Of all countries hit by Covid-19, India decreed the strictest lockdown as measured by Oxford University researchers. It also had among the smallest of fiscal stimuli, less than 2% of GDP. The result? India has suffered the greatest GDP crash among major economies (24%) in the April-June quarter. It also has one of the highest inflation rates. Meanwhile daily infections have risen to the world’s highest, almost 1 lakh new cases per day with no end in sight. The US that earlier led in this respect has flattened its infection curve, so new cases are down to 40,000 per day. India shows no flattening: infections keep rising.
That adds up to a damning indictment of India’s Covid policy. A stringent lockdown smashed the economy without seriously controlling the disease. The return to villages of millions of migrant workers who lost their urban jobs may have spread the disease along with distress. A miserly fiscal stimulus had the double whammy of insufficient relief to the needy and insufficient injection of demand into a crashing economy.
In Indian conditions, stringency was never going to work. Urban slums and many villages are extremely crowded, sleeping four to ten people per room. Locking down economic activity could not translate into social distancing in such circumstances. India got the worst of both worlds — an unprecedented economic crash and ever-rising infections.
India got a top score of 100 in the index of lockdown stringency when it was introduced in March. The comparable figures were 81 in Germany, 71.4 in the UK, 66.7 in the US, 81 in South Korea and 90.5 in Spain. India’s strictness aimed to control the spread of the disease, which was still in its infancy, giving time to crank up production of anti-Covid equipment (like ventilators and full protective suits) and rapidly expand hospital facilities to prevent the medical system from being overwhelmed. Other countries had the same aim and achieved it with less stringent lockdowns.
Despite US President Donald Trump playing down the disease’s impact, the first US fiscal stimulus was a whopping 13.2 % of GDP. The Democrats have proposed a second stimulus one and a half times bigger, though this will be doubtless pruned by the Republicans. Japan decreed an immediate stimulus of 20% of GDP. Developing countries were more cautious since big deficits could lead to credit downgrades by rating agencies. Even then many opted for ambitious stimuli — Brazil (11.8% and rising), Turkey (10.8%), China (7 %). India announced a relief package of Rs 20 lakh crore or 10% of GDP, of which the additional fiscal stimulus was barely 1% of GDP. Subsequently, India has announced some additional support, but its fiscal conservatism stands out.
Inflation was already 5.9% in March when Covid struck. In most recessions, inflation falls, but in India it rose to 6.93% in July. Of 42 countries for whom The Economist publishes weekly data, only three have higher inflation than India. Only in one other country, the Philippines, has inflation risen after Covid.
Inflation has risen in India despite a bumper agricultural crop in 2019-20 and a good start to this year’s monsoon. Oil prices have crashed internationally but the Indian government has, understandably, mopped up much of the windfall through higher taxes, diminishing the deflationary impact. Part of India’s problem is the disruption in production and transport caused by an over-strict lockdown. Depreciation of the rupee from Rs 68 per dollar to Rs 75 has raised import prices. Depreciation has affected other Asian countries too yet many of them — Malaysia, Singapore, South Korea, Taiwan and Thailand had negative inflation (falling prices) in July.
The RBI has, rightly, flooded the financial system with liquidity, and real interest rates are negative. Moratoriums on bank loans have kept the economy going but must soon be phased out, exposing the damage to businesses. GDP will revive everywhere after the April-June quarter, but India’s annual prospects remain grim. The State Bank of India predicts GDP will contract 10.9% in 2020-21, while Goldman Sachs estimates contraction at 14.8%. Only in 2022 will we get back to the pre-Covid GDP level.
One study showed crowded Mumbai slums having an infection rate of 57% (against 16% in non-slum areas), yet fatality was not correspondingly higher. This suggests the slums are close to herd immunity, and the disease is far less lethal than expected. That strengthens the case for phasing out lockdowns quickly, while encouraging masks, social distancing and isolation of the infected to the extent possible.
Meanwhile, the government should greatly increase cash handouts to the masses through MNREGA and Jan Dhan accounts. The poor are worst-hit and most likely to spend additional cash, boosting the economy. Richer folk are more cautious and less likely to spend.