Second wave may derail economic gains: Analysts
The raging second wave of Covid-19 infections in India is threatening to derail the gradual recovery the economy has achieved in the last one year, the trajectory of the Nomura India Business Resumption Index (NIBRI) indicates.
It took almost a year for NIBRI to reach close to 100, which captures the pre-pandemic levels of activity. It reached 99.3 in the week ending February 21. In the eight weeks since then -- latest data is available for the week ending April 18 -- it has fallen continuously and come down to 83.8.
NIBRI was lower than 83.8 in the week ending October 25, 2020. It was 83.3 that week. The disruptive effect of the second wave can be understood from these numbers. It took seventeen weeks for NIBRI to reach from 83.3 to 99.3. But it has just taken eight weeks for it to undo those gains.
Experts believe that the worst is yet to come as more states resort to restrictions to prevent the surge in infections from overwhelming medical infrastructure. “While lockdown stringency has not increased since last week, this may be temporary, as states could impose stricter restrictions in response to the burdening of hospital infrastructure,” said a note by Nomura economists Sonal Varma and Aurodeep Nandi. “This suggests the economic impact of the second wave could intensify in coming weeks, particularly through the mobility route, with the downside risk of spreading to the wider economy, even as power demand and labour participation rate so far remain largely unaffected,” the note added.
While the note believes that “business resumption index (NIBRI)... probably has yet to bottom”, it sees the economic impact as “short-term (onethree months) and less severe (than in Q2 2020), due to a more pandemic-adept economy”.
“Overall, we expect a loss of sequential momentum in Q2 2021, but once the second wave passes (we assume July-September), it should result in a release of pent-up demand in the subsequent quarters. In addition, the economy should benefit from faster vaccinations after June, the lagged impact of easy financial conditions, frontloaded fiscal activism and strong global growth. We expect GDP growth at 11.5% y-o-y in 2021, up from - 6.9% in 2020, with downside risk,” Varma and Nandi said.
Other experts believe the pace of vaccinations will be critical to minimising the damage to the economy. A research note by Pranjul Bhandari at HSBC Securities and Capital Markets India Private Limited said that “the growth cost of these (Maharashtra and Delhi) lockdowns could be 1% of the country’s GVA in the June quarter and could rise further, if they are extended or replicated by other states”. The key to economic recovery would be the pace of vaccinations, Bhandari argued.
“A scenario analysis suggests that, if India manages to gradually ramp up vaccine supply and the vaccination rate rises from 3m doses/day now to about 5m doses/day by August, it could cover about 50% of the population (two doses/person) by the end-2021,” her note said.