04 Jun 2021 17:34 IST

Covid’s second sledgehammer blow

RBI has pitched for an investment-led revival strategy, but direct cash transfers may be better to boost demand

In January this year, the dreaded SARS-COV2 virus had gone off the front pages, though it still featured prominently on the inside pages of major newspapers. Then it was the farm protests and the angry farmers massed on the Punjab-Delhi borders that were hogging the limelight. In January 2021, the daily case loads had dramatically come down since their peak in mid September 2020. Hospitalisations had also come down quite considerably and so had mortality rates. It seemed then that India had miraculously weathered the Covid storm.

The economy had slowly started to revive and there was much celebration over the “green shoots” sprouting. It was in this backdrop that the 2021 Budget was presented in Parliament by Finance Minister Nirmala Sitharaman. The general feeling both inside and outside the government was that the worst was behind us. Prime Minister Narendra Modi had even declared victory against Covid-19 in his address to the Davos gathering in a barely concealed tone of triumphalism in February.

Early triumphalism

Three months later we seem to be living in an almost dystopian world. The second wave began in early March and by April it was clear to everyone that would soon become a tsunami. The months of April and May were dogged by a severe oxygen shortage and people literally gasping for breath.

The five Assembly elections and the Kumbh Mela did their bit for spreading the virus and reams have already been written about it. The second wave worryingly has spread in rural India which was largely insulated during the first wave last year. To say that the rural healthcare system collapsed would be a bit of a misnomer as in large parts of North India it never existed in the first place. The agriculture sector which was largely unaffected during the first wave bailed out the overall economy then. But this time around the situation seems grim.

The Central government unlike last time refrained from imposing a national lockdown and thankfully left the decision to the State governments. The “localised” lockdowns has impacted economy activity and livelihoods though it is too soon to make an informed assessment.

Growth forecasts by various organisations are fast being revised. The State Bank of India has put the first quarter of fiscal 2022 loss at ₹6 lakh crore. Barclays says the staggered lockdowns across the nation will cost the economy $1.2 billion.

RBI’s prognosis

The Reserve Bank of India weighed in on the economy’s prospects in its Annual Report for 2020-21. “Moving forward, out-turn predictability has turned a bit turbid. The growth prospects essentially depend on how fast India can arrest the second wave of Covid-19 pandemic,” says the report rather tersely.

Though it says the second wave’s impact of the economy is unlikely to be as bad as that of the first one (a view shared by the Finance Minister), it has revised its growth projections for 2021-22 to 10.5 per cent. The RBI has stressed on reviving private investments for the economy to recover. “Reviving it awaits an environment in which ‘animal spirits’ are rekindled and entrepreneurial energies are released so that backward and forward linkages and multipliers prepare the ground for durable investment-driven recovery,” says the report.

It further says that, “It is apposite now for Indian industry to pick up the gauntlet.” So is this an admission that the fiscal stimulus of the government, which according to RBI was 15.7 per cent of GDP, has run its course and the onus now is on the captains of industry to revive the economy? But in an economy where private consumption, which forms 56 per cent of the economy, is near collapse can an investment-led strategy work?

Instead of relying in investments, which were anaemic even before the pandemic hit last year, many economists have called for immediate cash support to revive spending and demand. Leading among them is Nobel Laureate Abhijit Banerjee who has pitched for more spending from the government. He feels that the government can spend 2 per cent of its GDP and argues that bond markets are unlikely to react adversely to it.

Uday Kotak, CEO, Kotak Mahindra Bank


More tellingly Uday Kotak, CEO of Kotak Mahindra Bank, on Thursday, in an interview to NDTV, said it was time for RBI to start ‘printing money’. “In my view, this is the time to expand the balance sheet of the government, duly supported by the RBI... for monetary expansion or printing of money. Time has come for us to be doing some of that... If not now, when?”, Kotak told NDTV. He said the government must consider cash transfer to the poorer sections and spend 1 per cent of GDP on this.

It remains to be seen whether the government heeds to these calls.

Stock bubble

One segment of the economy which has been completely oblivious to the misery doled out by the pandemic is the stock market. The BSE Sensex which crossed the 50,000 mark in January has stayed over that level since. It has even the RBI worried which has warned of a bubble. A puzzled Banerjee says he doesn’t understand how in a “demand-constrained what must be a substantial demand-earnings shock, especially among the poor, is not having a bigger effect.”

Despite the stock market’s exuberance, the Indian economy’s path to revival is bound to be rocky and turbulent.