Santosh Kumar Mohapatra
The coronavirus pandemic is the greatest global trauma since the Second World War and unprecedented in most of our lives. Calling the pandemic, the world’s worst public health crisis in 100 years, an Oxfam report in 2021 said it triggered an economic crisis comparable in scale only with the Great Depression of the 1930s.
The global economy has shrunk by 4.3 per cent in 2020 – the sharpest contraction since the Great Depression that began in 1929 and far higher than the 1.7 per cent reduction during the Great Recession of 2009. The ILO estimates it cost the equivalent of 25.5 crore people full-time jobs.
Indian economy is believed to have contracted by 8 per cent in 2020-21 while China’s economy grew around 2.3 per cent. China’s GDP galloped to a record 18 per cent in the post-Covid comeback in January-March 2021 while India may revise its growth forecast downward. But neither people nor politicians learnt from first wave of the pandemic. India is witnessing resurgence of the second wave in a ghastly shape. The Indian government had enough time to prepare for the second wave to at least lessen its cataclysmic impact. But complacency, arrogance, greed for power and apathy for poor hindered the ruling dispensation from foreseeing the danger ahead. The scenario appeared like Covid never hit India or will not hit again and the main issue before the ruling dispensation was to capture more power.
India’s daily Covid cases have already breached the 3-lakh mark, the only second country after the US to have reached this ugly milestone. India is now the worst affected in terms of daily infections, second worst affected in term of total number of infections, and fourth worst affected in term of the death toll. This portends a scary future for the Indian economy which has been already sliding due to the draconian demonetisation and complex GST system, defective policies and the first wave of the pandemic. The second wave is going to exacerbate the beleaguered economy further.
As some states resort to localised lockdowns to tame spike in Covid-19 cases, India’s GDP growth will be hit hard further, delaying the fragile economic recovery and pulling down overall economic growth for the current fiscal. Some economists and rating agencies have started trimming India’s expected economic growth in 2021-22. Some say the permanent GDP loss stemming from the brunt of the coronavirus is massive at 10 per cent.
In countries where poverty levels are already high, the immediate impact of even a small downturn in economic activity can be devastating. Recently, the US-based Pew Research Centre reckoned the global middle class shrank for the first time since the 1990s. It finds that the middle class in India is estimated to have shrunk by 3.2 crores in 2020 as a consequence of the pandemic induced downturn while the poverty rate in India likely rose to 9.7 per cent in 2020, up sharply from the January 2020 forecast of 4.3 per cent.
Meanwhile, the number of people who are poor in India (with incomes of $2 or less a day) is estimated to have increased by 7.5 crores. China fared much better, with the number of people in the middle-income tier decreasing by only 1 crore, while the poverty level remained virtually unchanged in 2020. As the Covid-19 recession has exacerbated inequality, the increase in the number of poor is likely greater than estimated in this analysis. The middle class may have shrunk by more than projected.
An aura of uncertainty further looms large unless the monstrous pandemic is incarcerated. The assumption of smooth economic recovery is now in question as the production chain is going to be disrupted again. The IMF says the surge in new Covid cases represents a ‘worrisome downside risk’ to India’s economy, and it’s the poorest who may be worst hit.
With the spread of the virus, economic activity is being adversely impacted—sending ripples across sectors as varied as auto, real estate, tourism and banking. Some of this is bound to spill over into the so-called informal sector as well, where the vast majority – 90.7 per cent of India’s workers operate, without written contracts, paid leave, health benefits or social security.
Further, the government tax collections will plummet with debt-burden getting escalated. It may be noted that India’s public debt as a percentage of GDP has increased from 72 per cent in 2019-20 to 89 per cent in 2020-21. This means debt is not spurring growth. The RBI Current Situation Index has been negative in all surveys conducted in the past four years except the one in March 2019. On April 7, RBI released updates to its regular Consumer Confidence Survey. The households are found wary of discretionary spending.
What will also make things difficult is the fact that inflation has been rising, eroding purchasing power of people and India that witnessed recession is now facing stagflation. Consumer Price Index inflation stood at 5.52 per cent in March compared with 5.03 per cent in February and 4.06 per cent in January. Similarly, Wholesale Price Index (WPI)-based inflation soared to 7.39 per cent in March, the highest in the series that started in 2011-12. It was 4.17 per cent in February. Core inflation also increased to a series-high 7 per cent.
Unemployment is increasing. As per CMIE’s latest data, unemployment as of March 31 had stood at 6.52 per cent. It has mounted to 8.4 per cent as of April 18. But urban unemployment has increased from 7.21 per cent on April 4 to 10.72 per cent for the week ended April 18. This reflects a shift in the burden of job losses to urban India, reversing the trend of rural India largely bearing the brunt of Covid-induced stress on employment. In the organised sector, companies will try and cut down expenditure, retrench employees, cut wages to maintain or enhance profits, thus affecting aggregate demand of the overall economy adversely.
The banking crisis is going to be further aggravated. The excess money in the banking system, (that banks park with the RBI) had stood at Rs 3.8 lakh crore as of March 31. It has since grown to Rs 5.55 lakh crore as of April 18, indicating that lending by banks is slowing down intensely. The ratings agency ICRA estimates that banks have accumulated bad loans worth Rs 1.3 lakh crore between September and December 2020. An economic downturn likely to have a significant increase in NPAs and credit losses could lead to a lower economic risk score.
The state has got a role and responsibility towards those who are languishing under poverty and starvation or any natural calamity or pandemic. To recall Albert Einstein, “We cannot solve our problems with the same level of thinking that created them.” The need of the hour is we introspect and address the old thinking which plunged the world into the worst public health and economic collapse since the Spanish Flue of 1918 and Great Depression of 1929.
The writer is an Odisha-based economist and columnist.