April 2021 feels similar to April 2020 as the country witnesses a surge in COVID-19 cases. The second wave has struck us by a surprise, and consequently. states have responded by interventions such as curfews or lockdowns.
Last lockdown had an impact on the nominal incomes of many people as firms decided to cut wages in an attempt to avoid layoffs. That layoffs happened across the world was an inevitable situation – and India was no different. In the first wave, India had by far the most stringent national lockdown. The lockdown was used to prepare necessary physical infrastructure while gathering as much information about the disease as possible. However, the intended belief that a lockdown could break the chain of virus and eventually put an endgame to the disease was witnessed only in 10 out of over 180 countries (refer to Lockdown vs Covid-19: Covid Wins).
That we haven’t undertaken a lockdown in the second wave and why most countries have decided against lockdowns is precisely the same reason. On one hand lockdowns do not flatten the curve, on the other they have a significant negative impact on the economy. Nominal wage cuts are just one part of the picture – the key issue is the significant disruption in cash-flow of various economic agents. That is, governments don’t get tax revenues as economic activities are lower, households are unable to spend but witness nominal wage cuts, firms are unable to operate and book cash-flow even as their fixed costs keep piling up. Thus, every economic agent finds their balance sheet stretched during a lockdown. The only economic agent with the ability to tide over is the government which has the ability to print currency.
No lockdowns in 2021 are a blessing as it means economic activity can resume and we can get back towards restoring balance-sheets. However, the pandemic still poses as a major economic constraint. There are two related issues here – first is that several states have in fact adopted restrictions on mobility and operation of businesses. Second is that the rise in cases does tend to promote risk aversion which has a dampening effect on the level of economic activity. This is precisely why it is necessary to get a handle on the public health emergency – as only that will enable for a full economic recovery.
In terms of the impact of these restrictions on the economy, and our personal balance-sheets, the present localised lockdowns will not result nominal wage cuts for most workers. But, at the same time it will delay the process of economic recovery. This means that additional jobs that could have been added to the economy in the first half (some of which were jobs that were lost due to the pandemic) may now be added in the second half of the financial year.
Localised lockdowns, however, do have economic costs as they disrupt businesses and prevent economic activity to take place in a particular region. For example, the lockdown in Delhi and Maharashtra & now in Karnataka to a great extent would disrupt the supply chains that run through them, prevent adequate trade and commerce to take place which would further result in less economic value addition. The period of lockdown, say two weeks may not seem to be small, however, for businesses with weak balance-sheets, this could disrupt their cash-flow situation significantly.
That these two states had to do a lockdown while 14 other states did night-curfews or localized lockdowns does lead one to conclude that there is substantial economic disruption that the economy has experienced in the first month of the financial year. However, this disruption is not as sharp as the one last year which is why we may still witness a slightly positive growth in the first quarter of our financial year.
We should however recognise the enormous costs associated with the pandemic – and lockdowns. This is precisely why state governments need to work together towards containing the spread of the disease by the proven strategy of testing, tracing and treating, while alternatively step up their vaccination efforts.
Lockdowns are not the endgame of the pandemic, but vaccines are, and this is why state governments need to make efforts to improve their daily vaccination numbers post-May 1 once the liberalised vaccination drive is announced. Failure to do so would delay economic recovery and have an economic impact of close to 2% points on an annual basis.
(The writer is an economist and policy-researcher. Views expressed are personal)
