Dr Ashwani Mahajan
While the last year’s pandemic created a health crisis in the country, all economic indicators including people’s incomes, employment, production, exports were badly affected by the first wave of Corona. Trembled by the sudden lockdown, the tragedy of the exodus of workers had shaken the country. The nationwide lockdown had brought economic activity to a complete halt. There was a significant reduction in consumption (especially non-essential consumption). Employment opportunities were significantly reduced. People were either fired from private jobs or their salaries were reduced by 25 per cent to 60per cent. Most of the factories were closed. Construction was stopped. The service sector was also badly hit. Many people engaged in self-employment, including shopkeepers, street vendors, khomchas, tea shop workers, restaurants, hotels and even advocates, engineers, etc., were all affected. The lockdown period was also very long and its opening pace was significantly slow.
All this had a devastating impact on the government’s revenues Significantly, when there was no trace of the coming pandemic, in the budget presented in February 2020, the tax revenue of the Central Government was proposed to be 20.21 lakh crores for the year 2020-21. While the revised tax revenue in the budget presented in 2021 had to be reduced to Rs 15.55 lakh crore (a loss of 4.66 lakh crores). Declining revenue on the one hand and forced spending on health and free ration (food items) to 80 crore people on the other, to deal with the pandemic; increased expenditure on employment generation in the villages, all led to fiscal deficit jumping from 3.5 percent of GDP to 9.5 percent of GDP.
Expectations of ‘V’ Shape Recovery
Plagued by pandemic, India’s GDP shrunk by 8 percent in the year 2020-21. However, better handling of pandemic as compared to the rest of the world and starting of vaccination, raised hopes for faster recovery of Indian economy. Good performance in the last quarter of the year 2020-21 (January to March 2021) had led to the expectation that the economy will achieve faster growth in the new fiscal year 2021-22. Various international agencies had expected GDP growth of over 13.8 percent for this year. The rating agencies were also improving India’s rating accordingly.
However, the devastating second wave of the pandemic in April 2021 is once again forcing us to think whether the Indian economy will shrink further? Will it wreak havoc on employment, income or manufacturing and exports, same way as it did in the first wave? It is true that the second wave of the pandemic has created a major health crisis in the entire country. The magnitude of the disease is high, mortality rate is also higher compared to first wave. A large number of people are dying due to lack of oxygen and treatment facilities. But the opinion of economists about how much effect this will have on the economy, is that the economy can do better than last year.
Economy will be better than last year
Most economists believe that though the magnitude of the pandemic has increased, the economy will do better than last year, though, earlier estimates of improvement in the economy will no longer be applicable. It is noteworthy that in the past, the International Monetary Fund had estimated growth of 13.8 percent in the economy. That is to say, in other words, after the contraction of 8 percent, the growth of 13.8 percent i.e. ‘V’ shape growth. It is to be noted that if the GDP starts increasing rapidly without any hindrance and lag, then it will be called ‘V’ shape growth.
Now that the pandemic has spread across the country in less than two months and its magnitude is also very high, the forecasts of growth in the economy will naturally go wrong. However, the question is, will the economy again go on the path of contraction? Experts believe that although the health crisis and economic crisis have increased in the second wave, its impact on the economy will not be so catastrophic. The Reserve Bank of India says that the second wave of Corona has affected economic activity in the first quarter of this year, but it is not totally collapsed.Therefore, its impact will not be as dreadful as it was last year, as per the Reserve Bank’s assessment. It’s notable that the lockdown was nationwide last year, this year it has happened only in those places where there is an outbreak of pandemic. Another reason for RBI’s thinking is that the time it took to adopt the ‘work from home’ mode last year, now people have already become accustomed to it. The system of online delivery and digital payment has also been fixed. The report acknowledges that the mobility of people must have been affected due to the pandemic. Non-essential spending and employment have also been impacted. Stocks have also piled up, but supply continues unabated, and there is no difficulty on supply side. The Reserve Bank has stepped up its security measures to reduce hardships to the people. Overall, 6.4 percent growth has been estimated on an annual basis in the first quarter (April to June 2021).
The Reserve Bank’s report states that it is true that the ‘V’ shaped recovery expected earlier will not be possible, but that the growth may adopt U-shape. The impact of this second wave will be more on the self-employed sector such as shopkeepers, street vendors, transport business, small industries etc. But agriculture and IT sectors are functioning almost normally. The impact of this second wave is also less visible on the services, manufacturing in organised automated segment, BPO etc. As the spread of the pandemic recedes, economic activities will possibly come on the track. In the second wave, we did not impose nationwide lockdowns and locally imposed lockdowns have yielded desired results. Most experts believe that the road ahead will pass through the vaccine. Through vaccination, we can save maximum part of the population from the disease. As we continue to get vaccinated, both the outbreak and fear of the disease will get reduced. In America majority of the population is vaccinated and now they have entered the mask less protocol. Economic activity is also gaining momentum there, Europe and other rich countries will also vaccinate their populations soon, and their economies will also be back on the track. Although the speed of vaccination in India is the fastest in the world, however, due to the large population size, it may take us nearly 9 months to vaccinate the entire population. But we can hope that with the spread of vaccination, the clouds of health and economic crisis will disappear and the country will be back on the track.
(The author is Professor, PGDAV College, University of Delhi)
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