The Indian economy and its citizens have just had a heartbreaking experience with the second wave of Covid. But as we look to the quarters ahead, we see reasons for optimism.
The economic impact of the second wave is expected to be localized to April-June 2021-22. The sharp drop in the number of virus cases has allowed states to embark on a gradual reopening of the economy. It helps the economy take a turn. With people shopping and driving, mobility has improved. Demand for electricity recovered after a sharp drop in May. With the reopening of stores and factories, the labor market is also gradually recovering, with the unemployment rate falling.
We have combined these indicators into an aggregate index called the Nomura India Business Resumption Index to measure the state of business recovery. Before the pandemic, in February 2020, this index stood at 100. It fell to a low of 45 during the first wave, before normalizing almost completely in mid-February 2021. The second wave derailed the rapid V-shaped economic normalization, pushing the index back down to 60 in the third week of May, but the reopening in June has already caused our index to rebound sharply to 81 as early as June 20, with a further rise to the horizon.
Other high-frequency data, such as rail freight and passenger receipts, electronic goods and services tax invoices – all point to a similar story: a sharp decline in May, but also a rapid recovery in June. , so that the economic impact of the second wave is expected to be limited to this quarter.
Additionally, unlike last year’s blacksmith’s hammer approach, the blockages in Wave 2 were more nuanced with many areas cleared to operate. Global growth is much stronger today, as the world was in a synchronized slowdown during the first wave.
In this way, exports will probably be able to partially offset the slowdown in domestic demand. Businesses and consumers are better prepared to deal with supply chain disruptions and have adapted to the new normal with greater digitization and online shopping.
What this suggests is that even though Wave 2 was a great humanitarian crisis, its economic impact will likely be much less than feared.
Of course, we are not out of the woods yet. The interim period between the end of the second wave, but before the generalized vaccinations, will be a difficult road to travel. The virus has receded precisely because of the lockdowns and as states reopen and mobility increases, there is a risk of further waves. The virus continues to mutate into riskier variants, and our vaccinations have not yet reached a critical threshold.
Until we reach this point, balancing lives and livelihoods will be crucial. This means continued restrictions on sectors and events that could turn into super spreaders, while still allowing the rest of the economy to function.
The bad news is that the economic outlook will remain hostage to health policy for a long time to come, but the good news is that there is light at the end of this long, dark tunnel.
Vaccinations are finally taking off. The breakneck pace of nearly 6 million daily doses of vaccine administered last week may not be sustained next month as there are still supply constraints, but the pace is expected to accelerate further in July and can be sustained. to over 8 million a day as of August.
Increasing domestic production of already approved vaccines, approvals of new vaccines and imported vaccines will significantly improve the prospects for domestic vaccine supply. By the end of 2021, our estimates suggest that the total vaccine supply will equal 1.7 billion doses, enough to inoculate half of the total population, assuming two doses.
Vaccinations are essential to unlock economic recovery. The pandemic recovery has been uneven, as contact-intensive services have not been able to fully normalize due to the viral threat. Vaccinations offer hope for these services. They will also have other spillover effects that are often underestimated, in particular the uncertainty premium.
The fear factor due to the recurring viral waves has pushed consumer confidence to its lowest point. Uncertainty about the sustainability of the resumption of growth prevents companies and the financial sector from making long-term decisions. Vaccinations will reduce that uncertainty, boost consumer and business confidence, reduce risk aversion, and re-fuel the economy. We will learn to live with the virus over time.
There are two other growth boosters. National financial conditions are already very accommodating with abundant liquidity and low interest rates. These should support stronger demand from interest rate sensitive sectors. In addition, the resumption of the global growth cycle will be a plus.
Historically, India’s exports and investment cycles have moved in tandem, so our forecast of global GDP growth of 6.4% in 2021 and 4.7% in 2022, compared to an average over 10 years of 3.7%, will support a cyclical recovery of investment in India. .
Over the coming months, political priorities should continue to be aligned with these economic needs. Until the economy fully reopens, targeted survival support is still essential for households and sectors most affected by intermittent shutdowns. A more sustainable growth recovery still requires a serious multi-year surge in infrastructure investment, so that India’s decline in trend growth can be halted. But the biggest fiscal stimulus the economy needs right now is simple: a health policy stimulus.
The opinions expressed above are those of the author.
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