Indian Economy Caught Between a Raging Pandemic and Politics

Just a few months ago, India was being lauded for how well it had handled the Covid-19 pandemic and how the severe lockdowns that were imposed in 2020 actually worked. Never mind that they were cruel on the lives of millions of migrant workers and their livelihoods. Still, the fact that the government quickly scrambled a Covid-relief package for the poor and for small businesses meant that the damage was limited. And by the start of the festive season last September, it looked as if the worst was behind us and that the recovery would only hasten to improve.

I was probably one of the few who thought that this was merely pent-up demand and festive demand that was playing out in the September and December quarters and that there would be a slowing down of economic activity. Not least because of a base effect that would apply. In fact, the optimistic growth figures put forward by everyone from the IMF and World Bank to banks and rating agencies are almost entirely based on a huge base effect that would operate through 2021 and a little into next year as well.

Nobody imagined that the Covid-19 pandemic would have its second wave in India, just as it has across the world, because of the lifting of restrictions and new variants of the virus. We have been caught unawares, and worse, we are quite unprepared for it. Successive waves of Covid-19 should have been anticipated in India and we should have planned for how we would handle it, given our large population, our overcrowded cities and towns and our less than adequate healthcare system. Instead, we kept our focus squarely on vaccine production and distribution, losing sight of the fact that we still need to follow social distancing and mask rules.

And the vaccination drive, while it has begun in India, is not as intensive or extensive as it should have been, when we should have known that it would take years to fully vaccinate even 75% of our population. Covid-19 vaccinations in India were initially restricted only to certain government hospitals and it took long for the government to open them up to private hospitals. Then, we took even longer to decide on allowing private sector companies to participate in the vaccination drive, something that the private sector was requesting for, in order to speed up the process. And on who should be vaccinated first, and who all count among frontline workers, we didn’t have much clarity.

Now, with the surge in new Covid-19 cases, our entire healthcare infrastructure is under severe strain, plagued by shortages of oxygen, Remdesivir, vaccines, as well as hospital rooms, beds and trained medical personnel. With the result that we have vaccinated just 1.29% of our population as of April 21, 2021, according to Johns Hopkins University’s International Vaccine Tracker. At over 257,000 new daily cases, our trend compared with other countries can be seen in the chart below from Johns Hopkins University’s Coronavirus Resource Centre.

On the economic front, it is important to point out that there is no way we can grow the Indian economy at a desired rate, unless we get the pandemic under some kind of control. Right now, the numbers of Covid cases are only surging alarmingly, taking India to the No. 2 spot in the world, a distinction the country can do without. The last thing we need is for more lockdowns and more migrant workers to return home to their towns and villages, increasing the risk of the spread of the virus even more. There is also widespread concern that vaccine stocks are running out and media has reported the closing of several vaccination centres, including in the large cities. This, while the government at the centre denies that there is a shortage of vaccines.

There has been no strict communication from the government, either at the centre or state level on the importance of continuing to follow social distancing and mask-wearing protocols. In fact, in Goa, the government is welcoming tourists without insisting on negative Covid-test results. This, when government authorities should themselves recognize that the vaccine alone doesn’t prevent one from contracting the virus. It merely lowers the risk of patients getting too sick from it, and also lowers the chances of requiring hospitalization. That correct and strict communication should have been sent out by everyone, from the prime minister and union health minister to state chief ministers and health ministers. Worse, we have allowed mass gatherings such as the Maha Kumbh Mela to take place in Haridwar, when millions of devotees gather for a holy dip in the Ganges river. Despite the authorities claiming that Kumbh Mela will not cause Covid-19, over a thousand visitors are reported to have already contracted the virus, and one person has died due to Covid-related complications.

Many seem to be too busy trying to win elections instead. In the midst of a raging pandemic we have assembly elections in four important states under way in India, and as we have been seeing for many years, state level election campaigning also requires the prime minister to personally address large rallies. This time around one can see the importance of these elections: three of the four states are not ruled by the BJP and the party is naturally keen to win and extend its rule as much as possible. Fortunately, none of these states is as badly affected by the pandemic, though Covid cases in Kerala had started to increase after the initial success in containing its spread.

Recognising that these state assembly elections are taking place during a pandemic, I wonder at the wisdom of stretching elections in Bengal to eight phases, when three might have sufficed, as in the case of Assam. The media reporting on the elections have been sketchy and woefully inadequate to say the least, and you wouldn’t know the main election issues in each of the states, from either reading the newspapers or watching television news.

The epicentre of the second wave of the pandemic is in India’s most industrialised state, Maharashtra, and its capital as well as India’s commercial capital, Mumbai. Other badly affected states are Chattisgarh, Punjab and Delhi in terms of daily increase in Covid cases. Large parts of India’s industry are located in Mahararashtra, and there was growing concern over another lockdown there as well as in the other affected states. Finally, the chief minister of Maharashtra announced that there would be a partial lockdown for 15 days in the state, with offices and other places of business shut, but with essential supplies working, and with aid to the state’s poor, including street vendors, in both cash handouts and free food rations.

The latest economic news doesn’t seem to be very encouraging. India Inc had reported a stellar set of earnings, especially net profits, in the September and December quarters, even though revenue had barely grown or had stayed flat. Car sales had boomed, post lockdown, as more people preferred to own private transport and that must have come as a huge relief to the industry. However, there is every possibility that the growth momentum slows down in the coming quarters, as fears over the pandemic and lockdowns take over. Indian banks continue to be under tremendous pressure, as the period for moratoriums on loans end and as they try to recover them. This April corporate earnings season will tell us how much the improvement can be sustained, if at all. That is, if the media, and the PR agency that is scripting news for them nowadays, allows them to do their job professionally.

On the economic front, we have mixed news, but both telling us of the possible slowdown in the months ahead. India’s industrial production for February 2021 came in with a contraction of -3.6%, led by a sharp fall in manufacturing and mining. Strangely though, consumer durables grew at a fast clip, while consumer non-durables – which recovered first from the pandemic impact and generally is more resilient in recessions – showed a contraction. Even if the 6.2% growth in consumer durables is because of a -6.3% contraction last year and can be attributed to a base effect, the -3.6% contraction in consumer non-durables is quite inexplicable.

https://tradingeconomics.com/india/industrial-production

If we look at manufacturing PMI for the same month, it is strongly in expansion territory at 57.5 and slowed in March to 55.4. None of this suggests contraction in industrial activity, which the IIP seems to indicate. In fact, for all of the past 11 months, IIP has been in positive territory for only three months, at 1% in September, 4.5 % in October, and 1.6% in December of 2020. One possible explanation for such wide discrepancies, is perhaps the profile and numbers of companies that contribute to the two indices; IHS MarkitEconomics PMI surveys are based on responses from 400 companies in the private sector, and perhaps these are the best performing ones in their industry. You can see the PMI trend for the past year in this chart from Trading Economics, where it has been in expansion territory for 8 months since August 2020.

The other piece of not such good news is the rising consumer price inflation in India. CPI (consumer price inflation) for March 2021 rose to 5.5% from 5% in February 2021, led by food inflation once again and by a 12.5% increase in transportation and communication prices. This is to be expected and I am surprised that it did not reflect in CPI earlier, with all the frequent price hikes in fuel that we have seen, thanks to the central government increasing excise duties and taxes on fuel regularly for the past several years. Even excluding volatile food and fuel prices, core inflation has risen to 6.1% from 5.88% in February 2021. The WPI (wholesale price index) too has moved significantly higher, jumping from just over 4% in February to over 7% in March and almost all components of it have increased.

On corporate earnings, we have a few of the tech companies such as TCS, Infosys and Wipro announcing Q4 earnings so far, and they appear to be good. There is strong revenue and net profit growth and since the world is turning even more to technology during the pandemic, one can expect other Indian tech companies to also report good earnings. I expect automobile companies, especially passenger and commercial vehicle manufacturers to report a good set of earnings, while banks are likely to be under the weather, especially with pandemic-related lending and low demand for credit overall from corporates, since there’s little or no new investment. FMCG companies, on the other hand, should fare reasonably well in the last quarter of FY21.

The Union Budget 2021 led us to believe that there is going to be a huge capex on the part of the government to kickstart the investment cycle, at least on the infrastructure front, but we have yet to see any progress on it. The massive infrastructure push was also expected to create millions of jobs and that too remains a pipe dream. And while news reports indicate that GST collections are back above the Rs 1 lakh crore mark, and that direct tax collections are also better than the revised estimates for FY21, we have yet to see how the expected economic growth and tax buoyancy for 2021 pan out. I had expressed my doubts over this in a previous blog post.

We will know the results of the assembly elections on May 2, 2021. And whether it is a Modi wave or not, it is not going to be enough to get India out of the second wave of the Covid-19 pandemic. US, UK and Europe experienced not just one or two but three waves of the pandemic. If – god forbid – India was to experience as many waves of the pandemic, and if this continues to be our weak and ineffective response, the Indian economy and its people will simply drown.

The featured image at the start of this post is of people in Maharashtra, the state worst-affected by Covid-19, by Amol Sonar on Unsplash.