What Are the Costs of a Delayed Lockdown During Second Wave of COVID-19?

Most parts of India are in lockdown in May 2021. So, effectively there is a national lockdown, without declaring it. While it has apparently helped contain the spread of the disease where lockdown was declared early like, in Mumbai and Delhi, it has spread into the hinterland as the prime minister stated and experts are predicting a possible third wave sometime soon.

Inadequate testing prevents us from knowing the full extent of daily infections or the spread of the virus. Some argue that the infections could possibly be 10 times and deaths possibly three-eight times the official figures. Media reports lend credence to these numbers. Visuals of mass cremation, overwhelmed burial and cremation grounds and bodies floating down the Ganges point to the extent of the crisis.

The true number of infections and deaths are not known since data from small towns and villages is not available and even the official data from the cities is incomplete since it is based largely on hospitals data. Additionally, there are accusations of deliberate underreporting. If all this is true then the much bigger second wave was not acknowledged officially and planning was delayed.

A delay in lockdown meant that superspreader events continued and workers migrated (though in lesser numbers than last year) without being tested. This enabled the new virus strain (B.1.617) to spread to the rural areas and small towns, since it is more virulent. Due to a lack of testing facilities and weak or non-existence health infrastructure, the spread of the disease in these areas cannot be stopped and it can be taken that they are experiencing community spread. A complete national lockdown was needed by March-end to stop such spread.

The rapid spread of the disease also carries with it the risk of the virus mutating further and returning to the urban centres where the second wave may be in wane. Rapid vaccination could have helped but we are far from it due to mismanagement – advance planning was weak, enough doses were not ordered in time and the logistics of a massive vaccination are missing. This is indicated by the repeated changes in the protocol for vaccination. There is a worry that some of the vaccines, like Covishield, are less effective against the B.1.617 strain rampaging in India. There is also the possibility of the evolving mutants displaying stronger vaccine escape.

Delay in lockdown

A lockdown prevents people from moving around and slows the spread of the disease. But businesses largely oppose it and/or press the government to reopen the economy quickly. It is only reluctantly that businessmen agreed to a lockdown in April, when the disease got out of hand and companies, like those in the automobile sector, started to close down. The CII president towards the end of April suggested the need for stricter measures.

India reached a low of 9,121 cases on February 15. Thereafter the numbers exploded – 15,616 on February 28, 22,814 on March 10 and 43,815 on March 20. There were enough signs that another wave of infection had started and a lockdown was required to stall the further rapid rise of cases. Local lockdowns were implemented from mid-April, when the daily cases reached around 2 lakh. Widespread lockdowns were implemented in May, when the daily cases reached around 4 lakh. These are official numbers and understate the true extent.

So, the lockdown was delayed by at least a month. Better data would have given the true picture and helped in planning better. The Mahakumbh could have been curtailed and the elections postponed but, these events were allowed to go on. Migration from cities to villages started in April and without testing the disease went to the rural hinterland, with all the terrible consequences that are all too visible. Given the community spread of the disease right into the villages, inadequate testing and impossibility of tracing huge numbers, to slow the spread, the current wave is likely to persist.

How much will the delay in lockdown cost the economy? The Ministry of Finance has said the impact will be marginal. But that depends on the underlying assumptions about the course of the disease in the coming months and the duration of the lockdown?

International experience

The impact will depend on the likely trajectory of the disease. But, some idea can be obtained on the basis of our own experience and that of other countries, in the last one year.

India’s first wave started in February 2020 and peaked in mid-September, in spite of a stringent lockdown in April and May 2020. Unlike other countries, which relaxed their lockdown after the cases had come down substantially, we did so when the cases were still rising in June 2020. So, our lockdown did not deliver the punch it should have.

In the UK, the cases peaked at around 5,000 (seven day average) in mid-April 2020 and declined to a few hundred by the end of June. Starting in August, they peaked in mid-November and mid-January with a small dip in between. The economy was opened up when cases declined in April 2021. So, the first wave lasted four months and the second one went on for eight months. The UK was the first to start vaccination in mid-December and by May 1, more than 50% of its citizens had received at least one dose. Rapid vaccination possibly contributed to a decline in the cases and gave the government confidence to open the economy.

The US presents a contrast since it did not implement a national lockdown and left it to individual states. Further, there was resistance to masking. Starting March 2020, infections reached a high of around 35,000 daily cases in mid-April and then declined but rose again by mid-July to about 70,000 daily cases and then declined by mid-September to about 25,000 daily cases. They again rose to peak at about 2,25,000 daily cases in mid-December and after a small dip, they again peaked at almost 3,00,000 cases in early January before showing a secular decline.

So, the first wave was three months long and it merged into the second wave of another three months and that merged into the third wave of about six months. On May 15, the number of cases in the US is around 38,000, which is fairly high. Due to a delay in lockdown and not imposing a national lockdown, the US became the most impacted country in the world with the highest number of reported cases and deaths, in spite of the highly advanced medical system. By mid-May, it has administered at least one dose of vaccine to about 50% of its population and that could be one reason for the decline in reported cases.

So, without a national lockdown, a wave of infection can persist and merge into the next wave as in the case of the US – it has persisted there for 13 months. The same is visible in the case of Brazil, which also did not go for a lockdown. The UK also, in the initial months of the second wave, delayed the lockdown and the wave persisted. It is also apparent that vaccination, which provides some immunity and slows down the rate of spread of the disease in the medium run.

By May 15, 2021, 18 crore vaccine doses had been administered in India, with around 11% of the people receiving at least one shot. Given the current dearth of vaccines and a confused strategy, the pace of vaccination has slowed down. India’s own production has slowed down because of delay in orders and non-availability of adequate amounts of inputs from abroad. India plans to import vaccines but how successful will that be given the global shortage of vaccines remains to be seen. At the current rate of vaccination, even by the end of 2021, 60% of the population will not have got at least one dose of the vaccine. So, vaccination cannot be depended on to slow the current surge of the disease.

The delay in lockdown has led to a higher peak than in the first wave and its length is also likely to be longer. The British example suggests that the length could be one and half times longer. But if India’s case turns out to be like that of the US (without a national lockdown) and the virus spreads to the hinterland, then the second wave could possibly merge into the third wave and become a long wave, much longer than last year’s. So, it could continue past the end of 2021 and delay the opening up of the economy. This is most likely given that our health infrastructure is far worse than that of the US and therefore, suffering is likely to be more intense.

Further, the persistence of the second wave, aggravated by a possible third wave, will further strain the medical system, which has literally collapsed in much of the country. The doctors and nurses are already strained and can they continue like this for some more months? If not, the potential for the number of deaths soaring and further damaging public sentiment is high.

If the economy is prematurely opened, there can be further reinfection, especially because vaccination is proceeding slowly and because new strains may emerge. This could force another lockdown. Associated with the disease is long COVID, which impacts the nervous system and various organs and leaves the patient weak for months after the person is declared to be cured. This will impact the workers’ capacity to work. Due to the spread of the disease this time, work in the rural and semi-rural areas will be impacted in a big way. Consequently, agriculture and local industries which got off lightly during the first wave will be more seriously impacted now.

The economic impact

The breakdown in the health systems in major urban centres has deeply impacted the elite classes. People have needlessly died or been put to enormous hardship. They have faced non-availability of hospital beds, oxygen, medicines and medical attention. The poor were always deprived of proper medical treatment but now even the elite suffered because their connections did not always work. The result has been despondency even among the middle classes and the elite. Consequently, not only demand for non-essentials has declined now but it is likely to remain low for the foreseeable future as the wave persists.

Medical expenses have pauperised many in the middle classes as black marketing and hoarding of essentials occurred. Ambulance, hearse, medicines, oxygen and hospital charges soared leaving many in deep debt. Charges for burial and cremation also soared. An indication of financial distress is the default in payment of EMIs. Another indication of uncertainty is the sharp rise in public holding of cash as people want to be prepared for eventualities. The persistence of the wave will ensure that uncertainty continues and most people will save as much as they can by curtailing expenditures.

Consequently, even if the wave begins to abate by the end of 2021, given that the fear of COVID now is far greater than it was last year, revival of consumption will be gradual. The already weak consumer sentiment, which according to RBI was at 55 in January 2021 compared to 105 in January 2020, would have fallen further. So, demand will remain low for the rest of 2021 and therefore, capacity utilisation would remain poor and that would impact fresh investment which anyway was low. Capacity utilisation in the organised sector was at 63% in January 2021 according to RBI and would have declined even more.

So, consumption and investment will be much lower than their pre-pandemic levels in 2019-20 and no better than in 2020-21. Government has not yet announced a step up in its expenditures, so demand will remain low. Data for 2020-21 presented in the Union Budget 2021-22 shows, the rise in the fiscal deficit was small and that too mostly due to a drop in tax collections and not due to rise in expenditures to boost demand. This is likely to be repeated in 2021-22 as well, due to the fear of downgrade by the credit rating agencies which frown on any increase in fiscal deficit. Last year, when every major economy increased its fiscal deficit, it mattered less but this year with major economies coming out of recession and cutting back on their fiscal deficit, India would get singled out and therefore, it would matter more. Finally, government cannot compensate for the decline in private sector demand. So, growth will decline – by how much?

Growth projections

Various agencies have revised downwards their growth projections for 2021-22 by one or two percent. This can only be based on assuming a quick end to lockdowns and a prompt restart of businesses in a month or two. But, what is the basis for this optimism? They all accept that there is uncertainty but assume that there will be a quick normalisation; this is contradictory.

On the low base of GDP in 2020-21, growth was expected to be higher and may turn out to be the case for Q1 of 2021-22 because of the steep slump in Q1 of 2020-21. But what about the remaining quarters, given that the wave is not only likely to persist but possibly merge into a third wave which is said to be around the corner. The fear among the consumers is greater now because it is said that the next wave would impact the children whose vaccination is yet to start. This would keep the consumer sentiment low, unlike last year.

April 2020 saw a complete national lockdown, so there will be a sharp rise in GDP in April 2021 when there were only partial lockdowns. May 2021, with more or less a complete lockdown imposed on large parts of the economy, will be similar to May 2020 and will show no growth. June 2021 is likely to be much worse than in 2020, when unlock started. So, Q1 of 2021-22 which was expected to show a sharp rise in growth by around 20% based on official data, may show a growth of perhaps 5%.

Q2 of 2021-22 will show a sharp decline due to the persistence of the wave, the possibility of the third wave starting and lockdowns again taking place. Predictions about Q3 are difficult but if the sentiment remains low due to personal losses suffered by a large number of families, it could also show negative growth. Even agriculture may experience negative growth since the disease has gone deep into the villages and this would also impact the unorganised sector adversely and make it difficult for it to revive.

Conclusion

The chances are that the economy will experience no growth, if not a negative growth in 2021-22. It will all depend on how effective the government is from now on. Can it ramp up vaccination and health infrastructure in the coming months by mobilising on a war footing? It has not shown such resolve as yet and has been muddling along as seen in delay in lockdown and laxity in ramping up vaccinations. Budgetary support to the poor has not been announced as yet. The government has almost been non-existence whereas it needed to instil confidence in the people that it will take care of all contingencies.

The picture will be complicated by international developments. Major world economies are reviving causing commodity prices to rise. This and the supply bottlenecks in India will further stoke inflationary pressures which will slow down revival. Foreign capital flows have already reversed and this can accelerate. The stock markets currently buoyed by the Domestic Institutional Investors (DII) like, LIC, can decline sharply as the overall public sentiment remains poor. The current large foreign exchange reserves will help and exports can do well provided the economic disruption remains minimal.

In brief, the delay in lockdown by more than a month has led to a huge second wave of infection, which is likely to persist longer than the first wave last year. This presents the Hobson’s choice of unlocking the economy prematurely and going for another lockdown later or persisting with lockdown for some time. Either way, due to large scale fear and personal losses, the sentiment in the economy is unlikely to recover soon. If due to the impact on consumption and investment, there is no real growth in 2021-22 as compared to the officially expected 10% growth, real GDP would contract by around Rs 20 lakh crore due to the complacency in dealing with the pandemic.

Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences and the author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead.