery

Arange of research agencies and financial institutions, both domestic and multilateral, have lowered their forecast of the growth that the Indian economy is likely to achieve in the 2022-23 financial year that has just commenced. What is more serious is that we have not seen the end of this story.

As the year progresses and the negative factors that have recently come into play become more robust, further downward revisions may be ahead in the country. The Indian central bank, RBI, has lowered its projection from 7.8 per cent to 7.2 per cent. The World Bank, displaying a similar perception, has lowered its sights from 8.7 per cent to 8 per cent.

Before we go any further, it is important to note that despite these downward revisions, the growth outlook for the Indian economy remains one of the highest for major economies. And if there is a further downward revision, it is likely to be part of an overall similar movement in the entire global economy which is likely to affect most other economies as well. So downgrade or not, the differential in the growth rate between India and other major economies is likely to remain in India’s favour.

There are two major reasons why the outlook has turned sombre. One is the war in Ukraine which has wreaked havoc on global commodity supplies. This has sent commodity prices soaring, with a major part of the impact being on global energy prices. Russia is a key energy supplier to a lot of European economies, notably the Germans. Even as it is seeking to cut back on trade with Russia, it remains dependent on Russian natural gas.

In India, the need for energy majors to pass on the impact of the price rise for global imports — and on energy, India remains heavily import-dependent — has been coupled with the need to make up the lost ground when in the run-up to the last round of Assembly elections, prices were held steady despite the rise in input costs. As a result, there is now severe consumer anguish over the manner in which the prices of petrol, diesel and LPG, widely used by households, have been hiked.

The overall impact as a result of the disruption in supply chains and rise in international prices is the consumer price index-based inflation reaching a 17-month high of 6.95 per cent in March. As a result, for the entire first quarter of the 2022 calendar year, retail inflation has breached the monetary policy committee’s target of 4 (+/-2) per cent.

If this persists, the central bank will have no option but to tighten liquidity, which will set in motion a vicious circle. As banks and financial institutions tighten their purse strings in response to regulatory signals and lending rates go up (the SBI and several other leading banks have just done so), business will have to live with costlier working capital. This will force them to cut back production, which will accentuate the overall sentiment of shortages and, thus, do its bit to take prices up further.

Cutting back on production at the small and medium business levels will mean a cutback in the unorganised sector job availability. The resultant cut in earnings, along with the rise in prices, will hit private consumption and stymie the recovery in demand and overall economic activity that had begun to take place as the third Covid-19 wave had waned and life overall sought to get back to a normal rhythm.

This brings us back to the second reason why a cloud has appeared over the growth prospects for the current year. There are ominous signs that in a small way, Covid-19 is appearing to enter a new phase of resurgence as a new mutation of the virus appears to take hold. Right now, Delhi and adjoining Haryana appear to have been perceptibly affected and going by the pattern that has already been established, it is only a matter of time before the entire country is affected.

Europe, China and the US are all in the grip of a virus resurgence even as with infection from the last Omicron wave subsiding, India and a cross-section of countries had begun to remove all international travel restrictions.

The outlook right now is that the new mutation of the virus, having begun to spread from across the country’s international borders, will cross state boundaries too and before we know it, the country will be in the grip of another infection wave.

What can be done to minimise the damage that clearly appears to lie ahead? The first answer is — don’t take the path followed earlier; that is, do not go in for a strict and severe lockdown (as China has been doing in Shanghai) which will do more harm than good. The last thing that the country can afford is a loss of unorganised sector jobs that will raise the spectre of destitution again for those who are least equipped to fight it.

The policy that needs to be followed is to let national life go on as undisturbed as possible and the government continuing with its welfare measures, like the distribution of free food, which it has already announced. But for this to work, there has to be a powerful non-economic agenda to go with it.

The first thing that needs to be done is to make it obligatory for all to wear masks in public and follow the three Cs: avoid crowds, closed spaces and close contact. Right now, the use of masks has almost disappeared in most parts of the country.

Along with this, it is imperative that the vaccination drive be stepped up. All adults need to complete not just the two-dose vaccination regime but also be administered the booster dose. Currently, the government has permitted all adults to privately secure the booster dose. This is ill advised. It is unthinkable that a poor person will be denied the additional protection that the booster dose will give because he does not have the means to pay for it.

Against this forbidding scenario, there is one distinctly bright spot. Even as the spread of infection gains momentum again, its impact does not appear to be severe. The level of hospitalisation remains low, as also the number of deaths. This raises the hope that the pandemic is on its way to becoming endemic, like the flu which is tackled with an annual flu shot.