At the beginning of 2021, although India’s economy showed signs of recovery after the first widespread pandemic, now the country has been hit by the second wave of Covid-19. For Q1 of 2021, the Centre for Monitoring Indian Economy published data that indicate that the employment rate slightly decreased for men and substantially fell for women. In that time, states announced informal lockdowns, but now that they are starting tightlockdowns, the employment rate will, further, fall. Furthermore, consumer sentiment has taken a huge blow after the second devastating wave. Covid protocols and transportations between states are still up and running so that large factories could continue working, but in a country like India where 60% of the GDP runs on consumer sentiment the economy will be hurt regardless. The second wave will have a more severe impact on the rural Indian population as cases increase especially in the areas outside the cities disrupting rural activities, which counts the 50% of India’s GDP.
When talking about the Indian situation amid the second wave of Covid-19, we should focus more in-depth into the demand inside and outside the country. First, income declines are causing domestic demand to fall. In fact, as the disease and lockdowns in most parts of the country increase, unemployment rises, and because of that people experience an income shock and their demand will fall. Meanwhile, people who have not experienced an income shock are now reducing their consumption because habitual ways of spending, such as restaurants and tourism, are no longer available. Second, even if Indian domestic demand is experiencing a decrease, the global economy and trade are picking up as exports increased by 80% at the beginning of last month. It is also likely that the industry will consolidate since both small and bad managed firms are going to die, so the more robust firms will more likely the ones that will survive. Once local lockdowns are alleviated, economic activity might resume as people will go back to work, fear may decrease, and uncertainty might play a smaller role especially in countries where vaccines are widespread. In addition, the overall growing economy will help India emerge out of the hopelessness from the Covid second wave. In general, while the unexpected quick comeback of advanced economies improved the export outlook, the rise in infections contracting the domestic demand could delay recovery.
If the first wave of Covid has taught us anything it is that governments must develop policy interventions looking at the short-, medium-, and long-term perspectives. Given the challenges posed by the second wave, it is likely that the longer the pandemic crisis lasts the greater the harmful effect on the economy will be. In the short term, investment in the health sector should be aimed at relieving not only the immediate shortages of vaccines but also the critical COVID-19-related medicines, medical oxygen, and availability of hospital beds. In light of the COVID-19 vaccinations’ supply constraints, a major issue in terms of inter-state vaccines allocation and distribution may be developing, but the vaccine supply constraints should ease over the next few months. Following the government’s decision on April 19th to allow private companies and institutions to obtain and manage vaccinations, there is a lot more emphasis on the issue. This measure would also help in the following months when booster doses are required, as the world population will no longer be dependent on the central government’s ability to deliver the vaccine. The Indian administration should arrange specific policy intervention to alleviate immediate shortages as well as create long-term capacity. Also, relevant economic sectors such as construction, manufacturing, and service sectors demand quick attention apart from the health sector.
In the past month, the alarming increase in the numbers of Covid-19 infections has caused doubts regarding the pace of economic recovery. In fact, key economic indicators suggest that the recently growing recovery is losing momentum, but this loss of momentum is less severe than it was one year ago. As a consequence of the second wave, we still expect a reduction in the annual GDP growth rate as the economy will not expand as fast as forecast, but hopefully, the economy will still grow, compared to last year when experienced a contraction. So, the fact that lockdowns were mandatory in certain areas of the country, people were better able to adapt to smart working, and online payments were becoming the norm helped in the process.
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