“For the first time since the pandemic began, there is now hope for a brighter future.” That was the assessment given by the Organisation for Economic Co-operation and Development (OECD) on December 1, 2020 following the news of progress being made with coronavirus vaccines. “The worst has been avoided, most of the economic fabric has been preserved and could revive quickly, but the situation remains precarious for many vulnerable people, firms and countries.”
Hopes of life one day returning to normality for the world were given a huge shot in the arm after US and German pharmaceutical firms Pfizer and BioNTech announced on November 9, 2020 that they had developed a coronavirus vaccine that is more than 90 percent effective in preventing the contraction of COVID-19. The announcement was soon followed by further good news just a few days later from Moderna, which reported that its vaccine is 94.5 percent effective.
In response to the news, the International Monetary Fund (IMF) stated that a faster global economic recovery was feasible. “Progress with vaccines and treatments, as well as changes in the workplace and by consumers to reduce transmission, may allow activity to return more rapidly to pre-pandemic levels than currently projected, without triggering repeated waves of infection.” While the news of the vaccines has been welcomed across the world, ensuring the global population receives the vaccine in due course seems another proposition altogether.
By preventing economic disaster and helping to end the pandemic, 10 major economies could be $466 billion better off by 2025, new data finds. This is 12 times the $38 billion estimated cost of the Access to COVID-19 Tools (ACT) Accelerator. The collaboration was launched in April, 2020 by the World Health Organization and its partners to support the development and equitable distribution of COVID-19 tests, treatments and vaccines. Making sure everyone has equal access to COVID-19 vaccines could be worth more than $460 billion to 10 major economies by 2025, according to a new report. Data shows that leaving low, and lower middle-income countries without access to vaccines amid the COVID-19 pandemic will cause significant economic damage for all economies and put “decades of economic progress” at risk.
Even as India contends with “recession” as the country’s gross domestic product (GDP) fell down in two consecutive quarters, a covid vaccine could be a game changer. With the help of vaccinations, virus cases will start to fall visibly by mid-2021, with effective herd immunity reached globally by year-end. There is also the risk that our optimistic view on the vaccine is not met due to efficacy or logistic problems.
While Pfizer NSE 1.22 % and Moderna’s vaccine could matter more globally, we think the availability of AstraZeneca and Novavax vaccines with standard cold chain needs will be more feasible for India. Both have tie-ups with Serum Institute of India for manufacturing and supplying to India and other developing countries. It is being noted that India is one of the largest vaccine manufacturers globally.
India’s GDP contracted by 7.5% between July and September, 2020 compared to the same quarter a year before. Between April to June, 2020, Indian economy contracted by 23.9% as against the same period in 2019. While the contraction—7.5%– was much lower than what many predicted, this has caused fear that the country could slip further into recession.
“India already has the world’s largest Universal Immunization Program (UIP) in place, which administers c390m vaccines annually (mostly to children and pregnant women). As a precursor, some cities have already seen private sector diagnostic labs handling more COVID-19 tests than government hospitals in recent months.
A rebound to levels of 9% in FY22 and a 6% uptick in the two years thereafter. That is the course the Indian economy is expected to chart in the near-term.
The biggest promise that the coming year holds is the vaccine; it would not just speed up business activity, consumer confidence would soar too. But the vaccine alone can’t help an economy that is shambled by sluggish investments, lean credit flows and capital constraints. Rising prices of commodities and firmer interest rates will pinch, making both goods and services costlier. With the critical services sector lagging, and expected to recover only very slowly, new jobs will stay scarce; this, together with incomes that are barely growing, will keep consumption demand weak.
Already, between FY14 and FY19, nominal household disposable incomes grew slower by an average of six percentage points than in the previous five years. Moreover, even ahead of the pandemic, slowing disposable incomes had begun to weigh on the appetite for leverage-driven consumption, as seen in lower household leverage ratios in FY20. Until they are more confident, households are going to save rather than spend.
The consequent subdued demand will hurt smaller businesses, especially in the informal sector, though the larger companies will continue to recover. Nonetheless, a good many bigger corporations will focus on strengthening their balance sheets before they embark on fresh capacity additions. The recent announcements notwithstanding, private sector investments will, in aggregate, stay sluggish for at least two more years, extending the slump in the capital expenditure cycle.
As economists like Pranjul Bhandari of HSBC have opined, the pace of revival is likely to be gradual and heavily dependent on policy support. In the absence of a predictable policy environment, a strong pipeline of reforms to keep future expectations of growth buoyant and further steps to tackle the twin balance sheet problem, corporations would be reluctant to risk capital.
What is needed now is a big fiscal stimulus. The government has been reluctant to loosen its purse strings, possibly for fear of being rapped on the knuckles by the ratings agencies. However, it would do well to step up spending soon so that the recovery doesn’t stall, as is feared will happen, once the pent-up demand gets fulfilled. Should the recovery lose steam, it would be even harder to get it going again. So far, the direct spend in FY21 has been less than 2% of GDP; a much bigger impulse would be needed to ensure the recovery stays firmly entrenched even as the reforms are being rolled out.
As we have seen, it is the formal sector comprising bigger businesses that will emerge stronger while the much larger informal sector—which accounts for nearly half of the GDP and 80% of the jobs, continues to languish. As most economists have pointed out, this widening gulf between the haves and the have-nots would probably be the biggest blow dealt by the pandemic.
They have also observed how the pain in the informal sector is visible through reduced labour participation rates, anecdotal evidence of lost urban jobs, and a considerable pick-up in demand for MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) scheme. The inequality is expected to worsen; 2021 will be the year of the haves, for the have-nots it might be worse than 2020.
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