Second Wave, Indian Poor, Basic Income, Income Destruction

A woman makes a thumb print impression on a device to attain free ration.

Getty

As India is engaged in a grim, sometimes visually apocalyptic battle with the second wave, a grimmer (but under-the-radar) battle is going largely un-fought. The battle of income destruction, where the expected respite (of which there were seeming green shoots till March 2021) has quickly given way to uncertainty and fear. Growth estimates for 2021—both macro aggregates like GDP and earnings estimates of the private corporate sector—are being furiously re-visited. Mostly downwards.

Some context is in order. COVID-19 has presented a massive shock for the world. No country is left unscathed. But there is a remarkable divergence in which economic agent—between households, private corporate sector and government—has borne what proportion of the pain.

Some context is in order. COVID-19 has presented a massive shock for the world. No country is left unscathed. But there is a remarkable divergence in which economic agent—between households, private corporate sector and government—has borne what proportion of the pain.

Source: Motilal Oswal

As can be seen in the chart above, households in India bore a massive 61 percent of the income loss due to COVID-19, one of the highest in the world (second only to South Africa in this cohort). On the other hand, the government bore one of the smallest relative losses, at only 20 percent. This is astonishing at several levels, not least the fact that the economic agent with minimum access to resources has been saddled with the maximum pain. Some of the countries show a stark contrast—governments took the pain (sometimes pain in the future via massive borrowing programmes) while households and the private corporate sector actually improved their income position.

India’s dispersion of the national pain was not an unexpected outcome—the fiscal backstop made available in India was one of the lowest in the world.

Source: ASKWA Research

Discounting liquidity support made by central banks (like RBI in India), the direct fiscal support provided, expressed in terms of  percentage of GDP, was one of the lowest in the world for India in 2020. As a result, the economic pain engendered by national (and state) lockdowns have invariably fallen mostly on households.

Discounting liquidity support made by central banks (like RBI in India), the direct fiscal support provided, expressed in terms of  percentage of GDP, was one of the lowest in the world for India in 2020. As a result, the economic pain engendered by national (and state) lockdowns have invariably fallen mostly on households.

Tyranny of legacy and apprehensions of the present

India was coming off a massive slowdown just before the virus hit us last year. Household income levels were stressed, a large leverage-fuelled consumption cycle had started unwinding on the back of multiple non-banking financial firms (NBFC) failures and private corporate sector investments were weak anyway. With weak starting balance sheets and anaemic fiscal support, the second wave has acted as the third whammy in terms of disrupted businesses and income streams. Add to it the spread of infection in rural India, which was relatively immunised during the first wave, and we also have a sentiment issue. The sentiment issue is likely to be resolved only with a larger coverage of vaccination across the country—currently, the pace of coverage has slowed and there are uncertain assumptions behind many of the coverage speed estimates. With 16 percent of the eligible population getting a first jab while three percent is fully vaccinated, India is still quite far away from having a critical mass inoculated enough for a confident opening-up.

Exporting our way out of trouble—plausible, but narrow base issues

Much of the globe, especially countries with larger economic footprints like the US, China, and (parts of) Europe, are opening up rapidly. Global trade has marked a smart pickup on the back of a sharp V-shaped economic recovery in these countries. With trade routes and logistics lines largely open in the second wave, exports could, plausibly, provide a ballast to the Indian economy. Some of it is already visible in trade data. However, both in terms of depth and spread, it won’t solve India’s macro stress issue. Firstly, protectionism is here to stay, and trade battles (if not wars) are going to remain ubiquitous. Secondly, as the large economies re-open, there is likely to be a shift from consumption of tradables to non-tradables, taking some of the tailwinds off export momentum. Lastly (and most importantly), the breadth of coverage for India will be naturally quite narrow, given our export basket (comprising mostly large, capital-intensive sectors rather than labour-intensive ones).

Capital markets—flattering to deceive (on macros)

It is easy to be deceived by the momentum in capital markets—select companies are doing very well and Indian start-ups are converting into unicorns by the boatloads. The correlation between macro aggregates and capital market performance has been weakening rapidly in India for quite some time, and COVID-19 has exacerbated the gap between the economic haves and have-nots. The disconnect between macro aggregates and capital market performance, however, embeds another serious risk—that of India’s R (return on legacy wealth) getting to be higher than G (growth in per-capita income). R>G is usually a developed country syndrome, where growth is low, and average income levels are high. In developing countries, with good population growth and significant slacks on productivity, the expectation is for R to be lower than G (RG trap would have serious socio-political repercussions going beyond the extant crisis.

Government needs to pick up the pain

There are very few “do it yourself” options left on the table. A large fiscal support programme is no longer a question of when (it was never a question of if)—the time for it is now. A mix of direct cash transfers to support consumption and public capital expenditure to try kickstarting an investment cycle would be required to prevent India from slipping into a structural R>G trap and exacerbate inequalities.

There is a well-embedded, and largely illogical, fear of inflation and bond market reaction. With macro-aggregates weak and large income losses being an established fact, the only material inflationary pressures are to do with imported commodity prices, which is not something that monetary policy has a great handle over anyway. To fear a few basis points of incremental inflation (“transient” in the words of the RBI, in its latest monetary policy statement) and trade it off for a much larger macro crisis of income destruction, has no logical legs to stand on either politically or economically.

With almost 100 percent of India’s sovereign debt being locally funded, government can afford to run a much larger expenditure programme via a mix of market borrowings and direct monetisation by RBI.

With almost 100 percent of India’s sovereign debt being locally funded, government can afford to run a much larger expenditure programme via a mix of market borrowings and direct monetisation by RBI.

History has shown that the only market-clearing price for macro stability globally has been external account stability—very rarely, if ever, do sovereigns blow up on domestically-funded debt. For example, the crisis in 1990 was triggered, not because of an expanded fiscal deficit, but by the source of funding the same. Between 1985 and 1990, external debt, a bulk of it funding the fiscal deficit, had doubled. As a result, when a temporary current account issue hit us post-Gulf War I, the “crisis” was one of sourcing enough foreign exchange. India continued to run similar, even larger, fiscal deficits in the years that followed, without there being a major “crisis”.

India’s external account today is in good shape, despite a spike in oil prices (a traditional marker of external account health). A weaker macro economy typically tends to depress non-oil imports and a strong global macro is expected to sustain a reasonable growth in exports—both are favourable for a benign level of current account deficit. Add to it a record US $600 billion foreign exchange reserve kitty and global Central Bank approach towards liquidity, and “Fx constraint” is not a material policy condition.

RBI has enough leeway to manage a higher borrowing programme without the country slipping into any serious crisis.

The Government of India has been cautious in terms of playing its fiscal hand till now. However, time is running out for India’s poor. A delayed (or absent) intervention would likely cause many more deaths due to poverty than those who have succumbed to the virus. The time to act is now.

The views expressed above belong to the author(s).

ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.

People

Somnath Mukherjee

Publication

Covid-19: What US, China data tell us about children’s risk profile

Covid-19: Impact on Africa

Covid-19 pandemic-pandemonium: Need for a more holistic idea of disaster management

Nigeria must not forget its poor in the Covid-19 world

No, China isn’t winning the virus propaganda battle

Mauritius: Old and new challenges in a post-pandemic world

A global comparison of COVID-19 deaths: How is India doing in counting its sick and dead?

How China overcame the Covid-19 pandemic

Amid Covid-19 crisis, its politics as usual in Slovenia

Redefining the development narrative during Covid-19: The private sector perspective

A global pandemic and globalisation

Technology and business order post COVID-19

France facing Covid-19: growing pressure on the public health system

COVID19: What we’ve learnt from New York’s deadliest week

The circuit breaker: Singapore’s next move in its fight against COVID-19

American bioweapon or the ‘China Virus’? The war of words over COVID-19

Coexisting with #Covid19: Saving lives and the economy

The wrong diagnosis

Covid-19: China’s donation diplomacy towards Africa turns into a public relations disaster

COVID19: The Chinese military is busy exploiting the pandemic

Mitigating risks and adjusting to isolation: How Argentina is dealing With Covid19

Covid-19: The perfect storm for deep reform

#Covid19: For now, lives over livelihoods

How a changing global order will emerge in the post-Covid world

The Caribbean region must come together to fight Covid19

Politics of pandemic: Public health can no longer wait

Georgia goes all out in fight against Covid19

COVID19: A boost for Indian labour in the global market

Armed Forces and the Covid19 pandemic

Bhutan’s preparedness and response to COVID19

Economic recovery and recurring lockdown in China after Covid19 crisis

Public transit in post COVID19 India: where do we go from here

Critiquing Amartya Sen’s contention of post-lockdown society

Post pandemic city planning

Could third world countries seek a new world order in Covid19 aftermath?

Economic vulnerabilities and power shifts in a post-Covid19 world

Opportunity in Crisis: Will a pandemic lead to peace with the Taliban in Afghanistan? 

Health Policy belongs to the national security domain and different stakeholders must engage

Can the global economy survive COVID19 shocks?

The COVID19 reality of Afghanistan

Changing the script

Leadership in the time of Corona

PM’s India shutdown is an unprecedented gamble

COVID19: Tamil Nadu’s demand for fiscal grant can put centre in a fix

COVID19 brings Australia to the crossroads

The battle to set oil prices

Luxembourg faces the same dilemma as the EU: become a bridge or a fortress

Peace during a pandemic: The US fumbles on in Afghanistan

Crisis communication and the Coronavirus contagion

COVID-19 and maritime operations

How PM Modi scored with COVIDiplomacy

Covid-19: The crisis will strengthen anti-globalisation voices

An old scourge in a new, uncertain age

To what extent will coronavirus outbreak rewire global trade dynamics?

The Chinese model is under stress

A sneeze, a global cold and testing times for China

Corona: The case for taking China to ICJ

Covid-19, India and crisis communication

How Is COVID-19 reshaping China-India relations?

France must confront the grim realities of its war against COVID 19

Covid19: G20 leaders reclaim power from bureaucrats – and China

The United Nations Security Council and securitization of COVID-19

Mexico can teach us COVID 19 management

Covid-19 and European solidarity: The fight for who we are

Dr WHO and Mr Hyde

Certified Corona-Immunity as a resource and a way back to normality

Coronavirus derails Glasgow

Food security and the Corona Virus

The Polish example: Defending the castle in the European East

COVID19: Americans brace for brutal week against grim backdrop of chaotic policymaking

SOS for the road transport sector at the time of CoVid19 pandemic

Despite Coronavirus outbreak, India-Israel friendship continue to shine

COVID-19 and international collaboration in a leaderless world

Covid-19: A report from Nigeria

As Dubai EXPO 2020 is postponed, a tough time for NRIs

The virtual space uptick during Covid-19

OECD, BRICS Countries must mitigate Covid-19 fallout through targeted measures

A new human being will emerge in the post-Covid-19 world

Ravaged by war, Cameroon’s Southwests region turns attention to Covid-19 fight

What India needs on 14 April

Covid-19 crisis and a probable role for the Indian Military

COVID-19 and the gameplay of West Asia’s geopolitics

Covid19 has sharpened great power politics

Liechtenstein’s national and international response to COVID19

Why China and Pakistan need each other in the Covid19 crisis

Diplomacy is another victim of the virus

Gated globalisation and fragmented supply chains

West Asia is staring at an economic crisis. India has to be prepared

Fishing in troubled waters during a pandemic

Xi’s moves seem to be backfiring

Iran’s grim fight against coronavirus

Why is the Covid 19 situation so grim in MP?

Hacking the pandemic : Lessons from the Silicon valley of India

Between firmness and hesitation: How Russia is responding to the COVID19 challenge

World after Covid19 pandemic

Israel must bring its diverse communities together in Covid19 fight

China tightens grip over the South China Sea – should India worry?

Nod, Nudge, (K)nock out: Ways for RBI to prompt banks to lend

Will Covid19 crisis hasten the end of PM Abe’s regime?

Covid19: China-Russia make strategic geopolitical moves in Italy

Leadership accountability for Covid19 and the reasons for WHO’s apathy

Maldives: Amidst worsening Covid19 crisis, ISIS ‘claims maiden attack’

The impact COVID19 pandemic is exerting on e-commerce

COVID19 and competition for influence in South Asia

Examining India’s employment landscape amidst the COVID19 disruptions

Will COVID19 crisis rejuvenate the coalition of SAARC nations

The future of international cooperation in times of existentialist crises

Rebooting Ramadan for COVID19 times: With tech but without Iftar parties

COVID19’s impact on India’s solar industry

Reset in EU-China relations tougher in a post Covid19 world

India fires a salvo at China

Bend it like Kerala: How an Indian state is holding its own against COVID19

Post covid stimulus for clean energy: Govt must focus on developing an EV ecosystem

Women leaders and alpha males up against Covid19

East Africa and Kenya under the COVID19 emergency

Can ‘Advance manufacturing’ change the game in India-Australia relationship

International trade and environment sustainability: The two must tango

Fiscal prudence still matters

Maldives: Evacuation, yet another-milestone in bilateral ties

2020 could be to Narendra Modi what 1991 was to P.V. Narasimha Rao: a lasting legacy

China’s salami slicing overdrive

Rolling up the welcome mat for Chinese investors

China’s assertive behavior in the South China Sea and the implications for India

Xi Jinping: A matter of state security

How growth and equity get a boost in Finance Minister’s economic stimulus package

Why is China building its nuclear arsenal as world fights COVID?

Keep Hobbes at bay whilst Covid is at play

Nepal: Challenges of reviving economy, post-Covid

The pandemic and China are strengthening US-India relations, for now

The trends shaping the post-COVID19 world

How the pandemic is an opportunity to create a ‘more equal’ world

COVID19 and the middle power moment in global politics

Coronavirus is straining the concept of federalism

Infections, Islamophobia, and intensifying societal polarization

Government is being cautious, and that’s sensible

Covid19 and implications on global health governance

Community model from rural Maharashtra to combat Covid19

Covid19: The birth of a new power

Biological Weapons and Biosecurity – Lessons from the COVID19 war

What can we learn from the genomes of the novel coronavirus?

What India’s digital divide means for migrant workers in a COVID19 world and beyond

COVID19 has hit Africa’s amateur athletes

Exiting the ‘COVID chakravyuh’ through a bioethics prism

Guiding democracy through Covid19: Poland shows us what not to do

Rethink, Revive, Rescue: From the Pandemic to Multilateralism 2.0

Return of the migrants

Covid19 is reshaping Brazil’s politics

Vietnam emerges victorious in fight against Covid19

How Georgia tackled Covid19 bit by bit

The potential fallouts of EU’s collective response to COVID19

Covid19 has forced us to think about building a remote working culture

How Bangladesh is addressing the Covid19 pandemic

Covid reality: Cost of human lives and how to fund healthcare

Walled city dilemmas in the fight against COVID19: The case of Ahmedabad

Viral load matters: Frontline healthcare workers 11% of US COVID19 cases

Sustained shift to virtual classrooms may not be a good idea for India

Cooperation of consequence: Lessons from the 2004 tsunami response in the era of COVID19

COVID, oil collapse and economic contraction: Can the low carbon transition be salvaged?

Antibody tests not useful for back-to-work policy decisions: Expert

Risks of putting all eggs in China basket

Mumbai in numbers

Every policy change does not a reform make

Reviving the Indian economy- revisiting Mr. Keynes

India needs to win back the third world’s trust

Epidemic in China and the world: Public health, earth science and geopolitics

COVID-19: China’s ‘Health Silk Road’ diplomacy in Iran and Turkey

China’s footprint is growing within the United Nations

Russian response to Covid-19: The challenges ahead

Inter-species spillover of viruses: Understanding zoonosis and India’s future concern

Nature, politics and Covid-19

The real journey of Hydroxychloroquine

The economic cost of COVID19 is bigger than the great depression

To die hungry or die sick

US-India cooperation against COVID19

Towards a quad-plus arrangement

Will the coming monsoons result in a spike in COVID19 cases in India?

Covid19 and Conflict in Myanmar: No Truce for the Rohingya

Perspectives on SARS-CoV-2 strains

COVID19 and the acceleration of digital transformations in maritime logistics

  • May 22 2020

How the Visegrád group countries have managed the Corona crisis

Lockdown: uncertain gains, rising losses

Covid Corrections: How the Pandemic Reveals the Failures of India’s Growth Model

COVID19: Public health is a question of national security

Understanding the coming challenges to India’s pharma sector

Lockdowns, curfews and prayer: Exploring East African countries’ COVID19 response

WHO, the battleground for cold war 2.0

Covid-19 and emerging economies: What to expect in the short- and medium-term

The Good, the Bad, and the Ugly: Germany’s response to the COVID-19 Pandemic

Covid19-Indian political class needs to band, not to bicker

Understanding the risks posed by COVID-19: A Public Health perspective

No, India doesn’t need a bigger stimulus

Russia in the post-coronavirus world: New ideas for foreign policy

Building a new India after Covid19 amidst the fear

Global contest for medical equipment amidst the COVID19 pandemic

State of the States: Two months of the pandemic

Need to revisit Anganwadi workers

From SMART to sustainable cities: Is COVID19 an opportunity?

50 days of lockdown: Measuring India’s success in arresting COVID-19

Driving self-reliance while combating a pandemic

Post-Covid, nations will look inwards; India should look at neighbourhood: Ex-NSA

The migrant as economic hero and saviour

Atmanirbhar Bharat package concludes with a Rs 21 lakh crore climax

What does COVID19 tell us about democracy vs authoritarianism?

Poor sanitation in Mumbai’s slums is compounding the Covid19 threat