ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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A Dilemma for the Government

The response to the pandemic has aggravated both the economic as well as the health crises.

After a prolonged lockdown of close to three months, which started on 24 March 2020, there does not seem to be any clarity within the government on when to unlock the economy, and that is because the Covid-19 curve for India is still at some distance from its peak.

Not only has the lockdown not managed to control the pandemic, it has inflicted severe economic loss in terms of jobs, lives and livelihoods of a vast majority of Indians, particularly the poor and the vulnerable. It is yet another case where those who are the least responsible for a problem are made to suffer the most. Unlocking without a counter health strategy in place would be at the risk of infections rising at an alarming rate. But, a prolonged lockdown would be at the risk of huge unemployment for a long period, coupled with distress-driven loss of lives and livelihoods.

The lockdown has led to a colossal waste of economic resources. Unemployment, according to the Centre for Monitoring Indian Economy data, increased more than threefold during the lockdown with an open unemployment rate of a whopping 26%. The burden of unemployment fell disproportionately on women, with four out of every 10 employed losing their jobs during the lockdown as against three out of 10 employed among men. It is not just unemployment that women workers had to face during the lockdown, there have also been an increase in cases of domestic violence. The axe fell on Dalits too, whose employment declined by 36% as opposed to 23% among the upper castes.

The plight of the migrant workers compounds this misery. In terms of access to income and food, according to the Stranded Workers Action Network, about 78% of stranded workers have not been paid during the lockdown, with half of them having less than just a day of rations as on 26 April 2020.

Apart from high open unemployment, the people who have suffered the most are the self-employed and casual workers, constituting 77% of the total workforce, with median monthly earnings of `8,000 and `5,000, respectively. For most, these numbers would have fallen to zero as a result of the closure of the economy. With these levels of income, the likelihood of them having enough savings to survive three months is quite low.

This heavy unemployment and loss of livelihoods came against the backdrop of a severe economic slowdown for eight straight quarters even before the Covid-19 crisis began. Credit growth, the bellwether of economic activity, has been on a sharp decline since November 2018. There is going to be a sharp decline in output in the first quarter of FY 2020–21 resulting from the economy coming to a grinding halt during the lockdown period. One obvious signal of this decline is the index of industrial production, which fell sharply across sectors in March 2020. So, a severe supply disruption has come riding on a prolonged aggregate demand slowdown, a deadly combination for an economic crisis. In all likelihood, there is going to be a contraction of output in this financial year, which many institutions, including the World Bank, have predicted for India. Even if the lockdown is lifted, the economy cannot come back to life just like that, particularly for an economy that is facing a structural crisis rather than a mere cyclical slowdown.

What are the sources of this structural crisis? Rural demand is by far the most important factor that has kept the aggregate demand low during the pre-Covid-19 crisis period. The average agricultural growth during the Narendra Modi government years (including the second term with the second advanced
estimates taken into account) has been 2.8% as opposed to the United Progressive Alliance (UPA)-II’s term when it was 4.3%. Rural real wages—agricultural and non-agricultural alike—have been almost stagnant during this regime and have declined in absolute terms since April 2019. Since the post-lockdown data is not available, it is anybody’s guess that these would have fallen further. With rural demand being low and no counteracting force, the demand for industrial commodities has also suffered, which shows in its degree of capacity utilisation being at its lowest since the UPA-I years. This affects the income in the urban areas, both in the organised and unorganised sectors, since they are driven by industrial production. This situation of low demand could have been mitigated (in the absence of government intervention) if there were external demand, but that has plummeted even more drastically as a result of the global slowdown.

Unfortunately, the Modi government’s response has been grossly inadequate, despite the tall claims to the contrary. The Atmanirbhar package, which claims to be 10% of the gross domestic product, actually has only 1.5% of the substantial fiscal expenditure, with the rest 8.5% in the form of liquidity injection and loan guarantees, which are all at best indirect measures to potentially push up investment. Any amount of injection of credit is not going to increase private investment, which is demand constrained and not credit constrained currently.

There have been two successful models of fighting the pandemic. One, which South Korea attempted, is mass testing, tracing and isolating without a lockdown, and the other is what China, Vietnam, or, closer home, Kerala implemented, that is, a region-specific micro level lockdown with aggressive health measures to control the spread. India seems to have adopted the worst combination of a macro lockdown with micro testing that was bound to fail.

What is required at this stage, if we seriously want to address the twin crises, is taking a balanced position that treats both the crises equally and develops measures to address both simultaneously.


Updated On : 15th Jun, 2020


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