Mainstream, VOL LIX No 34, New Delhi, August 7, 2021
Persisting Socio-economic Crisis: COVID-19 Lays Bare the Social Fault Lines | Arun Kumar
Saturday 7 August 2021, by#socialtags
(*This article is substantially based on Kumar (2020d) and is appearing in Raza G. and S. Singh (Ed.) (2021). The Second Pulse of the Pandemic: A sudden surge in scientific temper during the Covid-19 crisis. N Delhi: Anhad. Forthcoming.)
The global battle with the Sars-Cov-2 virus is on for more than 18 months and in spite of vaccination it is continuing. Humankind has not yet got the problem under control. India is witnessing the persistence of the second wave with around 40,000 cases a day in mid-July while when the wave started around the mid-February, the daily cases were about 9,000.
Given the slow pace of vaccination which has barely covered 5% of the population with two doses and 20% with one dose, it is feared that a third wave of the disease has already started or is about to start. The third wave is most likely given that a large per cent of the population remains unvaccinated and susceptible to the disease. It is not known how many may have developed immunity to the disease since they had got infected earlier and anti-bodies may have developed in their bodies. So, it is unclear when the third wave may start and how intense it may be.
The prevailing uncertainty makes it is difficult to predict the course of the economy in the coming months. Government is of course predicting a quick recovery to talk up the economy and especially, the corporate sector. But reports from the ground have been rather grim and that would imply a slow recovery. As the economy unlocks, undoubtedly the rate of growth will rise as the stalled economic activity revives. But the issue is when will it happen and whether the economy will recover back to its pre-pandemic level in February 2020? It needs to be flagged that the economy was already slowing down in the last quarter of 2019-20 the growth rate had dropped to 3.1%. So, trouble was already brewing pre-pandemic.
The government presents data based on the organized sector performance for which it gets the data regularly. But this ignores the crisis in the unorganized sectors of the economy which have borne the brunt of lockdown. Thus, official data project a brighter picture of the economy than the actual. Government quotes international agencies and the Indian financial sector experts from banks and financial institutions in support of its projection of a quick recovery. But, these agencies do not collect independent data and use the government data only. Thus, their projections cannot differ much from those of the government.
Given the trickle down policies pursued for long in India, the pandemic has hit the poor and the unorganized sectors hard (Kumar, 2020d). Chakravarty, (2018) points out that in 2018, the top 1% of Indians had 51.5% of the nation’s wealth while the bottom 60% had 4.7% of it. This is one of the highest inequalities among nations and this does not take into account the black wealth of the top 1%. This inequality has increased during the pandemic. It is reported that 230 million people have slipped below the poverty line due to the pandemic (Centre for Sustainable Employment, 2021). This is impacting children also, of whom many have dropped out of school. BusinessToday.In (2021) quoting CMIE says that 97% of workers have lost incomes due to the pandemic. Given that the rich have made big gains in the stock markets, disparities could only have further increased during the pandemic.
This piece uses official data supplemented by data from alternative sources to present an alternative picture of what has been happening in the Indian economy since March 2020.
The Disease, its Virulence and Lockdown
Sars-Cov-2 virus is the 7th new virus to afflict human beings in the last two decades - there have been Ebola, Zika, H1N1 and so on. But, this is the most virulent of them all. It spreads rapidly and even though mortality associated with it (around 1% of the infected) is small compared to say Ebola (50% of those infected), it can kill large numbers, if allowed to spread.
Like, other diseases, it attacks at the cellular level and because people do not have anti-bodies against this new virus, it can cause severe illness and death. Its unchecked upsurge causes the medical system to collapse, as was the case with many Indian cities during the second wave. New York City which has a well-endowed medical infrastructure barely escaped getting overwhelmed. When the medical system collapses the number of deaths rise. In India, the medical system experienced shortage of beds, oxygen, medicines, medical personnel to take care of the sick and so on.
To prevent the systems from breaking down, the spread of the disease has to be slowed down. Since to begin with no vaccine or medicine is available, the spread of COVID-19 could only be slowed down through stopping human to human transmission. That is, if people did not meet each other. That meant that they do not go out and take appropriate precautions such as, social distancing and use of masks.
So, a lockdown becomes necessary to prevent people from going out and meeting each other. It is not a cure for the disease but it slows down the spread of the disease. After a successful lockdown is implemented, the disease keeps spreading for another 2 weeks and then starts to plateau and decline. But for this, the lockdown has to be effective.
II.1 Lockdown and Plight of Unorganized Sector
A lockdown was imposed in various countries — UK, Spain, Italy, China, S Korea, Iran, India and so on - at different points of time, depending on when they were hit by the disease. In most countries, it was relaxed in 2020 after the number of daily infections came down substantially. But in India, the lockdown was relaxed starting in June 2020 when the number of infections were rising. The peak was reached only in mid-September 2020 by which time the economy had opened up considerably, especially due to the festive season.
The economic impact of a lockdown is that the economic activity declines substantially. Factories, offices, schools, etc., exist but because people cannot go there to work, they stop and the output of the economy declines. Only those involved in the most essential activities are allowed to go out of their homes. Activities in open spaces like, in agriculture, mining and forestry pose less of risk so they can continue with precautions. Counting these and the most essential activities, economic activity in India contracted in April-May 2020 to about 25% of what it was pre-pandemic (Kumar, 2020d). Naturally, with greatly truncated activity there was a sharp decline in the economy and its measure, the GDP.
Out of the twenty major economies of the world, India experienced the sharpest decline in its GDP. The reason is that India has a very large unorganized sector — the largest among all major economies — and it was hit hard.
The unorganized sector in India employs 94% of the workforce and produces 45% of the output (Kumar, 2017). It came to a complete halt. These people (workers and employers) work with little capital and low incomes. So, as soon as their activity stops, their incomes dry up and 80% of the people surveyed said that they do not have the capacity to buy even one week of supplies. The employers quickly exhaust their capital and cannot easily restart activity on their own. Thus, millions faced a crisis of existence and started to migrate to the villages from where they had originally come to the cities in search of work.
This kind of mass migration in terrible heat without food and water, dependent on the charity of people on the way, dragging their few belongings and carrying children in their laps was not seen anywhere in the world. They were willing to walk a thousand kilometers. They were cheated by the transporters and beaten by the police but they had no choice but to go back to the village in the hope that at least food would be available there from the fields. The crisis in the villages increased since families there were dependent on the remittance from the city. Now not only did the remittance stop but additional burden of the returning family members had to be borne with little possibility of additional income. The demand for work under the rural employment guarantee scheme (MGNREGS) shot up but not enough work was available under it (Kumar, 2020d). All this points to how policy making ignores the interest of the marginalized sections.
II.2 Imperatives of a Successful Lockdown
It should have been clear to the policy makers that the unorganized sector cannot cope with the lockdown unless special steps were taken. Not only do they work on a day to day basis with no fixed contract, they do not get a living wage and live in uncivilized conditions. They may have to stay 5 to 10 people in a room, don’t have access to toilet or clean drinking water, don’t have money to buy essentials for extended periods of time, etc. This is the result of our faulty development paradigm in which the profits of businesses and the life style of the well-off depends on the cheap labour provided by the unorganized sector — they are the reserve army of labour, keeping wages down, to below a living wage.
To expect many people to stay 24x7 in one room is unrealistic. Further, they have to go out for water, toilets, food and other essentials. So, for them to observe a lockdown becomes impossible - unless special provisions are made for them. The government did not think of all this. On 18th March 2020, this author had spelt out what needed to be done for a successful lockdown but the government did not think this through. What was suggested was difficult but the impending situation was worse than a war and called for drastic steps (See Kumar, 2020d).
The steps suggested were
- Allowing those wanting to go back to villages to go back after testing
- Dispersing those who stayed behind in tent colonies and empty school buildings
- Providing the essentials of life to people wherever they were
- Ramping up the health facilities rapidly, and
- Providing support to the small and marginal producers
The non-implementation of such steps led to a vast majority of Indians facing a deep crisis, especially in urban areas. And the disease spread to the rural areas. There was a breakdown of the health system in the first wave itself but the lockdown was relaxed in June 2020 when the number of cases was still rising and the intensity of the wave kept on rising till the middle of September. So, the lockdown was not quite successful in controlling the disease in India.
This was in contrast to many other countries which implemented unlock when the number of cases had come down sharply. For instance, in UK, worst affected country in Europe, from a peak of around 5,000 cases a day the numbers came down to a few hundred a day when the first lockdown was implemented in July (Kumar, 2021d).
China was able to control the spread of the disease through a brutal lockdown which most democracies can hardly think of implementing. The lockdown in Wuhan and Hubei province was very strict so they could prevent the spread to the rest of the country and they could revive their economy quickly after the unlock process. Much of East and South East Asia implemented strict lockdowns and had extensive programme of testing and tracing to control the disease. They have had periodic localized breakouts of disease but they have quickly managed to control it.
II.3 Premature Opening up and Mutations
As the virus keeps spreading and infecting people, it mutates. Some of the new strains have proved to be very virulent - spreading fast and overwhelming nations. Apparently thousands of mutations have taken place in the original version which is called the wild or original variety that was first detected in Wuhan, China. The more it persists and spreads, the more the mutations. However, not all mutations are cause of worry. The significant variants are classified as Variant of Interest (VOI), Variant of Concern (VOC) and Variant of High Consequence (VOHC).
Many VOC have emerged and spread rapidly throughout the world. By the time a new variant is discovered and classified as VOC, many months elapse and by then it spreads across the world. For instance, the variant that emerged in Kent, England in September 2020 and the Delta variant emerging from India in February 2021 had spread globally by the time attention was focused on them.
So, the following things become essential:
- The disease should not be allowed to persist in any major way.
- Unlock can allow the disease to keep spreading if it is premature, in the sense that the number of infections is large at the time of unlock.
- Testing, tracing and genome testing, has to be kept up as long as the disease persists.
Whichever country went for premature unlock there was another wave of infections (See Kumar, 2021d). In Brazil the waves merged one into the other. In the USA also since it did not have a national lockdown, waves persisted and merged into each other.
It is only massive vaccination that has helped control the disease to an extent as has happened in some of the advanced countries, such as Israel, UK and USA. But `breakthrough infection’ is being reported among people who have been vaccinated. Fortunately, they get a mild form of the disease. So, vaccine definitely works in reducing the chances of severe infection. But newer VOCs seem to be able to cause more breakthrough infection. Further care needs to be exercised since we do not yet know how long the immunity created by the vaccine or the infection lasts.
Theoretically, it is possible that a new VOC may completely escape the anti-bodies created by the available vaccines. So, it is often suggested that we may have to keep changing the vaccines every year as new VOCs emerge.
The solution is a `collective’ one. As long as the disease persists, there is a possibility of the virus mutating and severely infecting people again. So, the disease has to be eliminated from everywhere in the world. The virus does not respect borders or classes. It has spread even to the Antarctica and has infected the Presidents and the high and mighty, even in the rich countries.
Unfortunately, the poor countries are not able to get enough vaccines since the rich countries have cornered supplies from middle of 2020. UNICEF started a programme called COVAX to supply 2 billion doses to the poor countries but it is unable to get enough doses. Not only the rich countries have cornered supplies but also production of vaccines in the world is inadequate. India though the largest producer of vaccines suffers from shortage of vaccines to quickly achieve herd immunity (Kumar, 2021c). It is partly the result of poor planning.
Thus, three things are required, a) massive vaccination to protect the population, b) un-lockdown should not be premature and c) COVID appropriate behavior must continue for quite some time.
Lockdown: Impact on the Economy
III.1 Macroeconomic Variables
During a lockdown, as production declines, all the macroeconomic variables are impacted - Output, Investment, Savings, Trade, Employment and Inflation.
When people are not able to go to work, they are paid a lower wage and salary or are fired and get no income. Thus, not only unemployment rose, incomes of many who remain in employment also declined. This immediately impacted consumption of non-essentials. The poor were forced to cut back on the consumption of essentials also. The effect was a decline in demand in the economy (Kumar, 2020b).
Due to decline in demand and uncertainty, investment in the pipeline slows down and new investment is postponed. This further lowers demand. With this, savings too decline in the economy. Due to lockdown in other economies of the world, demand for our exports declines. But due to decline in production in the home economy imports also decline. So, trade slows down and India had a surplus in its current account for some time.
Services sector, the largest component of the economy (about 60% of the output), gets hit because it requires contact between people which is not desirable even after unlock. So, trade, tourism, travel, hospitality, hotels, restaurants, etc. have been badly impacted.
As already argued earlier, agriculture can function with some precautions since it is in the open. But it was also adversely impacted even though the foodgrains production was a record high. Fifty percent of agriculture consists of dairy, poultry, fishery, horticulture, floriculture, etc. Kumar (2020d) shows that these were badly impacted since supplies could not come to the market. Thus, even agriculture declined sharply during lockdown in 2020.
As production and distribution in the economy gets affected, supplies also get disrupted and shortages occur leading to price rise. So, while agriculture prices dropped at the farm level they rose in the urban areas. Health expenditures got inflated as black marketing took place in medicines and other essentials. For many families education costs rose due to the classes going on line and they had to procure smart phones, laptops and other such devices. These did not get reflected in inflation numbers.
Data on inflation and production could not be collected during April and May 2020. So, the full extent of inflation could not be estimated then and even now in 2021. But with large number of people losing incomes, especially the poor, inflation further reduced their purchasing power and affected overall demand in the economy.
III.2 Financial Sector Speculation
The economy started to digitize with growth in e-commerce, use of IT, work from home (WFH) and so on. So, while many companies suffered due to low demand, companies in the Pharma, IT, FMCG and related sectors did well. Due to surplus labour, wages came down and profits of companies grew. Most companies using their pricing power raised prices and hence their profits.
Thus, the shares of many companies attracted a lot of investment and the stock markets after declining in March 2020 rose to record highs in 2021.
A lot of foreign investment poured in since globally, interest rates were lowered to almost zero and massive liquidity was pumped into the markets by Central Banks. All these steps were taken to support business. Since in India the rates of return were higher and also to take advantage of the e-commerce platforms, a lot of foreign capital came into the stock markets.
In India too, the RBI allowed easy credit and reduced interest rates to low levels so that real returns on bank deposits declined. So, savings in India also moved into the stock markets which were promising higher returns. Thus, with a lot of capital pouring into the stock markets both from abroad and internally, the stock markets went to record highs even though the economy as a whole showed a record decline. There is a large speculative element in this disjuncture between the real economy and the financial sector. The price to earning (p/e) ratio of many companies has gone very high and could fall sharply if the economy experiences a shock. The financial sector instability has therefore become a source of worry for the RBI.
III.3 Decline of the Unorganized Sector
The biggest impact of lockdown is on the unorganized sector which survives at the margins. It cannot take a shock. It has had to bear several shocks since demonetization in November 2016. That was followed by GST in 2017 and the NBFC crisis in 2018. Further, since 2016 the government has been trying to force digitization on the economy and that further undermined the unorganized sectors of the economy.
This sector of the economy produces 45% of the output and employs 94% of the workforce has declined since 2016 (Kumar, 2017). If such a large segment of the population loses incomes, demand in the economy is bound to decline. This is the underlying reason why the quarterly rate of growth of the economy dropped for 8 consecutive quarters before the pandemic hit the economy, from 8.1% to 3.1% (Graph 1).
The problem is aggravated by the shift in demand from the unorganized sector to the organized sector since GST came into force. This is a complicated tax and the former is unable to cope with it. Also, it favours the latter by cheapening its product compared to the former. The most obvious example of this is the growth of e-commerce which is leading to a decline in the business of the neighbourhood stores. With the overall economy declining in 2020, rapid growth of e-commerce can only be at the expense of the unorganized sector trade.
Agriculture is the largest component of the unorganized sector and employs 42% of the work force while producing about 14% of the output. It has been suffering a decline due to non-remunerative prices for its produce and that is why there have been big protests by the farmers in the last few years (not just now against the three farm bills). The reason clearly is that a bulk of the demand for the produce of agriculture has to come from the unorganized sector itself since food is a basic item. If the real incomes of the unorganized sector workers decline, it will impact the demand for agriculture produce and soften their prices, especially at the farm gate.
The other component of the unorganized sector is the micro sector of the MSMEs. There are more than 6 crore such units in the country and they constitute 99% of the MSME. They employ 97.5% of the employment in MSME (Kumar, 2017). They are also very different in scale from the other components of MSME namely the small and medium sectors, That is why it has been repeatedly argued that micro sector should be treated as a separate sector and not be part of MSME. Government’s policies for MSME are basically designed for the small and the medium sectors. So, the micro sector gets marginalized.
It is the micro and small sectors that suffered the most due to the lockdown. They have small amounts of capital and cannot continue working due to lockdown and quickly exhaust their capital so that it becomes difficult for them to restart. Their shut down led to massive unemployment and that persisted since these units could not restart. Also they suffered due to the shift in demand to the organized sectors as pointed out above.
CMIE data suggested that in April 2020, 122 million workers lost employment (The Hindu, 2020). But it also suggests that though this figure dropped subsequently, employment did not recover to the pre pandemic levels. Further, many more people dropped out of the labour force. In other words, they gave up looking for employment. This is especially the case for women.
Kumar (2020a) suggests that far larger number of people stopped work than the CMIE figure for loss of employment. The reason is that while people may not have been fired from work and therefore, they did not lose employment but they could not go to their workplace which was shut down. For instance, if one worked in an office or factory and it was shut, one did not go to work but was employed. The estimate for work stoppage would be about 200 million (Kumar, 2020d). It is this number that is relevant to calculate the impact on GDP. Thus, the GDP dropped by a much larger per cent than the official figures suggest or a figure based on CMIE data.
The result has been that due to the differential impact between the organized and unorganized sectors, disparities increased sharply in the economy. Further, a vicious cycle of decline resulted in the economy. Namely, as there was loss of incomes in the unorganized sectors, there was decline in demand for essentials leading to decline in food prices at the farm gate resulting in loss of income for the farmers and to further decline in demand in the economy and slower recovery.
III.4 Where is the V-shaped Recovery?
The government using quarterly data argued that there was a sharp recovery in the economy after the lockdown. It showed that in Q1 of 2020-21 the economy declined by 24.4% but grew in Q3 of 2020-21 by 0.5% (Graph 1).
Kumar (2020d) points out that this data is erroneous since data for the unorganized sector is not available and it is assumed that it is growing at the same rate as the organized sector. In fact the PIB note giving the quarterly GDP data itself admits that it did not even have the usual organized sector data and is based on alternative data. Thus, there are huge errors in the GDP data of 2020-21. The organized sector cannot be a proxy for the unorganized sector since the former declined much less than the latter, as argued earlier. Further, since the data for the former also was not available one cannot even estimate its contribution to GDP using official data.
The example of contribution of agriculture to GDP will make clear what problems the data had. It was assumed that the production targets were fulfilled. But as argued earlier, in large parts of agriculture the produce could not come to the market and perished. So, even contribution of agriculture declined while it was assumed that it grew by 3%.
Kumar (2020d) argued that the decline in GDP was of the order of 50% in Q1 and not 24.4%. Further, Kumar (2021e) argues there could not have been a positive growth in Q3 of 2020-21 given that in January 2021 the consumer confidence was at 55.5 compared to its year back value of 105. Further, the capacity utilisation was at 63 in January 2021. This was 10% less than its value in pre-pandemic period. Since this pertains only to the organized sector it meant that even this sector was working at 10% less than a year back. So, how could there be a positive growth in the economy. It was estimated that including the unorganized sector, the economy would have declined by 29% in 2020-21 (Kumar, 2020d) rather than the official figure of 7%.
Clearly then the economy did not have a V-shaped recovery. It was a shallow recovery as unlock progressed and more sectors opened up. After all and economy is not a rubber ball which when thrown to the ground immediately bounces back. People are unemployed, businesses are closed, investment declined and consumer confidence and capacity utilization did not recover to pre-pandemic levels.
III.5 Government Intervention, Resources and Supply Side
Government’s resource position depends on the performance of the economy. It weakens if the economy slows down. Both direct and indirect tax collections were short of targets (Kumar, 2021e). Further, the expected resource from disinvestment did not materialize. Also non-tax revenues from other sources also got hit. It is the tax collection from petroleum goods that came to the rescue of the government. The Centre collected much more of excise duty on it and the states collected more of VAT. But this is not desirable since it is a basic good and results in rising inflation. That impacts demand and is counter-productive to raising the rate of growth of the economy.
Government was expected to spend much more on taking care of the disease and providing support to the poor and marginal businesses. Unlike most other big economies in the world the Indian government provided very little additional support to the marginalized sections. This was needed to generate demand in the economy which had declined precipitously (Kumar, 2021e). Not doing so also led to the rate of growth of the economy declining more than it need have.
However, since this would have pushed up the fiscal deficit in the economy the government only offered about 2% of GDP as additional support to the poor. It was worried that a further rise in Fiscal Deficit would lead to down grade by the Credit Rating agencies and the IMF would frown on it. But this was unlikely, given that major economies raised their fiscal deficit by even 10% and more of their GDP (like, USA and Japan). So, India could not have been singled out.
Actually, the government had other plans. It wanted to push its pro-business agenda which was stalled since 2014 due to strong opposition. So, it pushed for supply side policies. Namely, give concessions to businesses to boost investment. But it forgot that this would be successful only if demand revived and capacity utilization came close to 85-90%. Of course, it is true that certain sectors that did well during the pandemic, like, pharma, e-commerce and IT, were investing but total investment would not rise due to this policy and supply side would not deliver on the whole.
Government announced the Atmanirbhar Policy package in May 2020 which is cleverly pushing the supply side policies to favour the private corporate sector. The cleverness lies in packaging it in the name of nationalism. So, under this rubric, the government has pushed for the Farm Bills, changes in Labour code, privatization of public sector and so on. These policies, even if they deliver, will do so in the medium to long term, while the need is for immediate relief to those who have suffered. Actually, if the situation does not improve in the short run, the policies will fail in the medium and long run also. So, why the tearing hurry to implement these policies.
The policies are counter-productive for another reason. They are resulting in a lot of agitation and diverting the attention of the nation from the immediate task of fighting the pandemic. They are also resulting in greater alienation of large sections of the population and that is not good.
The protesting farmers’ unions are arguing that the farm policies will adversely impact the large number of small and marginal farmers (85% of all farm households) and corporatize agriculture. As argued in Kumar (2020d) the problem of farmers is not just `unfree’ markets and the three Farm Bills will actually worsen their situation. It is argued that the real goal of policy is to help growth of large private monopolies. This is also the plan for the entire economy.
III.6 Social Sectors, Monopolies and Federalism
Already large monopolies are being created in much of infrastructure such as, in ports, airports, telecom and power. There has been growing concentration in other sectors as well like e-commerce and taxi services. These moves can only lead to growing disparities and to shortage of demand as was the case prior to the pandemic and will lead to slower economic recovery.
Privatization will also lead to strengthening of monopolies in the economy. After all, who has the capital to buy the large public sector units - only the big business houses? Reduced control over the public sector will also lead to reduced capacity of the government to intervene effectively in the economy in any future crisis.
During the present crisis it is the public sector that was used to provide support to people. Whether it be transportation, banking, gas for the poor, public distribution of foodgrains, keeping prices in check via Safal outlets, public hospitals for health requirements and government schools for the education of children of the poor. The private sector indulged in profiteering on a large scale by jacking up prices of essentials.
The pandemic has exposed the weak social infrastructure in the country and that led to increased deaths. People died due to lack of hospital beds, doctors and medical supplies like, Oxygen. The weakness is a result of inadequate investment in education and health over the last 70 years. So, investment in these areas needs to be rapidly ramped up but in the budget presented in February 2021, there was no sign of this and in fact the direct expenditure on public health was reduced (Kumar, 2020e).
The government is using the excuse of raising resources for investment in social sectors to go for privatization and selling off of public assets to the private sector (monetizing its assets). Instead, the government could have raised taxes on the well-off sections who have benefitted during the pandemic, such as the investors in the stock markets who have made huge capital gains. It could also have used a COVID cess on profits (above last year’s levels) to raise resources. Not doing so is a clear indication of the pro big business stance.
Another negative trend visible is the denting of fiscal federalism. Centre is imposing its will on the states on more and more matters. GST had dealt a big blow to federalism by curbing the taxation powers of the states. During the pandemic the folly of this has become apparent. The resource position of the states deteriorated much more than that of the Centre since the latter has access to many more resources. The states did not get the compensation due to them under GST and they were asked to borrow funds from the market. Further, the Centre raised revenue as Cess which it does not have to share with the states. Finally, the Centre can borrow far more than the states can and at lower interest rates. The cost of borrowing is higher for the states.
The greater damage to federalism has been the result of policy dictates from the Centre in respect of the pandemic. Much confusion resulted due to lack of consultation with the states who understand their own situation better than the Centre. Much of the problem was political in nature with the Centre and the opposition ruled states at loggerheads. So, mistakes were made regarding announcement of lockdown at short notice without consultation, how migration of the workers would be handled, regarding supply of oxygen, procurement of vaccines, handling of vaccination, testing and tracing, medical protocols to be followed and so on.
The above mentioned trends will damage the long term prospects of the economy and society and create more social and political problems which will undermine the nation.
Delayed Lockdowns and Waves
IV.1 Global Scenario
In the UK, the cases peaked at around 5,000 (seven day average) in mid-April 2020 and declined to a few hundred by the end of June. Starting in August, they peaked in mid-November and mid-January with a small dip in between. The economy was opened up when cases declined in April 2021. So, the first wave lasted four months and the second one went on for eight months. The UK was the first to start vaccination in mid-December and by July 20, 54% of its citizens had received two doses. Rapid vaccination possibly contributed to a decline in the severe cases and gave the government confidence to open the economy.
The US presents a contrast since it did not implement a national lockdown and left it to individual states. Further, there was resistance to masking. Starting March 2020, infections reached a high of around 35,000 daily cases in mid-April and then declined but rose again by mid-July to about 70,000 daily cases and then declined by mid-September to about 25,000 daily cases. They again rose to peak at about 2,25,000 daily cases in mid-December and after a small dip, they again peaked at almost 3,00,000 cases in early January before showing a secular decline.
So, the first wave was three months long and it merged into the second wave of another three months and that merged into the third wave of about six months. Due to a delay in lockdown and not imposing a national lockdown, the US became the most impacted country in the world with the highest number of reported cases and deaths, in spite of the highly advanced medical system. By July 20, 2021 it has administered two doses to 49% of its population and that could be one reason for the decline in reported cases.
So, without a national lockdown, a wave of infection can persist and merge into the next wave as was the case with the US — it has persisted there for 13 months. The same was visible in the case of Brazil, which also did not go for a lockdown. The UK also, in the initial months of the second wave, delayed the lockdown and the wave persisted. It is also clear that vaccination, provides some immunity and slows down the rate of spread of the disease in the medium run.
In India, the delay in lockdown led to a higher peak in the second wave than in the first wave and it is persisting in spite of the ongoing vaccination. If India’s case turns out to be like that of the US (without a national lockdown) and the virus spreads to the hinterland, then the second wave could possibly merge into the third wave and become a long wave, much longer than last year’s. It could continue past the end of 2021 and slowdown the opening up of the economy. This is most likely given that our health infrastructure is far worse than that of the US and therefore, suffering is likely to be more intense.
IV.2 Delayed Lockdown in India
India reached a low of 9,121 cases on February 15. Thereafter the numbers exploded — 15,616 on February 28, 22,814 on March 10 and 43,815 on March 20. There were enough signs that another wave of infection had started and a lockdown was required to stall the further rapid rise of cases. Local lockdowns were implemented from mid-April, when the daily cases reached around 2 lakh. Widespread lockdowns were implemented in May, when the daily cases reached around 4 lakh. These are official numbers and understate the true extent.
The intense second wave has had a deep impact on the people and the economy. It surprised everyone since the government had been claiming globally how well India had dealt with the pandemic and had claimed victory over the disease. This had lulled the government and the people into believing that normalcy had been restored and that there was no need to follow COVID appropriate behavior. Testing, tracing, sequencing were all relaxed so we could not know that another variant had emerged and was about to attack the population.
This virus known as the Delta variant had emerged in parts of Maharashtra and due to laxity, got a chance to spread rapidly through the country and the world. In virulence it surpassed the alpha and beta variants (VOC) that had emerged in UK and S. Africa in late 2020. There was mayhem in India with its weak health system, especially in the vast hinterland. Infections and deaths grew exponentially in March 2021. Super spreader events (elections and Kumbh) helped spread it. Allowing these events was a political decision by the Centre — a big mistake.
IV.3 Can Broken Systems Deliver?
The situation during the second wave turned so bad that the Courts which were mostly passive in 2020 suddenly became active. Members of the bar and judges faced the crunch and were unable to get help for themselves and had to take note of the dysfunction. But nothing much could be done because the systems had literally collapsed? For instance, orders on delivery of adequate amount of oxygen were not implementable since there was a shortage and systems were broken. The common person was in dire straits and if hospital beds were made available first to the privileged or oxygen supply first given to Delhi then their situation would have worsened.
Can the Courts stop the powerful from acting high handedly? Can they stop policemen from acting arbitrarily? The police snatched an oxygen cylinder from the hands of a youngster who was taking it for his mother who died two hours later? He had promised his family that he will not let her die. What trauma he will face for the rest of his life? Will he ever have faith in the police which has acted as `mai bap’ since the colonial times? Clearly, a police which normally collects hafta and does the bidding of those in power is bound to be insensitive to the common people. It has not been reformed in spite of the many observations by the judiciary over the last so many decades. Would it suddenly reform during a pandemic when might became right?
A talk with some people in small towns and rural areas in mid-May revealed that there was illness in most families but due to lack of testing there was no diagnosis. This is believable because getting tests done even in Delhi was difficult at that time. So, the deaths and infections in the heartland of India were not a part of the national statistics. Recent studies suggest that deaths could be under reported by five times. In Kerala excess deaths were a factor of 1.6 but in UP and Andhra Pradesh it was a factor of 40. Is there anyone to bring the plight of Bharat before the Supreme Court or any other Court?
Possibility of Third Wave
Some have argued that India is close to herd immunity and that is why the cases declined in June 2021. It is argued that more than 3 crore Indians have been detected to have contracted the disease. That is 2 per cent of the population. If sero-surveys conducted in June (and earlier) are to be believed then actual cases are likely to be 30 times the number of cases detected. In other words, 60% have already contracted the disease and that is the number at which herd immunity should be achieved as per earlier data. But, since B.1.607.2, the delta variant, is more transmissible and there is breakthrough infection, herd immunity may require 80% to be vaccinated. So, India may not have achieved herd immunity and the nation needs to be careful.
Due to lack of appropriate advance planning, our vaccination programme has been in shambles with repeated changes in the vaccination strategy leading to much confusion. Given the shortage of vaccines globally and in India, it is unlikely that herd immunity will be achieved at least till the beginning of 2022. So, with possible mutations, lack of enough vaccination and especially children being vulnerable, a third wave is very likely sometime soon. The only issue is how intense would it be? States are ramping up the physical infrastructure on a war footing by creating temporary facilities. But, where will the health personnel come from so quickly? So, we don’t know yet, but in an intense third wave the costs can be quite high.
Second Wave’s Economic Impact
The Second wave starting in mid-February 2021 has further damaged the prospects of the economy since it has come on top of the hit to the economy during the first wave.
As already argued, consumer confidence which was already low (55 in January, as per RBI) was further dented and demand had plummeted. Due to prolonged lockdowns over different regions, supplies were disrupted and production impacted. In the lockdown in 2020, many businesses were reluctant to close and restarted quickly after unlock started. In 2021, businesses voluntarily shut down, fearing a spread in their establishment. So, work declined and production took a hit. Workers migrated back to their villages and small towns though in smaller numbers than during the first wave. This was partly because many had not returned back to the urban centres after the first wave ebbed.
The disease spread to the rural areas as well, so, agriculture was impacted though less than in the first wave. Perishables were impacted and rotted in the fields but less than in the first wave. The unorganized sector was badly affected like in 2020, since it could not function. In 2020 about 200 million lost work because of immediate shut down and this time too, the figure will be large but perhaps not so high.
The organized sector did not shut down immediately in April 2021, unlike in 2020. But due to lack of demand, production was impacted such as, in the auto sector which advanced its maintenance shut downs. Similarly units in the textile and other labour intensive sectors closed down. The revival of these industries will be slow as the disease persists and consumer sentiment remains low. Demand for energy and transportation declined during lockdown. Thus, capacity utilization in the organized sector which was at 63% in January fell further and that has impacted both the ongoing and future investment.
In brief, all the macro variables — employment, incomes and investment declined and there revival is uncertain during the rest of 2021 due to higher social distress and uncertainty about a third wave.
VI.1 Recovery Stalled
India is currently in a tight spot because major world economies, where vaccination is proceeding apace and which have opened up after a lockdown, are reviving. This has put pressure on commodity prices and spurred inflation which is hurting the Indian economy. The already distressed public which was reeling due to shortages and profiteering is seeing its purchasing power curtailed. Families which experienced serious illness have had huge outgoes on medical treatment — charges had sky rocketed for ambulance, medicines, hospital beds, oxygen, etc. Many families have faced destitution as a result. Finally, those who lost work and incomes cannot bear the additional cost of higher inflation.
The stock markets have continued to sky rocket in spite of the adverse economic situation and uncertain future. But as major world economies recover post vaccination, FIIs are likely to move funds there out of the Indian markets. Of late, the Indian markets have been buoyed by the Domestic Institutional Investors (DII) like, LIC. But this cannot be sustained for long if the overall economic sentiment remains weak and FIIS withdraw funds. While some sectors linked to technology and essentials will continue to do well, most sectors will remain down if the disease persists and consumer sentiment remains weak.
Government policies have depended heavily on supply side responses but if sentiment remains weak, they will not deliver. The hope that the economy will post strong growth in Q1 of 2021-22 due to the low base in 2020-21, has been belied. Instead of the expected 24% increase based on official data on organized sector alone, the increase is likely to be around 10%. For Q2 it may be near zero given the continuing uncertainty. It is hard to predict what would be the growth in Q3 and Q4. For the year as a whole if luck holds out, growth rate may be around 5% or less. But, if the unorganized sector is also included, since it has declined sharply, the growth rate would turn out to be near zero or even be negative. So, we need to plan for the worst and hope for the best that the third wave is mild.
Importance of Collectivity Underlined
As mentioned earlier, the pandemic has underlined the fact that the human race is a `collectivity’. The virus has to be eradicated everywhere otherwise it will keep mutating and re-infecting in waves across the world. The rich nations or the better-off sections in each nation cannot just protect themselves leaving the poor to their own devices. That would not work.
Due to lack of credibility of the governments there is vaccine hesitancy (Kumar, 2021c) and many are not taking the vaccine. There are many reasons for it. But the most important one is that there is alienation among large sections of the population. In the past, governments have promised but not delivered on policies. Further, governments are seen to be mostly pushing the interest of businesses at the expense of the people. Finally, people also believe that governments have a hidden agenda in what they do which is not immediately apparent. For instance, some believe that the government may be using vaccination to limit the population, etc.
If people do not have faith in the government, implementing policies becomes difficult. This becomes crucial in times of a pandemic or other disasters. So, it is very important that governments regain their credibility and policies get implemented effectively. For this, governments need to be absolutely transparent and accountable to the public. Unfortunately this has been lacking during the pandemic with all kinds of false reports on every aspect of the pandemic — cases, deaths, vaccination, testing, vaccine availability and so on.
Public sector is an expression of the collectivity of society and came to the rescue of the public during the pandemic. Whether it be the health aspect or transportation or banking and transfer of funds to the poor, public distribution system or supply of gas to the poor. It is also the public sector that contributed funds to the government to tackle the crisis. So, in a crisis situation it is the public sector that becomes the instrument of the government to implement policies.
The public sector needs to be strengthened but instead the government is proposing to privatize it and thereby weakening its capacity to deal with a future crisis. It is no one’s case that there are no problems with the public sector. But these are all linked to the lack of autonomy of the public sector and political interference with its functioning. These matters can be taken care of by policy changes but privatization is like chopping off one’s nose to cure a cold.
Similarly the moves to push the anti-farmers Bills and labour code are alienating the largest sections of the population — the farmers and workers. So, what is the government’s strategy? It is neither what is needed currently by the country nor good for the long run.
Moving Towards a New Normal: Need to Plan Ahead
The government’s strategy is also faulty when one considers that the country and the world are moving towards a `new normal’.
This new normal is moving towards much greater use of technology to automate processes and reduce the use of labour. That will further marginalize the unorganized sector and swell its ranks. It favour the large scale and result in further loss of employment. These trends will lead to growing disparities and that will aggravate the shortage of demand and lead to further slowdown in growth of the economy. The trend rate of growth will decline compared to what it was in the preceding decade.
Due to need for maintaining distancing, capacity in many sectors will be redefined. That will raise costs. Costs will also rise since greater precautions will be required during production. Due to greater unemployment, real wages will decline except in some sectors which will do well. This will further impact demand.
Workers may be provided housing close to their place of work so that they can continue to work even if there is another crisis which restricts mobility. Due to work from home and closure of businesses which fail due to losses, commercial real estate prices are likely to decline. Workers losing incomes will also move to cheaper housing and those who have migrated to villages would also have vacated rental housing. The well off sections may go for bigger properties but they will be a small number. Thus, on the whole investment in construction is likely to decline.
Globally, there is likelihood of shortening of supply chains which got disturbed by the lockdowns in various part of the country and the world. Countries would want to produce the critical goods and services internally rather than depend on imports. Already, various countries are wanting their capital to return to their shores. This will reduce the flow of foreign capital when normalcy returns and the excess liquidity is drained out of the world economy. This will reverse the current trend of flow of foreign capital and India will have to depend more on the national capital. There is likely to be deglobalization of sorts in trade.
Massive investment will be required in the health sector to create infrastructure and train personnel. Many more doctors, nurses, technicians, etc. will be required to man the health infrastructure. R&D would have to be stepped up to track evolving viruses and disease, to respond rapidly with vaccines and medicines and do genome sequencing. In general this highlights the need for greater R&D across the board since various technologies will have to come into play.
Education has been in poor shape and has suffered grievously. It needs to be upgraded. Not only to produce more medical personnel but to inculcate scientific temper in society. Every child would have to be given good education so that they can understand the difference between dogmas and scientific ideas. Access and equity in education would have to be increased. The neighbourhood school idea is worth pursuing. Good education may also help reduce alienation and make workers more productive.
The development paradigm that has resulted in the kind of problems faced by society at present needs a rethink. It would need to address, environmental destruction and climate change, reorientation of trade, reduction in inequality, provision of a living wage to workers, strengthening of the public sector and so on.
This paper suggests that India will face the worst of all worlds — health wise, economically and socially. These are heightened by slow vaccination, continuing uncertainty and rising distress leading to demand shortage and economic decline. The economy will not recover to the 2019 level of production in 2021-22. It comes as no surprise that the rich do well when the economy is doing well but they have also done well during a pandemic with their wealth rising rapidly. This illustrates once again how much the system is biased against the poor in India.
Government policies are responsible for the situation becoming worse than it need have been, leading to more unemployment and greater distress among the poor. Instead of focusing on demand it has gone for supply side economics which gives concessions to businesses in the hope of boosting investor sentiment. It ignores the fact that this will only work when demand recovers and for that demand side policies are required. Today, even businessmen realize it and have asked for it but the government has paid little heed to it.
Government’s stance seems to be purely ideological — promotion of monopoly capital. The result is that there are two circles of growth in the economy with the organized sector growing at the expense of the unorganized sector. Within the organized sector also policies are encouraging large monopolies to grow bigger. Large scale privatization is being planned to help big business. This in a situation when the pandemic has highlighted the need for a well-functioning public sector. All this is damaging the long term prospects of the economy.
The pandemic has made clear that we are a `collectivity’. It needs to be reinforced and that would require the public sector role to be strengthened. Further, for government policies to deliver, people have to voluntarily follow them. But given the lack of faith of the common person in government’s promises, many do not take the government’s pronouncements seriously. Big changes suggested in Farming and Labour laws have further alienated large sections of the population which are protesting. So, the nation’s attention has been diverted from fighting the pandemic to these contentious issues.
In brief, not only is the country facing an economic crisis, the issues are also social and political. Given that society is headed towards a new normal for which it needs to prepare, the focus of the policy makers on the short run and promoting monopolies is damaging the country’s prospects in the long run.
(Author: Arun Kumar is Malcolm S. Adiseshiah Chair Professor, Institute of Social Sciences & Retd. Professor of Economics, JNU.)
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Graph 1: GDP Quarterly (Annual) Growth Rates 2016-17 to 2020-21
Source: Economic Surveys and RBI Monetary Policy Reports