The second wave of the pandemic is receding although it continues to have a significant negative impact on lives, livelihoods and the economy. Meanwhile, the threat of a third wave looms. The impact of the pandemic on the economy is expected to be weaker this time around, as the lockdown is less stringent. However, a difference between the first and second wave is that the latter also extends to rural areas. We know that rural areas have poor health infrastructure. Like the first wave, inequalities also increase in the second wave. India therefore needs to tackle both growth and inequality issues.
Overall GDP growth would be lower than earlier expectations – GDP growth in 2021-2022 is expected to be around 8%. The level of real GDP in 2019-20 was Rs 145.7 lakh crore. At the end of 2021-2022, the level of GDP could be the same or lower than that of 2019-20. In other words, India would have zero or negative growth over the two year period FY20 to FY22. This is in addition to the continued slowdown in the economy in the eight quarters leading up to the pandemic. India could grow into a $ 5,000 billion economy just in 2026-2027 or beyond, assuming nominal growth of 12% over the next few years. In other words, it takes a lot more effort to make up for lost growth and put the economy on a higher growth path.
The country must tackle the problem of growing inequalities in order to achieve higher sustainable growth and the well-being of a wider population. Inequalities were also increasing earlier, but the first and second waves of the pandemic made them even worse. The State of Work in India 2021 report from Azim Premji University found that poverty and inequality increased during the first wave. According to this report, the pandemic has plunged 230 million people into poverty. CMIE data shows a drop in income and a rise in unemployment during the second wave. In the week ended May 16, 2021, around 56% of households reported a loss of income compared to a year ago. Unemployment rose to 14.5 percent in the same week and is also high in rural areas. India is suffering from a jobs crisis. The recent RBI bulletin indicates that the impact of the second wave appears to be U-shaped. “In the well of the U are the most vulnerable groups – the blue collar workers who have to risk exposure for a living. and for the rest of society to survive; doctors and health workers; public order and municipal staff; individuals seeking to earn a daily living; small businesses, organized and unorganized – and they will deserve priority in policy intervention. “
The recovery seemed K-shaped in the first wave. The share of wages has fallen relative to that of profits. Much of the corporate sector could handle the pandemic, with many listed companies recording higher profits. On the other hand, informal workers, including daily wage workers, migrants, MSMEs, etc. suffered greatly from the loss of income and jobs. The recovery after the second wave is also likely to be K-shaped with growing inequalities.
What policies are needed for stronger growth and reduced inequalities? The government should have a three-pronged approach.
First, an aggressive vaccination program and improved health facilities in rural and urban areas are needed. Reducing the health crisis can lead to economic recovery. Inequalities in immunization between urban and rural areas must be reduced. As rural areas have poor health infrastructure, additional efforts are needed to reach rural areas for immunization. The crisis can be used as an opportunity to create universal health structures for all, especially rural areas. Other states can learn from Kerala about building health infrastructure.
Second, the budget made good announcements about capital investment in infrastructure. The Development Finance Institution (DFI) for financing long-term infrastructure projects is being established. Increased investment in infrastructure, including in rural areas, can pull the economy out of the Covid-19-induced slowdown. The government must speed up infra investments. This can boost employment and reduce inequalities.
Third, we need safety nets, including cash transfers. Informal workers and other vulnerable sections, including MSMEs, have suffered back-to-back hits over the past 13 months due to the first and second waves. A majority of workers suffered loss of income. Therefore, in addition to focusing on infrastructure, the government should provide safety nets in the form of free food grains for an additional six months, expand the work offered under MGNREGA in rural and urban areas, and undertake a transfer. in cash to provide a minimum basic income.
Regarding economic growth, the RBI Bulletin indicates that “the biggest toll of the second wave is in terms of demand shock” because aggregate supply is less impacted. There are two views on a recovery in consumption. According to some, once the second wave has subsided and the majority are vaccinated, consumption will return to normal levels. The second view is that demand will be a constraint due to loss of income and jobs. In the medium term, the investment rate must rise from the current 30% of GDP to 35% and 40% of GDP for stronger growth and job creation. There is positive news on exports as the global economy recovers. Exporting is one of the main engines of growth and job creation. However, in recent years India’s trade policy has become more protectionist and the country needs to reduce import tariff rates.
Monetary policy is already very accommodating and there are limits to more accommodation. In the short term, fiscal policy must play a greater role in achieving the goals of growth, jobs and equity by expanding fiscal space by restructuring spending, broadening the tax base and increasing revenue non-tax. Of course, fiscal policy must return to a stable path over the medium term.
The writer is Director and Vice-Chancellor, IGIDR, Mumbai