The Indian economy was expected to grow by 12-13% in 2021-22, primarily on the back of the contraction it saw in 2020-21. But with the second wave of the covid pandemic spreading across the country, the expected double-digit growth is now in peril.
As the pandemic has spread, state governments have been initiating lockdowns and curfews. This impacts economic activity negatively. Consumption, or what you and I spend on buying goods and services, makes up for around three-fifths of the Indian economy. And when people are confined to their homes, their chances of spending go down.
As Crisil Research pointed out in a recent report: “The traffic congestion index for major cities in some of the hardest-hit states — Mumbai (Maharashtra), Bengaluru (Karnataka), and Ahmedabad (Gujarat) — has nosedived in the past few weeks, and is winding back towards levels seen during the nationwide lockdown last April.”
When people spend less money, it means less business for everyone from the shopkeeper down the lane to the distributors the shopkeeper sources the goods from, to the companies which manufacture them. It also means lower incomes, given that one person’s spending is another person’s income.
The evidence of a slowing economy has gradually started to pop up around us. As per the Centre for Monitoring Indian Economy, the rate of unemployment as of April 29 stood at 7.8%, having crept up from 6.6% as of the end of March.
In the period between March 26 and April 9, the total bank loans contracted by around Rs 63,000 crore. This means that people are repaying loans and banks overall have been unable to give out fresh loans as the economy slows down.
Auto dealerships are shut across large parts of the country. This means that the sales for automobiles will come down in April and in May in comparison to earlier months, as the lockdowns across large parts of the country are expected to continue. Automobiles have very strong backward linkages. A fall in auto sales will lead to a lower production of automobiles. This will have an impact on everything that goes into the making of autos, from steerings to tyres.
Automobile companies employ many contract workers. And lesser production will mean lesser work for contract workers and so this cycle will work.
Also, unlike the first wave of Covid, the second wave is expected to spread to large parts of rural India. In fact, it already has. Given this, the number of people who have got Covid and are likely to get Covid, is much more this time around.
All these and many more factors will come together to slow down the Indian economy in the months to come. So, what is the way out of this?
Unlike the last year, the government isn’t as handicapped, simply because a vaccine against Covid is now available. And the fastest way to get economic activity back on track is to get people quickly vaccinated, so that they develop antibodies against the disease.
Bad strategy
The trouble is that the central government has totally botched up the vaccine strategy. A country as large as India has had only two vaccine suppliers till a few weeks back, of which one supplier supplied 90% of the vaccines. This anomaly has now been corrected with other vaccines being allowed into India. But their supply will take time and a vaccine shortage will remain for the next couple of months.
This can be gauged from the fact that while vaccination for 18-45 years olds was expected to start from May 1, most states do not have enough vaccines to vaccinate both the older and the younger lot parallelly.
Given the shortage of vaccines, it makes sense to vaccinate in the worst-hit districts first and control the spread of the pandemic.
What hasn’t helped is the fact that the central government is getting state governments and private hospitals to compete for vaccines. This is a bad vaccine strategy to say the least. The central government should have continued procuring vaccines directly from companies and supplying them to states for free. That was the need of the hour.
The central government had allocated Rs 35,000 crore towards vaccines in the budget for 2021-22 and was ready to allocate more as well. Wonder what happened to that?
Over and above this, there are other things that the government needs to do. It might just be a good idea to put some money into 42.28 crore Jan Dhan accounts, like the government did last year. Last year, the payment was limited to female Jan Dhan account holders. This year, it’s best not to make any such distinction. While this can’t be a large amount, some money is better than no money.
Also, more work needs to be offered under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). In 2020-21, the government increased the allocation to the scheme to Rs 1.12 lakh crore and this helped alleviate some pain of the workers who moved back from cities to their villages. In 2021-22, the allocation has been cut to Rs 73,000 crore. This allocation needs to be increased.
Encourage consumption
Further, to encourage consumption in the months after the pandemic ends, the government can look at cutting the goods and services tax (GST) on automobiles by a good chunk. The two-wheeler sales in 2018-19 stood at 24.5 million. They dropped to 20.9 million in 2019-20 and even further to 18.4 million in 2020-21.
Over a period of two years, two-wheeler sales have fallen by a fourth. To encourage sales, the price of the two-wheeler needs to come down and this can happen if the GST is cut. A revival in two-wheeler sales will lead to a revival of the auto-ancillary business as well.
What the government loses out on GST earned per vehicle it will make up for through an increase in two-wheeler sales. Also, once manufacturers make more profit, they will end up paying a higher income tax in absolute terms as well. Further, it might be a good idea to cut individual income tax rates, which have gone up over the years, and encourage people to spend more.
To conclude, the question is: Where is the money for all this going to come from? The government needs to ensure that the target for the total proceeds it had hoped to earn through disinvestment this year is met. Further, other ways of earning, like land sales and asset sales, also need to be pursued with vigour. That’s the need of the hour.
(Vivek Kaul is the author of Bad Money)