Covid-19 will have a bigger impact on the economy than previously expected

Impact on the economy would be heavier than estimated

India’s daily Covid-19 infection count continues to increase with no clear sign of stabilisation. The country crossed the 4 million infection mark last week and reported over a record 90,000 cases on Sunday. It now has over 12 per cent of all active cases in the world and accounts for about 8 per cent of all deaths. India is expected to overtake Brazil anytime now to become the country with the second-largest number of cases. Although the death toll compared to the population is still low, the numbers in absolute terms were unimaginable five months ago, and will get worse if testing increases. Previously imagined success stories such as Kerala and, to some extent, Delhi are seeing a second wave of cases.

It appears that with a simultaneous, progressive opening up, which was unavoidable to save livelihoods, the only solution left for containing the disease is developing a vaccine and then administering it as quickly as possible to the entire population. That task would be massive. As Nandan Nilekani noted in an interview to this newspaper, enrolling one billion people for Aadhaar took over five years, but vaccination can be done faster. Online training and certification can be provided to vaccinators. The entire programme will need to be tech-enabled. However, the vaccine is still some distance away and it is not clear how soon the availability could be scaled up in India. But the government will need to be prepared.

Meanwhile, the toll on the economy is likely to be heavier than previously estimated because localised lockdowns will disrupt production chains and slow the recovery. The Indian economy contracted by about 24 per cent in the first quarter of the current fiscal year. As the decline in output was higher than expected, most analysts are lowering their full-year forecast. Some of the high-frequency indicators such as car sales and the Purchasing Managers’ Index have improved, but it remains to be seen if the rebound can be sustained. The continued rise in infection will affect both demand and supply. The supply shock has pushed up inflation and the trend might continue in the coming months. As a result, the central bank would not be in a position to support economic activity by lowering policy rates. Further, the twin balance sheet problem will become even bigger. The Reserve Bank of India has allowed a one-time restructuring of loans. However, there is no clarity on recapitalisation of public sector banks.

In the given situation, both the monetary and fiscal authorities will be expected to come up with creative solutions. The good and services tax (GST) issue is one manifestation of new challenges. The Centre has recommended that the states borrow and cover the GST shortfall, which can be repaid through the extension of cess. But the idea has been rejected by many states. Besides, steps to prevent large-scale bankruptcies and provide consumption support for the poor would be essential. The government would require more resources to fulfil its obligations and support the economy. Thus, it would soon need a revised road map for expenditure and a clear idea as to how additional funds would be raised, including monetisation of deficit. Meanwhile, at a different level, the education system may well lose a year. Overall, there is bad news all round with no end in sight.