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Economic impact of second wave (27 April 2021)

Economic impact of second wave (27 April 2021)

Context:

India is witnessing a massive second wave of coronavirus infections. The daily new cases are touching an-all time high, overwhelming our healthcare systems. While there is no indication of a national lockdown like last year, with the Prime Minster himself calling it a last resort, there is fear that the second wave may extract a large economic cost. The week gone by has been an indication that the current wave of the outbreak is much bigger in scale and severity and could lead to more uncertainty in the economic environment.

Background:

  • A number of high-cases load states are under lockdown or other restrictions like weekend and night curfews.
  • Last year, India’s GDP growth has fallen to 4.7% in third quarter of 2020.

Summary of the Debate

How the severity of the 2nd wave is going to derail the economic gains?

  • The nature of this spread of the virus has actually impacted all sections of the economy.See the source image

  • The various forecasters analysts have scaled down the earlier growth estimates by at least 1 percentage point, Nomura has brought it down from 13.5 to 12.6, J.P Morgan which has brought it down from 13 percent to 11 percent is a 2-percentage point decline. The UBS has brought it down from 11.5 to 10 percent.

  • Reserve Bank of India which initially was very conservative in terms of growth estimates have projected a growth rate of 10.5 percent for the full financial year and it remains committed to that kind of a forecast that 10.5 will be the growth rate.

  • The economic activities will be impacted in a staggered way.

  • The workers and the employment will once again be impacted.

  • The companies particularly the touch industries or the experienced industries like tourism, hotels, travel even like the transport aggregating companies like Uber and Ola, they will also be impacted.

  • The cycle of our economic activity that is March last week plays an important role, government and public sector are a major player, so the lockdown affected both the demand and supply and the consumption was cut down to basically bare minimum, there were not offline sales the online sales allowed, that was also for essentials.

Signs of economic recovery:

  • In the midst of a raging war, it is very difficult to do any exercise of damage assessment because there are not very many dynamic data points that are coming.

  • The first quarter GDP contraction was about close to minus 24 on a quarterly basis and it was such a deep cut that all estimates say that this we will not be able to make up by the year end and it will be minus 25 percent.

  • But in many areas of economic activity, the offline taking to online, the Indian economy has shown great resilience and Digital India have proved very useful during this phase, they have allowed sustenance for vulnerable way in terms of direct benefit transfers and also a lot of activity has moved to digital.

  • In this second wave, it is suspected that this high infectious rate is because of a number of new mutants. So, the population affected numbers are very large and a lot of healthy young Indians are falling prey to it, they are recovering also but the fatality rate fortunately continues to be and it will definitely dent the overall consumer confidence level, the discretionary expenditures will be postponed. But the damage would not be as sharp as had happened last year and the recovery would also be equally fast in their quarterly.

In terms of the challenges how different are they and in terms of preparations how prepared are we this time around to prevent the shock to our economy?

  • It will once again increase the risk aversion among consumers, in a sense that the consumers will once again be very risk covers, that means they will not like to fly again, they may not travel, they may not go out and spend money, they may not like to meet up with more people, the wedding functions will become even more rare now.

  • Therefore, with this risk aversion, it will immediately impact one of the major legs of the Indian economy which is the consumption, which is more than 60 or 66 percent of the total economic activity.

  • There is vaccination but the vaccination rate has already come down and it may actually continue to remain low till the government can redirect its focus to vaccine rollout. Now, once the vaccine rollout takes place and that will be completed not before the end of this financial year.

  • While the economy has a lot of liquidity in the system but the banks are gone back into a shell, they are not lending money. The credit growth, the last two weeks have been 5.5 percent and on an annualized basis, it probably was 6 percent compared to 13 percent the year before.

  • Now, if credit growth does not pick up then the productive sectors of the economy cannot come back to their natural pace of activity.

  • The government will have to look at the investment side because the consumption side will not recover very soon.

  • So, government should actually rededicate itself in boosting more investment, creating more infrastructure projects so that they can bring back the people, the workers into those work sites.

  • The important key drivers which will determine the long-term growth, this year's growth will be statistical in a sense over an 8 percent contraction.

  • This year's growth even after the second wave will still be positive because of the deep contraction that we have seen but looking at the actual size of the economy, the actual size of the economy will not even reach the same size that prevail at the end of 2019.

  • Therefore, it is very important for the government or for the agencies, the new development financial institution that is being created to trigger more investment in the economy and if the government can get back to its budgetary promises of monetizing the assets, privatization of the banks and the PSUs as soon as possible, once near normalcy returns that will be hold a key to how soon can the economy come back to its original pace.

  • This year, it will definitely be not what we had earlier projected and next year's growth will depend on the kind of steps in terms of investment, in terms of demand generation taken in the current year.

What else can the government do to stabilize from the challenges of the second wave of the pandemic?

  • There are 3 positive factors which continue and are going to be major drivers for economic in the coming months and there are some things on which the government has to work, the 3 are, the rural demand, exports and infrastructure.

  • The government in the budget has paid a lot of emphasis on capital expenditure, in out of 35 lakh crore budget, more than 5 lakh crore is capital expenditure which has a multiplier effect as India is a consumption-led economy, if it is 65 percent consumption and 35 percent capital, so if a consumption goes down from 65 percent to 60 percent, can investment grow from 35 percent to 40 percent to maintain the same level of GDP.

  • In the rest of the world, there are different shapes of recovery taking place, so an export front we have to put our house in order and we continue, there we have playing a very small role right now, 2 percent of the world trade.

  • As far as rural economy crisis is concerned, the numbers are scary but this is concentrated in some high concentration urban centers. The agriculture growth has been very satisfactory so that is one where the government has to look into more. Some of these things are done

  • The banking sector, the credit growth is not going up, there's a plenty of money lying so it is necessary to enable banks to lend more aggressively.

  • The bank should lend more, people should spend more and not be worried too much about negativity.

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