ECONOMY AND MEASURES: 2nd COVID WAVE

[Dr. Sanjiv Agarwal]

Amid a severe second COVID wave, Ministry of Finance feels that the economic impact may not be as serious as was in 2020. Our GDP may take a hit of one percent as lockdown is being applied in few states and that it is not pan India.

According to Ministry of Finance, based on its economic review for April, 2021,the second wave of COVID 2019 is on and it poses a downside risk to economic activities in first quarter of FY 2020-21 (ie, April - June 2021 ). It is likely to have a muted economic impact as compared to COVID -19 first edition in 2020 . Many rating companies and other agencies have also now echoed the similar views and as a result, GDP projections for 2022 are being downgraded.

The FY 2020-21 closed recently resulted in higher indirect tax collection ( Customs, Central Excise and GST ) to the tune of 8.2% higher than the revised estimates (RE ) and 12.3 % higher than 2019-20 collections.given the fact that 2020-21 was an unusual year, this collection is Infact encouraging . Not only this, imports rose by 166 % and 7 % respectively over 2020and 2019. Similarly, grew by 197 % and 16% over 2020 and 2019 respectively . While these figures may sound like music to ears,we cannot brush aside the likely loss of lives, businesses and the economy as a whole in COVID second phase and the likely third wave in offing. How many more waves are in store, it could be anybody's guess .

Though fiscal position of Government improved with widespread economic activities in October ,2020- March ,2021, which is also reflected by tax collections , yet from April ,2021 onwards, second wave of COVID has resulted in partial lockdowns in the country and consequent imposition of restrictions over economic activities. With rapid spread of COVID , many states have imposed partial or total lockdown or curfew on all businesses and social activities. At the same time, higher health risk has also posed challenges with cost of health care  infrastructure mounting up as well as very high number of fatalities resulting in loss of lives.

The two silver linings appear to be Indian experience of learning to operate and live with COVID coupled with introduction of largest vaccination project being undertaken now. The results may show few weeks down the line.

A realistic consequence of COVID pendamic could be counted in terms of loss of jobs, stagnant or reduced employment opportunities, increase in poverty, regressive economic impact, deterioration in incomes and disposable surplus, lesser savings, gaps in education, malnutrition , increased inequalities and so on. For the Government , this could mean lesser tax revenues, both direct and indirect .

It is not that COVID brings in recession in all businesses. While there is general slowdown in the economy across the board due to multiple factors - closure , business restrictions , shortage of raw materials and other inputs, lack of demand, inadequate liquidity , shortage of labour owing to migration , demand I elasticity and so on , there are certain sectors in which businesses and demand have grown. Such sectors include food items, goods of essential consumption, FMCG , pharma products, health care goods and services etc. the consumer behaviour has undergone change with lesser spends and more savings. While credit off take has reduced in general, it may pick up in case of small businesses and where production has gone up due to more demand , say pharma , sanitisers etc.

It is also a fact to realise that COVID has impacted the poor more than the rich - be it jobs or income, this having an overall regressive impact on economic front. We need to ensure that both, demand side and supply side measures should be taken. Further, politics can not afford economic pain at the cost of populist measures.

With so much of destruction of lives and resources all around, there is now a sincere need for a new economic blueprint - may be over and above the Budget 2021-22. Infact , this year's Budget did not factored in the present second phase of COVID whereas we are now looking at the third phase of COVID . Given the present situation, our Government , both central and states, ought to draw a new economic framework which provides for numbers, timelines and logistics with enough of economic flexibility and cushion for adequate liquidity. This may involve policy measures for poor, middle- class, private sector, farmers, taxpayers, labour and job creation along with keeping the wheel of economic cycle moving at a desired pace. 

Recently, Reserve Bank of India has announced measures in terms of debt relief, enhanced liquidity and facilitation to MSMEs to overcome financial difficulties owing to COVID . Accordingly, debt moratorium will be made available to borrowers who did not restructure their loans in 2020 and were standard accounts till March , 2021. This would be available to borrowers with exposure upto to 25 crores. About 90 percent of the total borrowers fall under this category. RBI has also  allowed a special liquidity of ₹ 50,000crore for banks to lend to health care sector.

While RBI feels that the economic impact of COVID 2nd wave may not be as severe as that in 2020, rating agencies have started down grading their GDP forecasts for India . S&P Global has reduced the same for FY 2021-22 from 11 percent to 9.8 percent.