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Long Read: The Covid effect on India’s economy

New Delhi - A second wave of the pandemic has caught the government napping and toppled an already-weak healthcare infrastructure in the country. What will be the likely economic fallout?

People are dropping dead like flies,” Imran Ahmed, a native of Sikanderpur in Uttar Pradesh, India’s largest state, recently told Scroll.in.

Ahmed has captured the feeling of many Indians, as their country struggles to combat the second wave of the pandemic. Numbers indicate that 18.8 million Indians have suffered from Covid, since it broke out in early 2020. The number was at 12.2 million as of the end of March 2021. Hence, the total number of Indians who have suffered from Covid has gone up by a whopping 54 per cent in just a month’s time. And these are official estimates. The real number is believed to be significantly higher with different state governments underreporting numbers.

As Bhramar Mukherjee, an epidemiologist at the University of Michigan, told The New York Times: “From all the modelling we’ve done, we believe the true number of deaths is two to five times what is being reported.” She is not the only expert saying so.

India’s already weak health infrastructure has come under great pressure. As of December 2020, India had around 1.3 million doctors, with highly unequal distribution across the country. Socially developed states like Kerala had many more doctors per individual than backward ones like Bihar, Jharkhand and Uttar Pradesh. This stems from the fact that seats in medical colleges which produce doctors are highly skewed across states “with two-third of all MBBS seats in the country concentrated in seven states”.

Further, as Shruti Rajagopalan and Abishek Choutagunta write in a working paper titled Assessing Healthcare Capacity in India: “Across all sectors, we estimate that India has about 131 [hospital] beds per 1,00,000 persons.” Rajagoplan is a senior research fellow at the Mercatus Center, George Mason University. Choutagunta is a PhD candidate at Hamburg University. The global average as per data from the World Bank is 289 beds per 1,00,000 persons. The capacity in developed countries is considerably more.

There is a shortage of health workers across states. As the report of the 15th Finance Commission points out: “Rajasthan, Uttar Pradesh, Assam, Madhya Pradesh, Odisha, Jharkhand and Bihar are in a very vulnerable position, with very low ratio of hospital beds and health workforce to population.”

While medical infrastructure is not just about the number of doctors and number of beds, they are a good ballpark indicator of its state. And these data points clearly suggest that India’s medical infrastructure is below par. This can also be gauged from the fact that public expenditure on health in 2018-19 stood at 0.96 per cent of India’s gross domestic product (GDP). The public health expenditure to the GDP ratio has been at around 1 per cent, for close to three decades now. It was at 1.01 per cent of the GDP in 1992-93. Of this expenditure, nearly 70 per cent is made by the state governments and the remaining by the central government.

To cut a long story short, the Indian government doesn’t spend as much money on health as it should. The National Health Policy 2017 (NHP 2017) had recommended that the health expenditure be ramped up to 2.5 per cent of GDP by 2025. This lack of spending is now clearly coming to the fore as hospitals in large parts of the country are running out of beds. There is a massive oxygen shortage and medicines as well, with people regularly putting out SOS calls on social media, for friends and family, and even for themselves in a few cases.

In bad health

Now that health infrastructure has collapsed across the country, state governments are implementing lockdowns and curfews, to make sure that people stay at home. And this is bound to have a negative impact on economic activity and, in the process, economic growth. India was expected to grow by 12-13 per cent in 2021-22 on the back of a massive economic contraction in 2020-21. But that is under a cloud. Many economists have started cutting India’s economic growth forecast for 2021-22. The global forecasting firm Oxford Economics has cut the expected GDP growth to 10.2 per cent from 11.8 per cent earlier. The rating agency ICRA now expects a growth of 10-10.5 per cent, against 10-11 per cent earlier.

Economists change their minds slowly. So, as the second wave spreads, it won’t be surprising if they, in the days to come, change their forecasts of India’s expected economic growth to below 10 per cent. With lockdowns and curfews in place, people cannot go out. And if they can’t go out, their spending will be curtailed. This has an impact on many service businesses which cannot be home delivered.

An Indian Express report points out that, on April 23, as per the Google Mobility Index, visits to “retail outlets such as restaurants, shopping centres, cinema halls, etc were 46 per cent down compared to a pre-Covid baseline”. The situation would have only grown worse. The Shopping Centres Association of India said in a statement that malls across the country had recovered up to 90 per cent of their business and 75 per cent of their footfalls. “The industry was clocking Rs 15,000 crore revenue per month and had reached the same during mid-March 2021, but with the local restrictions, almost 50 per cent revenue has been slashed.”

The lockdown and the prevailing shortage of oxygen are expected to have an impact on automobile sales as well. With large parts of the country under a lockdown, many automobile dealerships are shut. The country’s largest carmaker Maruti Suzuki has announced closure of production at its plant in Gurgaon, very close to New Delhi, India’s capital.

Maruti and its component suppliers use oxygen for production. With Maruti stopping production, so will its component suppliers and the oxygen they would have used can be diverted for medical support.

Several automobile manufacturers in and around the city of Pune, in Maharashtra, which has been badly impacted by Covid, have also cut down on their production. As per The Economic Times reports, most are working at half to three-fifths of their normal production, leading to losses of Rs 100-120 crore per day.

The cascading effect

One factor that enough economists are not taking into account is the fact that the second wave is expected to spread more through large parts of rural India. This wasn’t the case with the first wave. Gagandeep Kang, a professor of microbiology at Christian Medical College in Vellore, told CNBC TV 18: “Right now, it’s really bad in the megacities but it is going to get worse in other cities as well… It will stretch into rural areas.”

A lot of this will not get captured in official statistics, but that does not mean this will not have an impact on economic activity. For the week ended April 25, the Nomura India Business Resumption Index (NIBRI) registered its steepest fall in more than one year and fell 24 percentage points below the pre-Covid normal.

This fall in economic activity is expected to put a lot of pressure on banks. Indian banks, in particular the government-owned public sector banks, have been in a mess for close to a decade now. As of December 2020, the total non-performing assets, or bad loans of the banks, stood at Rs 7.57 trillion, having come down from a peak of Rs 10.36 trillion in March 2018.

With the two waves of Covid, the bad loans of banks are expected to cross Rs 10 trillion all over again, though against a greater amount of overall loans than was the case in March 2018.

Complete lockdown vs partial lockdown

Having said that, a faint light at the end of the tunnel is that things are not as bad as they were in April-May 2020, when the first wave of Covid hit and the country was under a complete lockdown. As RC Bhargava, chairman of Maruti Suzuki India recently said after the company declared its annual results for 2020-21: “Today, the dealers’ inventories are still at 80,000-90,000 units, which is below what it could be. We have pending orders of around 90,000, which is huge.” As mentioned earlier, the company is shutting down its Gurgaon plant for the first nine days of May, but that’s not because of lack of demand.

Further, as Nomura Securities said in a note: “The experience from other countries suggests a lower correlation between falling mobility and growth. Parts of the economy like manufacturing, agriculture, or work-from-home and online-based services should be resilient.” Given this, things should not be as bad as they were in April to June 2020, when the Indian economy went for a freefall and contracted by nearly one-fourth. But they are bad nonetheless.

The question is: what can the Indian government do to get the country out of the Covid crisis and the brewing economic crisis? The fastest way to get economic activity back on track and help people build antibodies is to vaccinate as many people as fast possible. This is where things have gotten very tricky.

India currently has two Covid vaccines available: Covishield and Covaxin. Covishield is the brand name under which the University of Oxford-AstraZeneca vaccine is being sold in India. Covaxin has been developed by a company called Bharat Biotech in collaboration with the Indian Council of Medical Research.

Covishield is being manufactured by the Serum Institute based out of Pune. They currently have a production capacity of 70 million vaccines per month. This is expected to go up to 100 million vaccines per month by June. Covaxin currently has a capacity of just 10 million per month, which is expected to go up to 20 million in May and 60 million by July.

While these may seem like huge numbers, they are very small in the Indian context. Up until April 30, vaccination in India was largely open to only those over the age of 45. At the time of writing this on April 29, around 123.4 million individuals over the age of 45, had got their first dose. But only 25.2 million had got both the doses. This means a little over 98 million Indians over the age of 45 still need to get their second dose. Over and above this, there are others over the age of 45, who are yet to get their first dose.

From May 1, those in the age group of 18-45, have also been allowed to get vaccinated. But between India’s two vaccine suppliers, the supply of vaccines in May will be limited to 90 million. As mentioned earlier, there are still 98 million Indians over the age of 45 who haven’t got their second dose.

The median age of an Indian in 2021 is expected to be around 28 years. This means that the bulk of India’s population falls in the age group of 18-45. The number of people in this age group is estimated to be more than 500 million. On paper they are eligible for vaccination as of May 1, but the supply of vaccines is simply not there. This is why many state governments have postponed the vaccination of those in the age group of 18-45.

While vaccines other than Covishield and Covaxin are expected to be available in India, it will take some time. It will be take more than a few months for a significant part of the population to get vaccinated and thus develop herd immunity.

This is not good news for the economy nor is it good news for the people. The government in Delhi was caught sleeping at the wheel assuming that the second wave will not hit India and in the process the country ended up with just two companies manufacturing the vaccine against Covid.

Any revival will happen only in the second half of 2021-22, assuming by then that a significant portion of the population would have been vaccinated. As Zarin Daruwala, cluster CEO-India and South Asia Markets, Standard Chartered Bank, told Mint: “Unless we have 50 per cent of the population vaccinated we will not see a clear shift for the better.”

Also, unlike the rich countries, the ability of the government in India to spend its way out of trouble remains limited. This has basically ensured that the Indian economy will continue remain on a weak footing even in 2021-22. The double digit growth that the economists have been forecasting is looking more and more like a distant dream.

(Vivek Kaul is the author of Bad Money, and is based in India)