While policymakers may not have the conventional fiscal and monetary policy space deployed in 2020, what they have now is the ability to use a ‘vaccine stimulus’ to combat repeated COVID waves.
By Sajjid Z. Chinoy
The dramatic resurgence of COVID-19 in India risks reshaping the domestic macroeconomic narrative. Till a month ago, the focus was on assessing the nature of the economic recovery from the first wave, and its implications for fiscal and monetary normalisation. That narrative, however, risks being disrupted by fast-moving developments on the virus front.
India’s daily new cases have surged past 1,50,000, much above the first peak, a pattern similar to the US, UK, South Africa and Brazil, where second waves had much higher amplitudes. In India’s first wave, the increase from 50,000 to about 1,00,000 cases took about 50 days; in the second wave, it’s taken just 13. To start with, the second wave was more concentrated, with Maharashtra accounting for 60 per cent of cases. But its share has now dropped to below 40 per cent. While the top five states still account for about 65 per cent of cases, the reproduction (R) factor in almost 10 states is estimated to be two or higher, creating risks for a wider and more rapid spread, if unaddressed.
While case fatality ratios are lower, the sheer speed of the second wave has meant the elevated “denominator” is putting pressure on some healthcare systems. Therefore, even as policymakers are understandably reluctant to impose blanket lockdowns — given the associated economic disruptions — they may have no choice but to impose local or regional circuit-breakers to ward off pressure on the healthcare infrastructure. A series of local lockdowns have been announced in recent days, and more can be expected, reflected in the Oxford Stringency Index — a measure of restrictions on activity — jumping by almost 30 per cent over the last week. To be sure, policymakers, businesses and households have all learnt from the first wave and with the private sector better adapted to “live with the virus”, the economic costs should hopefully not be comparable to the first wave. Yet, they may not be trivial either. The five states that account for 65 per cent of new cases also account for almost 36 per cent of GDP. As virus cases have grown and restrictions have been imposed, retail and recreational mobility across these five states, is down 10 per cent since mid-March. Labour market surveys have also begun to show discernable impacts on both participation and unemployment rates.
Mitigating the economic costs from a second wave will be crucial because even as the IMF, for instance, projects India’s FY22 growth at 12.5 per cent, this would still leave India about 8-9 per cent below the level of output that was projected pre-pandemic for the end of 2021-22. The challenge for emerging markets is that, given the quantum of fiscal and monetary space expended in combating the first wave, space to respond to subsequent waves will be constrained, a phenomenon accentuated by global developments. The US exceptionalism currently being witnessed — both in terms of fiscal support and pace of vaccinations — has meant the US will be the only large economy, apart from China, to surpass its pre-pandemic path. This, in turn, has underpinned a hardening of US yields, tightened global financial conditions, induced dollar strength and triggered capital outflows from some emerging markets. All this makes it harder for emerging economies to respond expansively to domestic shocks. In effect, the heterogeneity of the recovery across developed and emerging markets is imposing policy constraints on the latter which, ironically, will simply compound the economic divergence.
In India’s case, consolidated public debt will approach 90 per cent of GDP, and with the consolidated public sector borrowing requirements still budgeted above 11 per cent of GDP in FY22, fiscal space to respond to a second wave appears constrained. Instead, budgetary execution and expenditure reorientation may become crucial. The importance of delivering on the budgeted asset sales has only increased, both as a hedge to tax revenues that could be impacted from a second wave, and as a means of protecting expenditures. While growing the fiscal envelope may be challenging, it will be equally crucial to leaving enough space for higher MGNREGA demand and other safety nets on account of a second wave, even while protecting capital expenditures — which generate large multiplier effects on the economy.
Similarly, monetary policy is already very accommodative, and with core inflation sticky and elevated, global reflationary pressures entrenched, there are natural limits to the degree of more monetary accommodation.
But even as emerging market policymakers have limited conventional fiscal and monetary policy space, what they have in their arsenal this time around are vaccinations. Israel, the UK and the US have all demonstrated how aggressive vaccinations can bend the COVID-curve. Emerging markets must follow suit by augmenting supply and reducing vaccine hesitancy. Therefore, the Indian government’s decision to approve a third vaccine and fast-track emergency approval for foreign-produced vaccines is unambiguously positive. On the demand side, of an estimated 100-110 million population of seniors (60-plus) in India, only about 40 million have taken the vaccine over the last six weeks, suggesting a reluctance to get vaccinated. But, in fact, it’s crucial to ensure the vulnerable — those whose probability of hospitalisation is the highest — are fully vaccinated to reduce pressure on the health infrastructure. Ultimately, it is this pressure that triggers lockdowns and therefore vaccinating the vulnerable cohort aggressively can obviate the need for repeated lockdowns even if herd immunity takes some time to be achieved. The vaccine effort should therefore be a full-court press, devoted to further augmenting supply and reducing demand hesitancy, particularly among vulnerable cohorts.
Second waves have exacerbated macroeconomic pressures in several emerging markets. While policymakers may not have the conventional fiscal and monetary policy space deployed in 2020, what they have in 2021 is the ability to use a “vaccine stimulus” to combat repeated COVID waves. Vaccinations should be construed as simultaneously delivering both a positive demand and supply shock (for the economy), and a negative demand shock (for health infrastructure), thereby providing the best chance to decisively break the trade-offs between lives and livelihoods that bedevilled emerging markets all of last year.
The writer is Chief India Economist at J.P. Morgan. All views are personal