Covid Second Wave: Hope Of Post-Pandemic Double-Digit GDP Growth Slips Away
As the second wave of the Covid-19 pandemic stretches out, the hope that the Indian economy will recover robustly in FY22 and grow in double digits is slowly slipping away.
The double-digit growth didn’t mean much to begin with. It was coming atop the pandemic base year. The only thing it implied was India will be able to get close to pre-pandemic levels of output by the end of this financial year and narrow the gap between the before-Covid and after-Covid growth path.
As parts of the country remain under lockdown, economists worry these restrictions and—equally importantly, the uncertainty—will stretch out the process of economic repair.
JP Morgan, for instance, expects that even by the end of FY22, the level of GDP will be 8% below the projected pre-pandemic path.
This is contingent on their forecast of a 7.3% contraction in GDP in FY21 and a 9% growth in FY22. The forecast for the latter has been marked down from 11.2% earlier because of the 7% sequential contraction forecast in the April-June quarter. But the damage may extend beyond the first quarter as well, wrote JP Morgan Sajjid Chinoy in a report titled “A Recovery Interrupted”.
While the near-term pothole may be smaller than last year’s, what’s likely to be different this time is the continuing uncertainty that the second wave could engender, Chinoy wrote.
When the economy began unlocking last summer, and especially once cases had peaked by September, there was a sense among economic agents that Covid-19 was in the rear-view mirror. It was that comfort and confidence that likely drove the strong rebound in subsequent quarters. This time is likely to be different, though. The suddenness and sheer viciousness of the second wave is likely to create behavioural scars for the coming months.Sajjid Chinoy, Chief India Economist, JP Morgan
Chinoy isn’t alone in driving home these concerns.
In a note titled “The Cost Of Uncertainty”, published on May 13, Pranjul Bhandari, chief India economist at HSBC, said the jitters brought on by the second wave could last longer than the lockdowns.
HSBC has taken its FY22 GDP forecast down to 8% for FY22 compared to 11.2% earlier. In their assessment, this will mean that the Indian economy is likely to stay 12% below its pre-pandemic path, even by FY23.
Bhandari points to four ways in which the second wave is different from the first.
For one, the state-level lockdowns are staggered and less predictable. Second, the urban spread has been more concentrated in more affluent households, which drive more consumption demand. “Weak sentiment there could hurt the recovery.” Third, a wider spread in rural areas may take away the comfort of strong rural demand. Finally, rising commodity prices could impact the margins of domestic manufacturers.
All these factors, in our view, are new sources of uncertainty this time around, which could lower confidence in economic forecasts and hurt activity (à la Keynes). Having said that, there are some silver linings on the horizon. Global growth is strong, capital markets are buoyant, and firms have learnt to function amidst the new normal.Pranjul Bhandari, Chief India Economist, HSBC
The biggest source of uncertainty, of course, remains the pace of vaccinations, which, if not quick enough, will expose the country to the risk of a third wave.
Flagging that off, Rahul Bajoria, chief India economist at Barclays, reduced his GDP growth forecast to 9.2% from 11% before the second wave hit. In a pessimistic “bear case scenario” where a third wave hits, FY22 growth could fall as low as 7.7%, Bajoria said.
India’s vaccination programme has slowed significantly, given persistent supply constraints and logistical challenges. Although the government has provided greater flexibility for states to set their own vaccine strategies, problems persist and supply is only expected to improve in Q3 2021. The slow vaccination drive may pose medium-term risks to growth, especially if the country experiences a third wave of Covid-19 cases.Rahul Bajoria, Chief India Economist, Barclays
Not everyone has abandoned hopes of double-digit growth.
For one, the Reserve Bank of India is yet to peg down its FY22 growth forecast of 10.5%.
Deutsche Bank’s Kaushik Das, whose forecast matches that of the RBI, says double-digit growth is still possible.
“Despite the localised lockdowns, we maintain our +10.5% year-on-year real GDP growth forecast for FY22 at this stage, on account of a very favourable base effect,” Das wrote in a report on May 19. “We think consensus estimates related to growth are becoming overly pessimistic at this stage, just as they were overly optimistic in the beginning of this calendar year.”
Shubhada Rao, the founder of QuantEco Research, has also FY22 pencilled in growth at 10%.
The growth setback in Q1 FY22 will be dominated more by demand deferment as opposed to Q1 FY21 which began with a supply disruption of epic proportion. This gives us the confidence that as the ongoing wave ebbs and vaccinations pick up pace, sequential growth recovery could look better Q3 FY22 onwards.Shubhada Rao, Founder, QuantEco Research
Behind the forecasts, a number of unanswered questions remain about how consumers, producers and lenders will react to a pandemic that has now stretched out for more than a year and threatens to prevent a return to what was once considered normal.
Sreejith Balasubramanian, an economist at IDFC Mutual Fund, summed up these questions well.
Household balance sheets were weak when Covid-19 hit and leverage had risen to keep spending high. The impact of the two waves could weaken them further. Will the small section of high-income consumers, who drove pent-up demand after the first wave come to the rescue again? Maybe, maybe not. “Households are likely to emerge from all this with implications for both ability and willingness to consume,” Balasubramanian wrote.
The impact of the second wave on the rural economy is another point to ponder. As is the behaviour of corporates, who may not be able to protect margins as they did in the second wave because of rising commodity prices. “India can produce to export into a strong global economy but for how long? What is the domestic growth driver in the absence of a growth cycle in employment and wages?” Balasubramanian asked in his note.
Much remains uncertain but the possibility that the second wave, even if short-lived, could inflict meaningful damage to the economy remains. “Even as the economic hit in the April-June quarter will be meaningfully smaller than the first wave, the income and health uncertainty that it has engendered is likely to increase risk aversion and drive a more gradual revival in the next quarter or two,” Chinoy wrote.