Covid-19: As Second Wave Brings Downside Risks, Policy Options Are Limited
A man wearing a protective mask wheels a bicycle past a mural of Covid-19 frontline workers in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

Covid-19: As Second Wave Brings Downside Risks, Policy Options Are Limited

With daily Covid-19 cases running above 2 lakh per day, local state governments are continuing to impose restrictions on movement, gatherings and high-contact services. The result is that economic activity is slowing, even as policymakers are left with fewer options to deal with another sharp economic downturn if it happens.

The Oxford Stringency Index moved to 69.91 as of April 15, 2021, from 57.87 on April 1. While Maharashtra has imposed the strictest lockdown so far, other major states such as Delhi, Karnataka, Gujarat, Uttar Pradesh, Madhya Pradesh, Rajasthan, Punjab, Haryana have imposed curbs ranging from night and weekend curfews to limiting gatherings, closing schools and colleges and tightening travel requirements.

Night curfews have been announced by eleven states accounting for about 60% of India’s GDP, according to Samiran Chakraborty, chief India economist at Citibank in a research note dated Apr.15, 2021. As of now, the second wave is still more concentrated than the first with urban India making up two-thirds of all cases but the pandemic continues to grow at an alarming pace, he said.

Accounting for peculiar year-end issues and general seasonality, we think our ‘narrow recovery index’ shows some early signs that the momentum we saw in January-February has waned and economic activity has stalled, although it is still not declining.
Samiran Chakraborty, Chief India Economist, Citibank

Accounting for restrictions and the impact on sentiment, Citi has revised its FY22 real GDP forecast to 12%, 50 basis points lower than earlier. Less stringent lockdowns, a better prepared organized sector, pent-up consumption in subsequent quarters and vaccination of the vulnerable groups could limit the economic impact of the second Covid wave, Chakraborty said.

Taking into account the new restrictions, the economic cost of the latest shutdowns will increase to $1.25 billion per week, from $0.52 billion earlier, according to a research note by Barclays dated April 12, 2021. This increase reflects a modest tightening of activity curbs and the widening geographical spread of the second wave.

Taking into account rolling Covid curbs, if the current restrictions remain in place until the end of May, we estimate that the cumulative loss of activity could amount to around $10.5 billion, or about 0.34 percentage points of annual nominal GDP...The impact on Q1 FY22 nominal GDP is likely to be higher, shaving about 1.4 percentage points.
Rahul Bajoria, Chief India Economist, Barclays

While Google community mobility reports continue to suggest a fall, it is still largely led by a decline in Maharashtra and adjoining states. Moreover, the correlation between mobility and economic activity has slipped, said Bajoria.

According to HSBC’s proprietary model, the current restrictions in Maharashtra imply a loss of close to 0.6% of the country’s gross value added in the quarter ending June. If the curfew is extended beyond 15 days, the cost will be higher, said Pranjul Bhandari, chief India economist at HSBC. Nomura’s Sonal Varma had earlier cautioned that the sequential momentum between the January-March and April-June quarters may turn negative, even if the year-on-year growth holds strong.

Fiscal Policy: Further Expansion Unlikely

Should the economic impact of the second wave worsen, policymakers may have tough choices to face.

Further fiscal expansion will be difficult. The government pegged the fiscal deficit at 9.5% in FY21, estimating it to narrow to 6.8% in FY22.

Kaushik Das, chief economist at Deutsche Bank said that fiscal spending in FY22 is still a tad higher than it was last year and the expected decline in fiscal deficit is because of expectations of sharper revenue growth. If the situation warrants, the government may prioritise specific sectors even as it sticks to the fiscal deficit target for this year, Das said.

Any expansion in fiscal policy depends on whether the lockdowns are national or remain localised, said Suvodeep Rakshit, a senior economist at Kotak Institutional Equities. With no recession likely, policy interventions will be a lot more focused this time, he said. States could announce measures depending on the nature of the lockdown and the fiscal space they have, Rakshit said.

State finances were hit worse than the centre due to the pandemic, said Bajoria. Most state finances are stretched and they lack fiscal space to announce substantial relief measures, he added. States can utilise ways and means advances or they can borrow more subject to conditions, he added.

Monetary Policy: Already Accommodative

The Monetary Policy Committee kept interest rates unchanged for the fifth straight meet since May last year. It had reduced the benchmark repo rate by 115 basis points in 2020. Elevated inflation has prevented further rate cuts after the emergency announcement last year.

Further rate cuts are unlikely since the benchmark lending rate is at 4%, said Das but monetary policy remains accommodative and the calibrated exit will be delayed if things go downhill from here, he added.

Rakshit, however, said that a rate cut can’t be ruled out if the situation warrants.

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