What about the States?

WHEN A SPIKE IN the number of Covid-19 cases became apparent in some districts of Maharashtra in mid-March, little did anyone realise that this would be the harbinger of a second wave of the pandemic. Six weeks later, it is clear that the second wave is far more intense and deadly. Daily new cases now routinely cross 2.5 lakh, a number that was never seen in the first wave last year. It is too early to talk about a peak even as some states are witnessing stability in their new numbers.

A far more pressing problem, one that is not on the radar at the moment, is the fate of the Indian economy. Last year, when the nature of the virus and its effects were unknown, the Union Government imposed a rigorous lockdown that led to a severe economic downturn. In the first quarter of 2020-2021, the economy contracted by 24 per cent while the annual growth is expected to be (-)8 per cent. In contrast, the annual growth in 2019-2020 was 4 per cent.

As a result, in the second wave, the Government does not have the option of limiting mobility to reduce the spread of infections. The economic cost of such a step, even at the state-level, would be severe. Prime Minister Narendra Modi hinted as much in his address to the nation on April 20th when he said that the effort should be to prevent a lockdown at any cost.

Yet, in state after state, lockdowns now appear to be the instrument of choice to limit the pandemic. Rajasthan, Maharashtra, Delhi and other states have resorted to lockdowns or some variant of limiting mobility to ‘break the chain’. But all of this is likely to impose a serious economic cost on the country. Towards the end of last year, economic forecasts hinted that the Indian economy was likely to bounce back. Estimates varied but virtually all economists from different institutional backgrounds stated that with a low base, the Indian economy was likely to witness double-digit growth. With these lockdowns, especially in economically vital states like Maharashtra and prosperous regions like Delhi, these estimates have the potential to go awry.

Some private sector economists estimate the cost of these lockdowns could be as high as 1 per cent of the Gross Value Added (GVA) for the June quarter of this year. If these lockdowns are extended, the growth foregone could rise even further. HSBC India, to give one example, has a tracker for economic activity. In a recent note, it stated that its activity tracker has dipped to 90 from the 100 (normal level) seen in late February, early March. These trends are visible from mobility reports issued (Google and others) that have dipped by five percentage points between the first week of April to the third week of the month.

These trends pose a number of difficulties for economic institutions in India. For example, inflation was already above the 4 per cent level considered acceptable to the Reserve Bank of India (RBI). In the meeting of its Monetary Policy Committee (MPC) on April 7th, RBI kept the policy rate unchanged and said, ‘The MPC also decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.’ Those were brave words. It is not clear if inflation hardens further, for how long the Central bank can keep an ‘accommodative stance’ to ensure that growth is not hampered.

Other economic problems are also likely. Last year, one big reason for the Government not undertaking a stimulus was the realisation that in an economy dominated by services, a stimulus is a very different proposition from one where industry and agriculture are dominant. The Government did provide succour to industries, particularly small and medium ones, but a mobility lock in economically vital states like Maharashtra makes the task of the Government difficult. Then there is the issue of revenue loss. In a difficult year, there are many demands on Government revenues. With a downturn, these demands lead to rationing and severe prioritising. Last year, for example, between April and September, work demanded under MGNREGA suddenly spiked. This was due in part to migrant workers who had moved from urban areas back to their rural homes. The situation slowly normalised from September to March this year. But in March this year, the demand for work under MGNREGA remained significantly higher than what it was last year in the same month. In case of lockdowns persisting in states like Maharashtra and Delhi, this demand has the potential to remain stubborn as migrant workers are likely to resist returning. It is certain that the Government will meet this demand. The trouble is that there are many such issues which require the Government to spend scarce resources.

There are other economic problems that have the potential to derail growth. One immediate issue is the rise in precautionary savings by salaried persons. This is natural in an uncertain environment. But in an economy that is driven by services, this drying up of discretionary spending and the killing of mobility harm the economy. The potential growth that is lost is gone for good and recovery becomes harder over time.

Politicians have already begun apportioning blame for not managing the second wave properly. But at the heart of the crisis lies the inability to heed basic precautions on the part of people who venture out of their homes. The chaotic scenes in markets of many towns in Maharashtra and other states clearly hinted at the coming wave of cases. The presence of faster spreading variants of the virus should have alerted state authorities to the danger at their doorsteps. But in February, when the first wave was tapering off, the dominant theme was that ‘tired’ people wanted to go out. The scenes of celebrations in urban India with caution thrown to the wind and unmasked millions in small-town India should have alarmed every one. They did not.

One noticeable trend in the ‘shifting’ of blame is how the debate over alleged centralisation in India has changed in a span of mere weeks. Last year, when the lockdown process and the management of the pandemic were Centrally driven, the complaint from intellectuals, civil society and state governments was that states were not allowed to manage the problems in line with their priorities. The same complaint was voiced when the vaccination strategy was rolled out in mid-January this year. At that time, when vaccine hesitancy was strong, these voices were muted. But three months later, states—with a terrible record in communicating the necessity of precautions—suddenly discovered that vaccines could solve all their problems. Now, when the Centre has liberalised the vaccine policy, there are contrarian voices that it has ‘washed its hands off’, and states are likely to get walloped and blamed when the new strategy goes awry. From shortages of oxygen to essential medicines and from hospital beds to ventilators, the Centre is to be blamed for everything. One can reasonably ask: What are the state governments around for? But in India’s charged and polarised debate—which usually boils down to labelling people as pro-government or against it—the role and duties of state governments are conveniently forgotten or ignored.

Covid-19GDP growthIndian economylockdownpandemicproduction