The second wave of Covid-19 will affect the economy negatively. Most forecasters expect that the fall in output compared to pre-pandemic levels will be less than in the first quarter last year when the full lockdown was imposed. But while the economy will do better than last year, it is expected not to reach pre-pandemic levels this year due to the second wave.
Growth forecasts for Indian economy in 2021-22 were in double digits, mostly about 12 to 13 per cent. These have been pared down after the second wave. JP Morgan has predicted that instead of 13 per cent, GDP growth in India in 2021 will be 11 per cent. Moody’s is forecasting that instead of 13.7 per cent, GDP growth in India in 2021 will be 9.3 per cent.
In this article, we look at the some of the emerging data that is showing the impact of the second wave of Covid, and leading to lower expected growth.
Rising infections slow down pace of economic recovery
The alarming rise in Covid-19 infections in recent weeks has caused uncertainty regarding the pace of economic recovery. Some of the key indicators that gauge the health of the economy suggest that the nascent recovery seen over the last few months seems to be losing momentum.
While export prospects have improved due to a faster-than-anticipated revival in advanced economies, the contraction in domestic demand due to the rise in infections could delay recovery. The rural sector which was relatively unexposed during the first wave of the pandemic seems to have been adversely impacted due to the faster spread of the virus.
The Purchasing Managers’ Index (PMI) for the manufacturing sector improved marginally in April. However, the improvement was driven by the faster pace of new exports orders rather than new domestic factory orders. This in line with the export data for April, which remained robust, reflecting increased external demand.
The second wave of the pandemic has also dented the labour market. Data from the Centre for Monitoring Indian Economy (CMIE) showed that 73.5 lakh people lost jobs in April, of which 28.4 lakh were among the rural salaried class. This is expected to impact rural consumption, which was relatively better placed last year.
The local lockdowns announced by states to limit the spread of infections have further caused distress in the rural job market. The demand for jobs under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) spiked with 2.45 crore households demanding work under the scheme. This is the highest demand in April since the data started being compiled.
The highly infectious second wave has impacted consumer sentiments and has led to a crash in demand in April. Vehicle sales contracted by 30 per cent compared to the previous month. Even tractor sales, a proxy for rural demand, which had so far shown resilience, witnessed a double digit decline in April.
While GST revenue collections rose to a record high of Rs 1.41 lakh crore in April, the numbers reflect economic activity and sales for March. E-way bill generation — a key indicator of movement of goods and economic activity — fell to 5.8 crore in April as compared to around seven crore in March. The low number of e-way bills could reflect in the GST collection numbers in May. Other activity variables such as steel consumption and fuel demand also showed a decline in April.
Prospects in the hospitality, travel and tourism sector, which had just started to recover, are also turning grim as people are scared to step out of their houses amid the spurt in infections. The fall in passenger traffic has prompted airports to shut temporarily, and recovery prospects will depend not only on when the Covid-19 infection curve starts, flattening but also on when people start regaining the confidence to step out and use these services. The index of consumer sentiments measured by the CMIE fell by 3.8 per cent in April.
Inflation and credit demand
The inflation data, as measured by the year-on-year change in consumer price index, eased to 4.29 per cent in April. However, the easing of inflation numbers provides little comfort as they are clouded by base effect. A year ago, the nation-wide lockdown-related supply disruptions had pushed up food prices. Moreover, data for a number of groups in the CPI basket was imputed due to closure of price collection centres. As such, a year-on-year comparison is not appropriate.
The US consumer price inflation surged to 4.2 per cent against the backdrop of soaring commodity prices, faster pace of vaccinations and a robust government economic stimulus package. As more advanced economies start to recover, higher commodity prices are expected to add to inflationary pressures in India. As more states introduce intensified lockdowns, supply side disruptions are bound to rise. Inflation is thus expected to bounce back in the coming months.
The health crisis and related lockdowns have hit credit demand. Bank credit expanded at a slow pace of 5.7 per cent in April. In addition to muted demand, banks have also become more cautious in lending as a spurt in NPAs could weaken their balance-sheets. The risk aversion by banks led to an increase in their investments in government securities, which surpassed the loans extended by banks in the last financial year — a phenomenon not commonly seen. This unusual trend is likely to continue this year too if infections are not contained.
The uncertain economic outlook has led many agencies to downgrade their growth projections for India for the current year. While the slowdown is not expected to be as deep as last year, the rapid spread of infections and the fast-mutating virus could increase the duration of the slowdown. A faster pace of vaccinations could help contain the spread of the virus, which has adversely impacted consumer sentiments and demand.
Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.
Radhika Pandey is a consultant at NIPFP.
Views are personal.