On May 16, the Delhi government ordered the extension of the lockdown in the national capital by one more week. The lockdown, which has been in place for a month already, is bound to have an adverse impact on economic activity. Even though there is no nationwide lockdown at the moment, most parts of India are under varying degrees of mobility restrictions. What will be the economic impact of these restrictions? Here is what we know and do not know about the evolving economic story, a month and a half into the fiscal year 2021-22.

On May 16, the Delhi government ordered the extension of the lockdown in the national capital by one more week. The lockdown, which has been in place for a month already, is bound to have an adverse impact on economic activity. Even though there is no nationwide lockdown at the moment, most parts of India are under varying degrees of mobility restrictions. What will be the economic impact of these restrictions? Here is what we know and do not know about the evolving economic story, a month and a half into the fiscal year 2021-22.

March 2021: The month of exuberance

Last week, the National Statistical Office (NSO) released the Index of Industrial Production (IIP) numbers for the month of March 2021. The headline growth number of 22.4% had a large base effect. IIP had contracted by 18.7% in March 2020. However, this does not negate the fact that industrial production across categories was at its highest levels in March 2021 since the pandemic disrupted economic activity. This is borne out by a comparison of absolute values of IIP sub-indices from March 2020 to March 2021.

That workplace mobility, as per data from Google mobility indices, also peaked in March 2021 -- it has fallen sharply since then -- also suggests that economic normalisation was being widely perceived as a possibility. 2021-22 was being seen as the year of restoration of normal economic activity. In hindsight, this exuberance was one of the key factors which led to lowered vigilance and allowed the second wave of the pandemic to disrupt economic activity once again.

April 2021: Food price-driven moderation in inflation

Retail inflation, as measured by the Consumer Price Index (CPI), went down by 123 basis points – one basis point is one hundredth of a percentage point – between March and April 2021 to grow at 4.29%. The headline number was driven by a sharp fall in food inflation, which grew at 2.02% in April compared to 4.87% in March. Vegetable prices suffered the largest fall in this category, with prices contracting by 14.2% on an annual basis.

To be sure, prices of some food items such as edible oils, pulses and meat products continued to grow at a high pace. Some economists believe that fall in price of staples such as cereals, vegetables and milk, especially the latter two, could be a result of supply chain disruptions and a fall in demand due to lockdown driven headwinds to incomes. The overall trajectory of inflation could remain elevated as petrol-diesel prices have started rising once again in May after the pause due to elections and prices in the producer market, such as of metals, continue to remain high. Wholesale Price Index (WPI), which captures producer prices in India, grew at 7.4% in March 2021. The April value had not been released until May 16, 2021. Fall in food prices, while all prices rise, will put a squeeze on farm incomes.

Double whammy for labour markets

Even before the second wave disrupted economic activity, the recovery was being seen as profit-led rather than wage-led. While the Indian economy re-entered expansion zone in the quarter ending October-December 2020, employment and wages were still to retain pre-pandemic levels. According to a recent report released by the Azim Premji University, the pandemic also led to a worsening in quality of employment, with a large number of erstwhile salaried workers joining the ranks of the precariously self-employed. The second wave and subsequent restrictions have given the labour market yet another blow. Data from the Centre for Monitoring Indian Economy (CMIE) – there are no high-frequency official statistics on employment – show that overall unemployment rate climbed up to 7.97% in April 2021, the highest since December 2020. In urban areas, the unemployment rate was 9.78% in April 2021, the highest since August 2020. The situation is likely to get worse in May as more areas have come under lockdown or similar restrictions.

What about taxes?

It is still early days in 2021-22. But the second wave has already cast its shadow on the growth prospects. Private forecasters have started downward revisions of their GDP projections for the year. The government itself has acknowledged the possibility of a third wave now. Any downward revision in growth prospects of the economy will also entail a shortfall in taxes from an already low base. The central government’s Gross Tax Revenue receipts given in 2020-21 Budget Estimates were reduced by more than 20% in the Revised Estimates (RE) given in the 2021-22 Budget. The Controller General of Accounts (CGA) is yet to release provisional tax collection figures for the month of March 2021, so even the fate of RE numbers remains unknown. Any significant shortfall in taxes will force the government to cut down its spending, unless it increases its borrowing to meet the shortfall, which will only make the task of economic revival more difficult. A Reuters story quoted a government official as saying that “lockdowns will start affecting tax collections by June, potentially lowering revenues 15%-20% from what was estimated for the quarter”.