Covid-19: Why another nationwide lockdown is a bad idea

This time last year, life as we knew it had changed beyond imagination. People were told not to step out of the house except for essentials such as groceries and medicines, masks and social distancing became the norm, and the country was in the grip of a paranoia of contracting the Covid-19 virus.

India recorded its first Covid-19 case on January 30, last year. But by March 24, 2020, the surge in fatalities and cases globally had made the Centre decide on a complete, nation-wide lockdown. The first lockdown was imposed for 21 days till April 14, which was then extended till May 31. This decision may have played a large part in containing the virus in the following months, but it had a debilitating impact on the economy.

With the second wave of Covid-19 threatening to disrupt our lives yet again, we look back at the impact of the lockdown last year, to see if it should be replicated this year.

Impact on the economy

Phased unlocking of the economy had begun from June 1, 2020 with most restrictions lifted by November. But the severity of the lockdown in April and May resulted in India’s GDP contracting 24.38 per cent in the June 2020 quarter. This contraction was more severe when compared to countries such as the US (-9 per cent), the UK (-21 per cent) and China (+3.2 per cent). The September quarter continued to witness contraction, but at a milder 7.35 per cent, plunging the country in to a technical recession last year.

Industrial output also tumbled with manufacturing taking the biggest hit; declining 66 per cent in April 2020. Mining output dipped 26.9 per cent and electricity output fell 22.9 per cent during the same period last year. Headline IIP numbers declined 57.3 per cent in April and 33.4 per cent in May with the contraction tapering after that. Industrial production growth became positive only in September 2020.

With revenue getting hit, several firms were forced to lay-off employees, cut pay and introduce furloughs. Unemployment rates surged to 23.52 per cent in April, with both rural and in urban areas taking a hit. As per a report by Oxfam, India saw its biggest migration since Independence, last year with over 10 million people walking thousands of kilometres to rural areas. This also led to the labour force participation rate falling as low as 35.57 per cent in April from 42.9 per cent in January 2020.

With the movement of goods and people restricted, global trade also took a hit. While exports from India tumbled 56.4 per cent in April, imports fell 54.6 per cent. Inflation spiked with supply disruption causing scarcity of goods. The food and beverages segment saw a 10.47 per cent jump year-on-year in April, with vegetables, pulses, spices, fats and oils, sugar and confectionaries leading the surge.

Who lost…

Trade, hotels, transport, and construction were the worst impacted sectors, due to social distancing norms, lack of labour and travel restrictions curtailing movement. While the GDP for trade, hotels, transport and communication segment contracted 47.6 per cent, the construction segment shrunk 49.42 per cent in the April-June quarter of the FY21 fiscal.

As per a Crisil report, the revenue of travel-linked sectors such as airlines and hotels de-grew ~79 per cent in the first half of the FY21 fiscal. The report also noted that construction-linked sectors such as steel and cement saw a double-digit de-growth, and the sales volume of consumer discretionary sectors was impacted heavily because of lockdowns, supply chain bottlenecks, and lower discretionary spending. The virus also played havoc with the livelihoods of people. Several lost jobs – while many were forced to take pay cuts, millions, on the other hand, were pushed into poverty.

As per data from Pew Research Center, 75 million people were pushed into living at $2 or less a day due to the pandemic-induced recession in 2020. And, according to The Inequality Virus, Davos India Supplement, 2021, in April 2020, 84 per cent of households suffered a loss in income and 1,70,000 people lost their jobs every hour in the month.

...and who gained

But it was not all gloom and doom. Many sectors proved resilient to the lockdown and many actually benefitted from it.

Farm sector put up a brave front during the lockdown with GDP of agriculture, forestry and fishing recording 3.26 per cent growth in the first quarter of the FY21, even as most other sectors shrank.

With movement restrictions, people turned to digital means for shopping, payments, entertainments, etc. leading to a boom for e-commerce, digital payments and OTT platforms. Other technology-based businesses such as ed-tech, online health insurance, online fitness, and online telecommunications, etc. saw significant tailwinds as of August.

While the last week of March was a nightmare for all asset classes, unprecedented scale of central bank stimuli brought back the bulls helping stock markets to scale new highs. This price appreciation is however unhealthy, making valuations very pricey. The hunt for safe havens made gold prices surge throughout the year after a dip in March. Alternative assets such as cryptocurrencies also moved into the limelight as the excessive liquidity in the system began flowing in to all channels. The 10-year government bond yields plunged from 6.6 per cent mid-January to 5.75 per cent end-May, but it has risen again on fears of large fiscal deficits for FY21 leading to elevated borrowing.

2020 was not bad for the Indian billionaires either. The Oxfam report released in January stated that the wealth of the Indian billionaires rose by 35 percent during the lockdown, and India’s 100 billionaires saw their wealth rise by ₹12,97,822 crore since March last year.

What lies ahead

It’s clear that while there are some who benefitted from the lockdown, the losers outnumber the gainers by a long stretch. The lessons from last year’s lockdown is that such severe lockdowns should be avoided in the future. Experts too think that though the second wave of infections is surging, a complete lockdown is not recommended.

“A complete lockdown will not be imposed anywhere is the impression which we have got,” says Madan Sabnavis, Chief Economist, CARE Ratings. “Lockdowns affect restaurants, hotels, travel including aviation, retail (malls) and entertainment. They are operating at less than 50 per cent in most cases and a further pushback will be negative for them. It will affect the business plans of these industries and hence planning for the future becomes a challenge.” He added that States and centre should concentrate on vaccinating more people so that the population becomes more resilient.

The very fact that the fear is lingering, the threat that there is a second wave coming is not good for business and consumer sentiment, because as far as big decisions are concerned, on the spending as well as on investment, this kind of environment definitely creates fear and doesn’t give confidence to consumers as well as businesses, said Rajani Sinha, Chief Economist and National Director – Research, Knight Frank.