NEW DELHI: As India's Covid virus infections surged to nearly 5.5 million on Monday, question marks on any quick revival of the country's economy which contracted by a record 24 per cent in the April-June quarter, have started cropping up.
More than the sporadic lockdowns by local authorities to combat the rising Covid graph, experts fear increasing infections will hit both investment and consumer demand as industry postpones fresh business plans and consumers wait it out to understand the possible fall-out of the disease spread before spending on big-ticket purchases.
"There is a growing Covid induced fear psychosis which is impacting both demand and investment. Households have been dis-saving during the lockdown as the economy contracted. But fears of future income losses will force postponement of most big-ticket spending and investment," said Dr Pronab Sen, noted economist and former Chairman of the National Statistical Commission.
Sen estimates India lost around Rs 18-20 lakh crore from its GDP between April and August 2020. The government's GDP estimates for the April-June quarter show a near 24 per cent contraction of the economy, the largest among major economies.
"The rising infections graph will spook both demand and investment plans," agreed Prof Arun Kumar, Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences.
"Absence of a wage protection scheme like in the US meant consumption had to go southwards," he added.
During April-June 2020, private consumption in the country shrank 27 per cent, while investment by private businesses fell by a whopping 47 per cent.
India, fared far worse than most major economies as its informal sector is by far the largest, accounting for some 45 per cent of India's $2.9 trillion GDP. Many economists argue that the decline in GDP in the first quarter could have been as large as 32-35 per cent if the full impact on the informal sector is calculated.
Officials in the finance ministry privately admit that more steps will have to be taken on top of the packages it has announced to help revive both demand and investment in the economy, hit by a Covid fear psychosis. The government has tried to augment credit in the market, but actual borrowing and spending on investment and consumption has been muted as the country combatted Covid.
"Among other things, we will have to augment spending on the rural employment guarantee scheme to help transfer spending power to the hands of citizens," said senior department of economic affairs' officials at North Bloc.
India's Covid cases tally rose to become the world's second-highest just behind the US earlier this month and the country is fast racing towards the number one position as testing is ramped up and the incidence of the disease spreading to the rural hinterland become more noticeable. It has been averaging 90,000 fresh cases a day for more than a week now.
"We are headed towards what can be called a second peak in terms of number of cases... it is difficult to say when that will occur, but we do need to bring back some mobility curbs without hurting the economy," said Dr Sukhendu Roy MD, a former public health consultant with World Health Organisation.
Economists however argue that any further lockdowns would be self-defeating.
"The stringent lockdown with a wide geographic spread from March was to buy time to ramp up our health infrastructure and we made significant gains during that period. Now, we have to assure people there will not be any stringent lockdowns but social distancing and safety measures will be implemented strictly to safeguard them," said Finance Ministry officials.
Analysts like Sen and Kumar also add that there is a need to step up public spending if need be by borrowing more in order to pep up demand and investment.
"One cannot depend on private investment in such crises' as firms are facing under-utilisation of capacity. The state will have to step in to rebuild investment and start a virtuous cycle of demand and investment which could help revive the economy," said Sen. "It's a dual war – one to contain infections and the other to resuscitate the economy. We need steps to win both."
ALSO SEE: