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The tentative nature of the gains in the battle against the novel coronavirus showed up following the discovery of a variant strain in the UK. This strain has resulted in lockdowns in parts of the UK and upset plans for the upcoming festive season. The fear of transmission has had a cascading effect and even in India, some states have taken a step back. Maharashtra has introduced a temporary night curfew and Tamil Nadu has banned New Year celebrations in hotels, pubs and beach resorts.
For sure, governments have to be extra vigilant now to ensure gains made so far are not reversed. However, the experience of April and May should teach us that lockdowns can no longer be part of the toolkit. Unemployment, according to CMIE, peaked at 23.5% in April. Once the economy began to open workers were quickly rehired. But that seems to be plateauing. Between the end of November and December 21, unemployment has increased by almost two percentage points to 8.5% as returning workers are faced with the challenge of an economy functioning way below potential. Very likely, aggregate employment at the end of this year will fail to reach the level that existed when the first lockdown came into effect.
This extraordinary situation has complicated economic policy making. RBI’s most recent projection is that the country’s output will shrink by 7.5%. The conventional approach in this situation, with aggregate demand squeezed, is that the government steps up to fill the gap. There have been announcements of a stimulus bundled with economic reforms. However, the data suggests that spending has been rather tepid given the scale of the problem. Till end October, government’s total spending at Rs 16.61 lakh crore was just a shade higher than the previous year. The outgo on major subsidies, including food, was actually lower than the corresponding period last year.
Fiscal deficit this financial year will widen on account of a collapse of revenue and not because of runaway spending. This leads to two conclusions. Another lockdown or even severe restriction of movement is decidedly ill advised. States, which have borne the brunt of revenue shortfall, should not resort to haphazard restrictions. But there is a strong case to be stricter in implementing rules on enforcing masks in public places. Alongside, the Centre should play a bigger role through spending on infrastructure projects. Fiscal policy needs to be more proactive.
This piece appeared as an editorial opinion in the print edition of The Times of India.