Economic outlook for the second wave

Business Standard, 19 April 2021

There is an unprecedented health tragedy unfolding with Covid-19, around us. This naturally leads to fears about an economic crisis that might follow. In this article, we argue that the consequences for the economy are likely to be more modest when compared with what was experienced last year. Firms should not be jittery, and firms should focus on building back better.

The pandemic has exploded, and generated a health crisis of a kind that has never before been experienced in India. The scenes around us are heart-breaking and unnerving. Health is a game of prevention and cure, and neither prevention nor cure are working. All around us, we hear stories of grief and loss, of health care requirements that exceed health care system capacity. Health care professionals are suffering the moral burden of being forced to make triaging decisions, absent well established protocols.

At this instant, the prime focus is on mobilising health care and on bending the curve. What about the economy? We tend to naturally make analogies with the experience of last year. The health problem is worse this year, so will the economic downturn also get worse? However, the economic outlook for this year is better than what we faced last year, for five reasons.

1. There is less dry wood. Last year, the entire population of India was vulnerable to the disease. Over this year, a lot of people have developed immunity through experiencing the disease. This is visible in a wide variety of sero-prevalence studies. In addition, about 9 doses of vaccine have been rolled out, per 100 people. This number is growing at the rate of 0.26 (doses of vaccine per 100 people) every day. We are in a better position today than we were last year: there are fewer people who are susceptible owing to disease and vaccination. If health policy runs at a steady clip of 3.5 million doses a day, then over 365 days, we would reach about 100 doses per 100 people.

2. Health care is working better. Last year, the health care system collapsed. Private health care providers, who make up the bulk of the Indian health care system, faced difficulties with health care workers, the lockdown, procedures, and customers. Non-covid activities collapsed, through a combination of hesitation on the part of providers and users. Treatments for Covid-19 were hampered by the lack of knowledge. Excess deaths took place, possibly through health system malfunction. This time around, the health care system is overloaded, but it is fully in play, with fully functioning facilities, protocols, procedures, supplies, workers.

3. Policy makers are more experienced. Last year, policy makers faced yawning uncertainty. Very big questions were confronted with limited information. India announced the world's more extreme lockdown, and yet experienced the rapid spread of the disease. This time around, policy makers are more experienced, and have understood that state power is useful in shutting down temples and movie theatres, but more extreme measures will yield high impact on the economy but low impact on the disease. E.g. we now know that the virus is not more active at night.

4. Firms are more experienced. Last year, the firms were caught by surprise. Firms were forced to scramble WFH responses and reinvent management processes on the fly, when the lockdown was announced. There were difficulties in operation of facilities, and storage and movement of goods. The economy experienced a substantial change in the composition of goods/services purchased in the socially distanced environment. This time around, there is less surprise, the firms know what to do, and there is a smooth transition into pandemic-sensitive methods of working.

CountryVaccine doses
per 100 persons
Argentina 14
Australia 6
Brazil 16
Canada 26
China 13
France 24
Germany 26
India 9
Indonesia 6
Italy 24
Japan 2
Mexico 11
Russia 11
Saudi Arabia 20
South Africa 1
South Korea 3
Turkey 24
United Kingdom 62
United States 61

Table: Progress of vaccination in the G-20 countries

Source: The New York Times tracker, as of 18 April 2021.

5. The world economy is coming back. Last year, there was gloom all around the world economy. Nobody knew how quickly vaccines and cures would be found, when normalcy would be restored. Now the outlook is optimistic and uncertainty is low.

Some countries, like Australia, South Korea or Germany, emphasised public health, i.e. disease prevention. Some countries which fared poorly in prevention have compensated through vaccination. Two key economies -- US and UK -- have pushed out about 60 vaccine doses for each 100 persons.

For India, the US and the UK are particularly important given the high economic linkages. The two countries add up to a GDP of $24 trillion. There is a dramatic revival of the economy in the US, through the combination of (a) Spring, (b) Vaccination, (c) Elections that gave a normal administration, and (d) Expansionary fiscal policy on an unprecedented scale. The second largest economy -- China -- has shown GDP growth of +18.3% for the Jan-Feb-March 2021 quarter.

The group of countries which have conquered Covid-19 is now large enough to generate a boom for Indian exporters of goods and services. In the latest available data, for January 2021, exports (non-oil, non-gold) per month for India were at $42 billion, which is a bit ahead of pre-pandemic conditions but below the pre-pandemic peak of $45 billion in a month. It is likely that in the following months, this value will significantly exceed $45 billion per month. As an example, in the month of February 2021, US imports from China were up 49% on a year-on-year basis. There is a case for Indian policy makers to remove trade barriers, so as to fuel India's ability to grow on the back of export demand.

The landscape of the economy, then, is one with strong growth in the export sector, many distressed firms which are available to buy at attractive valuations, strong productivity gains in many firms owing to WFH, and attractive prices for many kinds of labour. This is a time for creatively rebuilding firms based on rethinking strategy for this environment.

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