What damaged the economy more? First wave or the second?

In today's Finshots we talk about how the economic impact of the second wave has been quite different when compared to the first wave

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The first difference ought to be obvious. The initial wave affected both demand and supply. People didn’t want to go out and spend. And businesses were forced to shut down for good. Nobody had seen anything of this sort and there was considerable uncertainty in the air. However, this time around, supply chains have been more robust. The government has been quick to adopt exceptions and there hasn’t been a nationwide lockdown, yet. Also businesses that have had the experience of working through a pandemic last year, are better prepared to deal with the vagaries of Covid-19. So the impact is a bit limited.

Having said that, however, consumption took a nosedive during the last weeks of April and the whole of May. And since we still don’t know if a third wave is looming large, it might be too soon to predict a rebound in demand.

Then there’s agriculture.

During the first wave, agriculture was one of the least affected sectors. At the time, infection rates picked up primarily in urban centers. Rural areas were relatively unaffected. In fact, agricultural output grew last year, despite the contraction we witnessed in the overall economy. However, the second wave has been a bit different. The virus made its way into the deepest parts of India and many rural areas suffered the after-effects of the pandemic. Even if people were harvesting their produce, they couldn’t take them to the mandis, because the mandis were shut. And in most places, there's been a visible dip in agricultural activity these last few months. Now does this mean we will witness a downtrend in agricultural output this year?

We don’t know yet. There’s also the fact that monsoons have been real patchy this year. So even if we did witness a downtrend it’s hard to say for sure what’s really pushing the trend.

Then you have the manufacturing sector. Small and medium enterprises have struggled to stay afloat during both waves. They had little cash on them and banks were reluctant to lend to these people. The only difference this time around perhaps is that the government has tried to facilitate lending, hoping to get these entities up and running. Also, since restrictions were imposed at the regional level, many analysts expect the impact to be limited, at least on the production front. So yeah, the manufacturing sector isn’t expected to suffer a body blow like it did last year.

The services sector is another domain that we need to talk about. Last year the IT sector was struggling to figure out how to work remotely. The restaurant industry couldn’t figure out how to pivot to deliveries only. And the banking industry was adopting digital initiatives faster than ever. And while this whole transition took a toll on performance, it did put them in a better place. So while there was a visible contraction in service-related activities during the first wave, the second wave ideally shouldn’t affect performance as much.

Finally, there is the unemployment conundrum. During March and April last year, unemployment figures reached the double digits. And it was a pretty harrowing to see at first. However as the government started easing lockdown measures, unemployment figures moderated. By January this year, it was back to pre-covid levels. However, since then, the unemployment rate has been climbing and it touched a high of 14.5% by the end of May. Once again we seem to have breached double-digit figures, despite the fact that lockdowns this year haven’t been as draconian as the last time around

So yeah, while the second wave might not have impacted the economy as much as it did last year, it is still a force to be reckoned with.

Until next time…

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