Updated: May 25, 2021 9:03:53 am
The second wave of the pandemic is receding although it continues to have a significant adverse impact on lives, livelihoods and the economy. Meanwhile, the threat of a third wave is looming large. The impact of the pandemic on the economy is expected to be lower this time as the lockdown is less stringent. However, one difference between the first wave and second wave is that the latter is spreading to rural areas also. It is known that rural areas have poor health infrastructure. Similar to the first wave, inequalities are also increasing during the second wave. Thus, India has to address both growth and inequality issues.
The overall GDP growth would be less than the earlier expectations — the GDP growth in 2021-22 is expected to be around 8 per cent. The level of real GDP in 2019-20 was Rs 145.7 lakh crore. At the end of 2021-22, the level of GDP may be the same or lower than that in 2019-20. In other words, India would have zero per cent or negative growth over the two-year period FY20 to FY22. This is on top of the continuous slowdown of the economy during the eight quarters preceding the pandemic. India may become a $5-trillion economy only in 2026-27 or beyond with the assumption of 12 per cent nominal growth in the next few years. In other words, much more effort is required to compensate for the lost growth and put the economy on a higher growth path.
The country has to address the issue of rising inequalities for achieving higher sustainable growth and the well-being of a larger population. Inequalities were increasing earlier also, but the first and second waves of the pandemic have widened them further. The State of Working in India 2021 report of the Azim Premji University revealed that both poverty and inequality increased during the first wave. According to this report, the pandemic would push 230 million people into poverty. CMIE data shows a decline in incomes and rising unemployment during the second wave. In the week ended May 16, 2021, around 56 per cent of households reported a loss of income compared to a year ago. Unemployment increased to 14.5 per cent in the same week and it is high in rural areas also. India is suffering from a job crisis. The recent RBI Bulletin says that the impact of the second wave appears to be U-shaped. “In the well of the U are the most vulnerable — blue collar groups who have to risk exposure for a living and for rest of society to survive; doctors and healthcare workers; law and order and municipal personnel; individuals eking out daily livelihood; small business, organised and unorganised — and they will warrant priority in policy intervention.”
The recovery seemed to be K-shaped during the first wave. The share of wages declined as compared to that of profits. A large part of the corporate sector could manage the pandemic with many listed companies recording higher profits. On the other hand, the informal workers including daily wage labourers, migrants, MSMEs etc. suffered a lot with loss of incomes and employment. The recovery post the second wave is also likely to be K-shaped with rising inequalities.
What are the policies needed for higher growth and a reduction in inequalities? The government should have a three-pronged approach.
First, an aggressive vaccination programme and improving the healthcare facilities in both rural and urban areas is needed. Reducing the health crisis can lead to an economic revival. Vaccine inequality between urban and rural areas has to be reduced. As rural areas have poor health infrastructure, more efforts are needed to reach the rural areas for vaccination. The crisis can be used as an opportunity to create universal healthcare facilities for all, particularly rural areas. Other states can learn from Kerala on building health infrastructure.
Second, the budget offered some good announcements relating to capital investment in infrastructure. The Development Financial Institution (DFI) for funding long-term infrastructure projects is being established. A boost to infrastructure investment, including in rural areas, can lift the economy out of the Covid-19 induced slowdown. The government has to fast track infra investment. This can revive employment and reduce inequalities.
Third, there is a need for safety nets including cash transfers. The informal workers and other vulnerable sections including MSMEs have been dealt back-to-back blows in the last 13 months due to the first and second waves. A majority of workers have experienced a loss of earnings. Therefore, apart from its focus on infrastructure, the government has to provide safety nets in the form of free food grains for six more months, expand work offered under MGNREGA in both rural and urban areas and undertake a cash transfer to provide minimum basic income.
On economic growth, the RBI Bulletin says that “the biggest toll of the second wave is in terms of a demand shock” as aggregate supply is less impacted. There are two views on a consumption revival. One view is that once the second wave subsides and the majority are vaccinated, consumption will return to normal levels. The second view is that demand will be a constraint because of loss of incomes and employment. In the medium term, the investment rate has to be increased from the present 30 per cent of GDP to 35 per cent and 40 per cent of GDP for higher growth and job creation. There is positive news on exports as the global economy is reviving. Export is one of the main engines of growth and employment creation. However, in recent years India’s trade policy has become more protectionist and the country has to reduce import tariff rates.
Monetary policy is already very accommodative and there are limits to more accommodation. In the near term, fiscal policy has to play a more important role in achieving the objectives of growth, jobs and equity by expanding the fiscal space by restructuring expenditure, widening the tax base and increasing non-tax revenue. Of course, fiscal policy has to return to a stable path in the medium term.
This column first appeared in the print edition on May 25, 2021 under the title ‘The second wave challenge’. The writer is director and vice chancellor, IGIDR, Mumbai
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