The second wave’s economic aftermath
The economy will not contract as deeply as in the first wave, but recovery is deeply intertwined with health policy
Just as India’s economy was recovering from the first wave of the Covid-19 pandemic, the second wave hit, and its intensity, in terms of both fatalities and lockdowns, quickly put an end to India’s swift normalisation of growth after the first wave. Now, even as the second wave appears to have peaked, it leaves many unanswered questions on both the economic damage sustained and the path forward.
High-frequency indicators have collapsed. Mobility indicators and railway passenger revenues have plummeted, pulling along with them other real economy indicators such as power demand, Goods and Services Tax transactions and auto sales. The unemployment rate has risen again, and our weekly tracker of the pace of economic activity normalisation, the Nomura India Business Resumption Index (NIBRI), is 40% below its pre-pandemic levels, after having almost fully recovered in February.
This would sound an economic alarm, but the reality is a lot more nuanced. The second wave lockdowns have been far less draconian than those imposed during the first wave, both geographically and in terms of the sectors affected. During the first wave, the lockdowns were focused on both goods and services, with manufacturing also limited to the production of essentials. Intrastate and inter-city transport was restricted. This time, the lockdowns are primary focused on services. Some states have allowed industry and construction to continue operating, with some curbs, and minimal restrictions were placed on transportation services.
Importantly, although domestic consumption will take a knock as mobility is restricted, unlike the collapse in global growth during the first wave, global growth is on a synchronised recovery path this time, led by developed economies, so exports should provide an offset, unlike the collapse in global growth during the first wave.
Finally, consumers and businesses have adapted to the new normal.
Consequently, the damage to growth from the second wave, while substantial, should be much less severe than during the first wave as well as significantly less than what the drop in mobility suggests. Our analysis of countries that have gone through second and third waves in Europe and Asia confirms this view. For our sample, we find that, compared to the 12.3% quarter-on-quarter (seasonally adjusted) average drop during the first wave, Gross Domestic Product (GDP) rose by 0.5%, on average, during the second wave. We believe that similar dynamics will play out in India.
The duration of the lockdowns also matter. Amid limited fiscal space and falling caseloads, we believe states will likely move from rolling lockdowns to a calibrated reopening, as balancing lives and livelihoods becomes the priority. The reality facing states is that the virus variant is highly infectious and caseloads have fallen in response to lockdowns, while the pace of vaccination has been lacklustre in May and will likely take a few more months to accelerate. Against this backdrop, we expect the broad strategy across most states to remain one of a calibrated reopening, where restrictions are maintained across high-risk contact-intensive services sectors, while other sectors are allowed to operate with restricted timings, alongside the continuation of night curfews.
This suggests that the largest impact on economic data will be in May, and we expect a sequential improvement in June. Overall for April-june 2021, we believe GDP growth momentum will shrink by close to 4% q-o-q on a seasonally adjusted basis, much less than the 24.6% drag during the first wave.
A durable growth recovery is conditioned on more widespread vaccinations; otherwise, the economy will continue to be held hostage to future pandemic outbreaks. The pace of inoculation has slowed considerably in May, but our bottom-up analysis of India’s vaccine supply suggests the pace will rise sharply from July, as current vaccine makers ramp up production capacity, new vaccines are approved, and imported vaccines augment domestic supply.
We estimate that the total domestic vaccine supply by end-2021 could cumulatively amount to 1.625 billion doses, fully inoculating around 52% of the population by end-2021, assuming two doses. This suggests that the “vaccine pivot” — the point at which vaccines start to become more widely available and show demonstrative success in suppressing the virus, allowing governments to lift most social distancing restrictions and citizens to become less fearful — may be closer than it seems now. This should enable a swifter rollback of lockdowns and help resume the normalisation process that was suspended in February.
The progress on vaccinations will have two other important positive effects. First, vaccinations and a reduced fear factor can go a long way in lifting consumer confidence, which is currently at record lows, supporting the domestic consumption recovery.
Second, the uncertainty caused by the pandemic has diluted the usual transmission from easy financial conditions to stronger demand from interest rate-sensitive sectors. However, as pandemic uncertainty ebbs and vaccinations rise, the full impact of easy financial conditions should become more visible, which should boost demand for real estate and other consumer discretionary purchases.
Overall, the second wave has unleashed a devastating humanitarian crisis, but its economic impact should be less than feared, and muted overall. As caseloads fall and vaccinations rise, there is a light at the end of the dark tunnel. Monetary and fiscal policies can play a supportive role in the interim, but ultimately it is India’s health policy that can unleash the biggest growth stimulus.