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COVID-19 Second Wave | Economic challenges India must be prepared for

The declining economic activity may force the Centre to re-impose a spending cap. This can jeopardise the ambitious plan of infrastructure spending to spur the economy 

May 05, 2021 / 01:13 PM IST
Kerala is one of the states which has appealed the Centre to increase the vaccine supply (File image: AFP)

Kerala is one of the states which has appealed the Centre to increase the vaccine supply (File image: AFP)

The second wave of the COVID-19 pandemic has struck India with an unforeseen fury. It has disrupted the economic recovery after the national lockdown during the first wave in 2020 and threatens to ruin the middle class.

To enable a quick return to normalcy the only hope is if the vaccine drive picks up momentum. The rapid surge of COVID-19 cases on the back of new virus strains took India by surprise, which was blindsided by its success due to falling infection rates. By mid-April, India was in the midst of a full blow internal crisis like never before. Its debilitated healthcare system struggled to handle the inflow of patients while many more were left outside to scramble for the oxygen supply and medicines.

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The scenes of horror that unfolded forced several states to impose curfews and semi-lockdowns to try to mitigate the spread. Also, the sense of complacency that prevailed in India gave way to fear and paranoia with those who could, locking themselves at homes.

Impact On Middle Class

The first impact of the second wave is witnessed in the catastrophic health expenditure and loss of life suffered by the middle class, which is the economic backbone of India’s growth story. The middle class has suffered three significant shocks within five years. Demonetisation broke the back of the real estate sector, and with it, the large amount of money invested by the salaried class was permanently lost. The scale of this wealth loss and its impact has never been fully measured, but is likely significant. The second was the lockdown-induced job loss and salary cuts. Now the second wave-induced disruption will deepen those losses. It has set back families for decades and will severely impact the private consumption expenditure in India.

The current restrictions announced by several states has once again resulted in the exodus of migrant labour and brought construction work and factories to a standstill. Apart from income loss to the labour force, it will also push several businesses back into losses from which they were just about recovering.

Ripple Effect

The hospitality and restaurant businesses in major cities have taken a significant hit once again. Services like hostels, services apartments, multiplexes, pubs, bars, nightclubs etc., never fully recovered from the first lockdown. Now, many businesses would be forced to shut down permanently as losses and debts are mounting. This will lead to a significant loss in the rental income apart from the large number of job losses creating a ripple effect of falling demand for other products and services. Similarly, tourism, travel and aviation sectors face an uncertain future as the number of new infections show little sign of abetting. The travel and tourism sector is among the largest employers in India. It contributes around 9 percent of the GDP. Travel restrictions and lockdowns may push several airlines to bankruptcy.

The declining economic activity and falling tax revenues may force the Centre to re-impose a spending cap. This can jeopardise the ambitious plan of infrastructure spending to spur the economy. The states and the Centre will mainly bear the cost of universal vaccination. It will put a strain on the limited government resources at a time when it is scrambling to augment the healthcare facilities and supplies.

Increased Uncertainty

The second wave will compound the misery of repeated economic disruptions and slowdowns over the past few years. Unemployment will rise, and possibly many more people will drop out of the labour force. Salary cuts and income loss combined with the unbearable health expenditure and loss of life due to the virus threatens to stall the socio-economic mobility of a large section of the population with implications for social and political stability.

It has tanked consumer confidence and increased the uncertainty in decision-making, which is detrimental for economic recovery. Uncertainty, in particular, has been holding back India’s economic recovery as both consumers and businesses are unsure of the future policy direction.

Now the fear of a third wave will hinder any governmental effort to re-instil confidence in the economy. It means that the decade-long economic slowdown will linger on for years to come before we can see a recovery. The only ray of hope lies in ramping up the vaccination programme, which will enable us to uplift most of the restrictions sooner than later.
Abhinav Prakash Singh is assistant professor, Shri Ram College of Commerce, University of Delhi, Delhi. Views are personal.
first published: May 5, 2021 12:49 pm

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