India’s Covid crisis augurs lost economic decade

No top-10 economy has seen its 2021 unravel faster and with greater suspense than India’s.

Narendra Modi’s podium-thumping January 28 Davos speech sure does seem a lifetime ago. There, the prime minister detailed how “India beat all odds in coronavirus fight.”

Modi complained “a lot of experts had said India will be the worst-affected country, there will be a tsunami of cases.” He also said: “India is among countries that have succeeded in saving the maximum lives” and “the world from disaster by bringing the situation under control.”

It’s hard to think of words that aged more poorly as a fresh Covid crisis brings India to its knees and shocks the globe. Thanks to complacency and downright hubris on the part of Modi’s government, a new Covid-19 tsunami is imperiling his nation of 1.3 billion – and its neighbors. 

News reports read like an over-the-top Hollywood disaster script – mass graves, wood shortages tied to a surge in cremations, a race for black market oxygen, dying patients on gurneys outside hospital entrances, shortages of essential drugs, mass confusion, comparisons to Dante’s Inferno.

As a direct result, “India may be looking at another lost year for the economy,” says economist Robert Carnell at Dutch bank ING.

Or something even worse: a lost decade ahead at the worst possible moment for Asia’s No 3 economy.

When Carnell says “another,” he’s referring to a pre-Covid period when Modi’s government was slow-walking efforts to modernize and internationalize India’s economy. That, after all, was his remit in May 2014, when Modi’s Bharatiya Janata Party swept to power to raise India’s economic game.

The ‘Gujarat model’

Modi attained folk-hero status thanks to 14 years running the western state of Gujarat. There, he developed a reputation for growth above and beyond that national average, good governance and better infrastructure than found elsewhere in India.

Voters looked past the Hindu nationalist’s failings – including deadly anti-Muslim religious riots on his watch in 2002 – and hired him to apply the “Gujarat model” more broadly.

Yet Modi has been a reform laggard, not unlike the all-talk-little-action Shinzo Abe era in Japan.

Early on, Modi did put a couple of reform wins on the scoreboard. He opened some protected sectors like aviation, defense and insurance to increased international investment. And signing a national goods-and-service tax was no small feat.

Yet Modi was quick to rest on his laurels, shelving bigger and far more vital upgrades to land, labor and tax laws. The bold steps Modi actually did take were marred by incompetence.

The GST rollout caused financial mayhem. A sudden move to pull all high-denomination banknotes out of circulation – aimed at policing “black money” – backfired spectacularly.

Since winning a second term in 2019, Modi relied on central bank easing and copious amounts of populist rhetoric to rally his supporters. The Reserve Bank of India came under intensifying pressure to bail out Modi’s glacial approach to doing heavy lifting on increasing competitiveness.

It was these pre-existing conditions that Covid-19 exploited ruthlessly. They exposed a leader who’s far more skilled at dividing people and distracting the masses from his failures than engineering positive change. His efforts to spin the pandemic, rather than address it, came right from the Donald Trump playbook.

It’s a bigger problem, of course, that links Modi to Trump, but also other strongman leaders like Rodrigo Duterte of the Philippines and Jair Bolsonaro of Brazil. Before 2020 arrived, all four men had remarkable success blaming their failures on others.

The ‘Indian variant’

The one challenge they couldn’t swat away as “fake news” was a pandemic with fast-rising death tolls and widening economic fallout.

India has both in spades at the moment. The B.1.617 variant of the virus, first detected in Modi’s nation, has now turned up in at least 44 countries on six continents. Japanese media are buzzing about the “Indian variant,” adding to reasons why the Tokyo Olympics to begin in July should be canceled.

“The virus doesn’t respect borders, or nationalities, or age, or sex or religion,” says scientist Soumya Swaminathan at the World Health Organization. “And what’s playing out in India now, unfortunately, has been played out in other countries.”

As neighboring Nepal braces for the worst, for example, there’s a mad dash to divert oxygen canisters normally set aside for Mt Everest climbers to Kathmandu. Cases are surging in Pakistan. Bangladesh is scrambling for vaccines and other supplies from China and Russia.

“If India’s present Covid-19 infection and death situation happens in Bangladesh, our situation will be like falling trees during a heavy storm,” Anwarul Iqbal, a Bangladeshi public health expert, told the New York Times.

So much for the swagger and nationalism that until now were the currency of the cult-of-personality machine at the center of Modinomics. In early March, Modi’s Minister of Health Harsh Vardhan declared that New Delhi was in the “endgame” of the epidemic.

The endgame talk now concerns India’s designs of surpassing China in gross domestic product terms.

At the start of 2021, about the time Modi declared victory to the Davos crowd, S&P Global Ratings was predicting 11% gross domestic product growth this year. This latest Covid wave shattered the “V-shaped” recovery narrative as economists tripped over themselves to downgrade GDP calls.

Getting priorities wrong

“A drawn-out Covid-19 outbreak will impede India’s economic recovery,” says S&P economist Shaun Roache. “The country already faces a permanent loss of output versus its pre-pandemic path, suggesting a long-term production deficit equivalent to about 10% of GDP.”

A major impediment to growth: business and households don’t know who to trust. So far, Modi has resisted calls from medical exports for new lockdowns, prioritizing GDP and the stock market over public health.

Given the slow pace of vaccination rollouts, says economist Kunal Kundu at Societe Generale, any Modi attempt to reopen too soon could mean a third wave of infections. “This adds downside risk,” Kundu says.

So far, Modi has followed the Trump/Abe book of favoring giving citizens greater freedoms so as not to dampen GDP too much. Modi even let state elections in West Bengal, Assam, Kerala and Tamil Nadu, including huge political rallies, take place.

“Lots of people, lots of shouting of slogans, minimal social distancing,” says ING’s Carnell. “And in addition, the Kumbh Mela religious festival, famous for the millions of attendees over several weeks, provided yet another potential infection super-spreading event.

“Common to all of these events, whether sporting, political or religious, was a lack of social distancing, and frequently, a lack of mask-wearing.”

Another problem is outside economists don’t know what they don’t know given how Modi has worked to reduce public transparency and accountability.

“Identifying the peak will be harder than ever, as a devastating wave of infections rolls across the country, setting new records for both cases and deaths,” says analyst Tom Miller of Gavekal Research.

Growth revival challenge

“More than 20 states have imposed curfews and other curbs over the past week, meaning that at least 80% of the population is under some level of lockdown,” Miller notes. “Case numbers do appear to have peaked in Mumbai and Pune, and maybe in Delhi.

“But almost all states are now affected, with signs that the impoverished rural heartlands of northern India will be hit hard. The official death toll could exceed 400,000 by mid-June, nearly double the current figure, though the true number will probably be several times higher.”

India, like the US, also risks an inflation flare-up just as authorities are trying to revive top-line growth, says economist Rupa Rege Nitsure at L&T Financial Services. At the moment, inflation is rising at a 4.29% pace, but pressures bubbling up – including surging commodity prices – are reason for concern.

So is the longer-term fallout for Indian inequality. India’s public health system is chronically underfunded. Receiving only 1.26% of the total GDP, it leaves India’s ginormous population at the whims of Covid variants enjoying a second wind: understaffed public hospitals; chronic bed and equipment shortages; morgue facilities unready for a deluge of corpses.

These are graphic reminders of a lack of leadership, vision and basic competence – things Modi pledged time and again to address since 2014.

Some of the worst fallout from 2020 has been among rural youth, according to the Centre for Monitoring the Indian Economy think tank. It finds, too, that rural women have accounted for almost 80% of job losses in the Covid era.

India, it’s often said, enjoys a “demographic dividend” with nearly 30% of the population under 15. India needs to create several million net new jobs each year just to preserve social stability. Hence, Modi’s big push into manufacturing with his “Make in India” project.

Yet structural reforms are needed to increase India’s share of startups that create new jobs and wealth. In a recent report, Credit Suisse highlighted India’s potential to add to its stable of tech “unicorns.”

Standing in their way, though, are myriad bureaucratic hurdles Modi long ago pledged to remove. Simplified regulations would encourage increased participation via digitization, particularly among smaller businesses.

Unfortunately, Modi failed to recalibrate India’s dynamics when the economic sun was shining. An environment sparking comparisons to Dante or, at the very best, Charles Dickens is not promising for getting reforms done.

Or for where India’s economy might find itself 10 years from now.