The rapid spread of the second wave of the epidemic has inundated the health system in many parts of India. State governments had to impose sanctions to prevent the health crisis from deteriorating further. The cries of ambulance sirens that pierce the silence of our cities are not allowed.
Increasing lockdowns are hurting economic activity. Very high-frequency frequency indicators indicate a gradual decline in the movement of people and objects. However, the catastrophic recurrence of what we saw last year is unlikely, unless there is a national lockdown of the same severity. The lockdown index from Oxford University shows that the current restrictions in India are nowhere near as strict as the national lockdown imposed last year. There are a few other differences as well.
First, vaccines are now in play. The Indian vaccine program has gone into temporary supply limits, but if the daily vaccination rate is increased from 3 million to 5 million doses, half of the population could get two doses by the end of this year. More important from an economic point of view is how many people will get their two jobs by September or before the festive season begins.
Last year’s experience shows that home savings will spike during lockdowns, but will be spent quickly once sanctions are lifted. It is important to vaccinate enough people before the Indian festive season so that consumer demand gets back on track, however the risk of persistent precautionary savings after major revenue shocks should not be ignored. The measure of consumer confidence tracked by the Reserve Bank of India (RBI) has already weakened by March and the second wave has just begun to gather.
Second, governments and the private sector now have management experience during lockdowns. The most important lesson is that the movement of people should not be hindered by the movement of objects. The government continues to make a vague distinction between necessary and unnecessary goods. In a complex economy based on supply chains, what the government executive does not need may be exactly what the producer needs. A simple example of this is the distribution of laptops and their accessories to service employees working from home.
Third, there may not be a synchronized global economic downturn at this time. The two largest economies in the world seem to be recovering well. Moody’s estimates that additional household savings in pandemic-affected countries will be 6% of global gross domestic product (GDP) or $ 5.4 trillion. These lift global demand when people are confident in spending, which is based on a wide range of vaccines and strong job creation.
In India, the latest information in India suggests that states like Maharashtra and Punjab, which led the second wave, may be close to their maximum epidemics, while states hit by the latest wave will have to fight longer than those after. Economic reductions may be lower than last year if different states hit their peaks at different times. But the virus has been shown to cause nasty surprises.
So this time the potential for moderate financial losses is constant to bring the second wave under control. There are also concerns about the medium term. The Indian labor market has not yet recovered from its Kovid shocks, especially beyond the unemployment rate, with many retiring from labor and others returning to unemployment disguised as agriculture. Another challenge is to destroy productive capacity in the Indian economy, especially in small and informal enterprises. Larger companies performed better and possibly gained market share as well.
The main policy response to the first wave a year ago was driven by monetary policy. Monetary policy is traditional, especially when we take automatic stabilizers such as extra cost or lower tax revenues for the rural jobs scheme. Discreet financial motivation is best.
The RBI has kept policy rates lower than inflation for most of the last 12 months and has flooded the money market with liquidity through government bond purchases. It also used unusual methods to reduce term premiums. However, with persistent inflationary pressures, it will have to withdraw its extraordinary monetary support at some point — although this decision should only be considered after the second wave has subsided.
The smart recovery in tax collections in the second half of the previous financial year shows that a strong recovery in domestic demand would be less dangerous than what would appear if there were no temporary economic expansion. Despite the necessary concerns about government debt stability, the main policy response to another economic downturn should be led by the economy rather than monetary policy.
Currently, vaccination is the policy response with the most positive outcomes. There is a strong case for giving preference to vaccines over other control measures, as these diseases also protect the health of citizens and their incomes.
Niranjan Rajadhyaksha Meghnad Desai Member of the Academic Board of the Academy of Economics