It has been more than a year and a half since the COVID-19 pandemic penetrated the deepest core of human civilization and made us realize the power of mother nature. In India, after the first wave, we thought that we had gained control of the situation but the second wave found us wanting for basic necessities such as oxygen and medical supplies. It might appear that the second wave is on its way out with daily cases coming down to under 60,000 from the peaks of nearly 4 lakh cases, but we have lost over 3.8 lakh precious lives to COVID-19 already. With the hope that the situation will significantly improve on the medical side, it is time to assess the impact of the second wave on macroeconomics.
The government’s approach in dealing with the two waves has been different. The response to the second wave has been localised and driven by the states while in the first wave we went for a national lockdown. I attribute this to the economic compulsions of the hard-hit central government and progressive spread of the virus. The second wave started in the west with Maharashtra, went up North and now is peaking in the south of the country. This spread journey makes a national lockdown economically suboptimal.
The services sector in the last two decades has become the bedrock of the Indian economy contributing to more than half of the GDP. But, our services and knowledge-based industries have been built on the manufacturing industry premise of the 18th century i.e. proximity and discipline of workers to the factory is critical in getting good output. We apply the same philosophy for our software engineers and tele calling workforce. With the internet revolution this premise has proven to be an unnecessary legacy of the past. Now the workforce can be decentralized and anyone can work from anywhere till the time there is 4G internet. I do believe that COVID will prove a positive disruption for the services sector in the long run.The first wave required a steep learning curve for the organizations to develop infrastructure and processes for remote working. For the employees, first wave lockdowns were a new paradigm and it took them some time to adjust to work from home and be productive. Prolonged lockdown and unlocking phases during the first wave ensured that both the employer and employee got into a rhythm and the productivity started reaching pre-covid levels. The second wave disrupted this rhythm. But the impact of the second wave has been localized and centred around groups of people with typical disruptions costing 3-4 weeks of productivity. My assessment is that the services sector will be the least hit from wave 2 from an output standpoint.On May 31, the Indian government released the data for GDP that during the financial year 2020-21, GDP contracted by 7.3 percent. It is the most severe contraction from the time India got its independence. The reasons behind this trajectory are obvious – lockdown leading to the closing of business units, increasing unemployment rate and a significant decline in domestic consumption.
For the current financial year, the Reserve Bank of India has anticipated growth of 10.5 percent. But the rating agencies across the globe have downgraded it due to the impact of the second wave of COVID-19. Moody’s initially projected 13.7 percent of growth for FY 2021-22, but later lowered it to 9.3 percent. The same goes with S&P Global Rating. They have lowered the 11 percent growth to 9.8 percent in case of moderate impact of the second wave, but for a worst-case scenario, it would be 8.2 percent. The ideas around a third wave are not helping the situation at all. To summarize on the macroeconomic numbers of GDP, I expect a less severe impact of the second wave due to less strict, localized lockdowns and SSpractically a lesser number of days in reaching the peak number of infections. Agriculture will see a deeper cut from the second wave compared to the first wave where it grew. Our hopes of economic revival are pinned to us having an express vaccination drive, which takes away the fear of a third wave and a revival of consumer confidence and spending.The pandemic and consequent lockdown have hit various sectors, including MSME, hospitality, civil aviation, agriculture and allied sector.India’s GDP shrank 7.3% in 2020-21. This was the worst performance of the Indian economy in any year since independence.
As the spread of the virus is likely to continue disrupting economic activity and negatively impact manufacturing and service industries, especially in developed countries, we expect that financial markets will continue to be volatile. There is still a question as to whether this unfolding crisis will have a lasting structural impact on the global economy or largely short-term financial and economic consequences. In either case, it is evident that communicable diseases such as COVID-19 have the potential to inflict severe economic and financial costs on regional and global economies. Because of high transportation connectivity, globalization, and economic interconnectedness, it has been extremely difficult and costly to contain the virus and mitigate the importation risks once the disease started to spread in multiple locations. This warrants international collective action and global investment in vaccine development and distribution, as well as preventive measures including capacity building in real-time surveillance and the development of contact tracing capabilities at the national and international levels. As outbreaks of novel infections are not likely to disappear in the near future, proactive international actions are required not only to save lives but also to protect economic prosperity
