The Second Wave Is Different And Its Uncertainty Could Be Costly

Context: Key differences in Covid-19 second wave and first wave increases uncertainties and calls for a concerted policy response from the government.

Differences between the first and second wave

• Higher uncertainty: A patchwork of local lockdowns may feel less stringent than a national one.
• Urban spread concentrated among relatively affluent households:
  • In Mumbai’s municipal corporation, during the first wave, 34% of cases were in residential buildings (with the rest in slums), compared with 90% this time.
  • As better-off households generally spend more, recovery will be subdued.
• High rural spread: Rural India accounted for 21% of the country’s cases in April 2020 and 44% in April 2021.
  • While the growth was relatively robust in the first wave, as villagers were exempt from much of lockdown, if the disease spreads to the rural heartlands, it could mean a new cloud of uncertainty.
• Falling Profit margins amid rising global commodity prices: As companies unable to make emergency cost cuts for the second year in a row. Passing on higher prices to consumers risks denting demand further.

Silver linings amidst the pandemic:  Global growth remains strong, capital markets are buoyant, and firms have learnt to function amid the new normal of lockdowns.

Impact on growth:

• Lower than expected growth: Gross value added (GVA) could grow 7% in 2021-22, and gross domestic product (GDP) growth likely to be 8% (below consensus of 10.3% GDP growth for the year).
• A weak financial system and rising inequality: Due disruption in cyclical recovery period during the first wave has left behind:
  • If bad loans at banks rise over time, banks could become risk-averse, hurting credit and GDP growth.
  • The country’s informal sector makes up 85% of the labour force. Disruption there can weigh on demand.

Way forward: Key policy steps government can take

• Strengthen Insolvency and Bankruptcy Code (IBC): Incentive structure for resolving bad debts across borrowers, creditors and courts need to be revisited.
• Continue with social welfare spending: Expansion and support to Mahatma Gandhi National Rural Employment Guarantee Act, to support incomes of informal sector workers.
• Get disinvestment done: To achieve central government’s focus on capital expenditure in February budget as the second wave to induce lower tax revenues.
• Move from an import-substitution mindset to export promotion: Continue production-linked incentive schemes with further changes such as lowering import tariffs on a wide variety of goods which can work as a tax on exports by raising the cost of production