Managing the 2nd pandemic wave

Everybody “knows” what has gone wrong with the second wave of the pandemic in India.  

The government ignored the experience of the second wave elsewhere and did not prepare adequately. It should have ramped up vaccine supply and expedited the vaccination drive. It should not have eased restrictions on movements so quickly. Both the Indian media and international media have done a good job of trashing the Indian government on these counts.

When you examine each one of these propositions closely, you begin to wonder.

The second wave in other parts of the world was there for all to see. How could any government have ignored it? What the Indian government did not expect was the intensity of the second wave. The scientific establishment, as well as government economists, seems to have under-estimated the threat that loomed.

The principal scientific adviser to the government and also members of a panel that worked on modelling the second wave tell us that their model did not predict a wave of the present intensity. It showed a peak infection level of about 100,000 cases a day, nowhere near the peak of 400,000 cases that has materialised. (Another group of scientists tells us that it warned that a dangerous mutant of the virus had been detected but it does not indicate whether it had a forecast for cases).

The Economic Survey of 2020-21 argued at length how the government’s strategy in dealing with the pandemic had proved successful. The Survey went on to add: “The prospect of India facing a strong second wave is receding with the start of the vaccination this year.”

Commentators argue that the government should have planned for a larger supply of vaccines and expedited the vaccination drive. They seem to have forgotten the concerns about the lack of complete clinical trials and the possible side-effects of vaccines. Some insisted that vaccines approved abroad must undergo clinical trials in India before they were approved. In the initial days after vaccination commenced, the response was lukewarm and there were reports of large stocks of unused vaccines.

Many argue that we relaxed restrictions too early, and we should have waited for vaccination to gather steam. Well, lockdown fatigue had sent in. Many believed the economy would collapse if restrictions continued. Experts opined that the virus had been beaten in India because of our favourable demographic profile, genetic traits, climatic conditions, etc. Moreover, we still know too little about the virus to make assertions of any sort. China had vaccinated just around 4 per cent of its population by mid-April and yet is functioning normally.

This is in no way to minimise the tragedy that has unfolded. It is merely to say that many of the criticisms of the government’s handling of the pandemic are strictly hindsight or lack a rigorous foundation. The particular course that the government adopted did not seem unreasonable, given the inputs it received from experts and the conditions obtaining then. For all the advances in science, human systems seem unequal to natural disasters of colossal magnitudes — witness the tsunami in Thailand or Hurricane Katrina in New Orleans.

illustration: Binay Sinha

The government has since acted to deal with the threat to public health posed by the second wave. What about the threat to the economy?

The economy is in a good place in the second wave compared to where it was in the first wave. Then the economy was decelerating. The first wave caused the economy to shrink. Now the economy is rebounding. The second wave will likely mean a smaller rebound, not an absolute decline.

Secondly, during the first wave the world was searching for vaccines. Now the vaccination drive is on. The hope is that as the proportion of the people vaccinated rises, the pandemic will run out of steam.

Thirdly, the government has thus far stopped short of a complete lockdown and focused instead on micro-containment. This does limit any adverse impact of the economy.

Fourthly, the corporate sector seems well placed to deal with the stresses imposed by the pandemic. This is reflected in the response to the loan moratorium and loan restructuring banks offered in response to the first wave. Only 31 per cent corporate loans came under the loan moratorium scheme compared to the average of 41 per cent across all borrowers. At micro, small, and medium enterprises (MSMEs), the figure was 69 per cent. Analysts say that only about 2 per cent of the banks’ books is under restructuring, way below the 5-6 per cent earlier forecast.

What does the government need to do now? The optimistic scenario is that we will not need a lockdown of the sort we had in March 2020. With the restrictions currently in place, the incidence of cases should come under control. The government seems to be working on this assumption at the moment.

If this assumption is borne out, the government may be able to do without any significant addition to the fiscal stimulus already budgeted. The sector to watch is banking. The striking feature of India’s experience with the first wave was the way the banking system weathered it. If banking can withstand the present shock as well, it will be a huge positive for the economy.

The Reserve Bank of India (RBI) has been quick to realise that consequent to the second wave, further support to the banking system is needed. Among other measures announced on May 5, the RBI has allowed banks to restructure loans of borrowers with loans outstanding up to Rs 25 crore provided the borrowers had been servicing their loans up to March 31, 2021. This is a timely move aimed at enterprises and individuals impacted entirely on account of the second wave.

What if banks misuse the scheme? What if restructuring is done only to kick the can down the road? The onus is on bank boards to keep an eagle eye on restructuring cases. They must ensure that defaults are not out of line with those of peers and enforce staff accountability as required.

Banks would like the period for classifying non-performing assets to be extended from 90 to 180 days for MSMEs. The RBI must resist the clamour. Restructuring is okay, but not avoiding provisions where required. Let the government provide capital to public sector banks to make the necessary provisions.

If the second wave can be contained without a nationwide lockdown, the real risk to the economy will be not the second wave but a rise in interest rates in the US and the exodus of capital that will follow. The prospect is no longer insignificant with President Joe Biden announcing a $4-trillion plan for spending on infrastructure. US Treasury Secretary Janet Yellen’s recent statement that interest rates may have to rise to prevent over-heating in the US economy is ominous.

The human cost of the second wave in India has been tragically large. If the Fed can hold interest rates, we may be able to keep the economic cost low. That’s a welcome prospect in these dark days.

ttrammohan28@gmail.com