Lockdowns, GDP Growth And The Schrödinger’s Cat Paradox
Remember the imaginary Schrödinger’s cat experiment? Where a cat is left in a box along with an unstable atom which has about a 50% chance of undergoing radioactive decay? If it does, the cat dies. If it doesn’t, the cat survives. But till you open the box, the cat is considered to be equally dead and alive.
That’s quantum mechanics.
But it’s almost as if economies, including India’s, are facing a similar predicament. Till the varying lockdowns across the nation and across different states are lifted, you won’t know how alive the economy really is.
For now, economists continue to adjust their estimates month to month as various stages of the lockdown unfold. As the second quarter begins, a variety of restrictions on movement and regular business activity continue prompting a revision of estimates.
Still Below Normal
High frequency indicators have continued to show improvement from week to week but some are showing signs of plateauing.
According to a June 29 note from Nomura Global Market Research, while business activity has normalised partly, its pace has waivered. A Nomura proprietary index of high-frequency indicators suggested that activity is still about 30 percentage points lower than pre-pandemic levels.
A business disruption index by Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, threw up a similar result. It showed maximum disruption as of April 12, 2020, with a move up thereafter. The first two weeks of June continued to show improvement but the index declined again in the third week.
Rise In Local Lockdowns
What’s adding to the uncertainty over the extent of rebound in economic activity is the rising number of containment zones and local restrictions in a number of states.
For instance, in Tamil Nadu, while restrictions have eased in some districts, a stricter lockdown has been imposed in other parts of the state. Economic activity continues to remain uneven and disrupted.
In Maharashtra, restrictions on movement have been tightened as the case load remains high. Containment zones remain under strict curbs.
Even in case of Delhi, which has refused to extend the lockdown, a high number of cases continues to hurt economic recovery.
In Maharashtra, Tamil Nadu, and Delhi—the top three states by the number of confirmed coronavirus cases—mobility across places of retail and recreation, work, supermarkets and pharmacies remained lower than the aggregate mobility trends across the country.
Revising Q2 Growth Estimates
As a result of the continued uncertainty, economists believe the improvement in the second quarter may not be as steep as earlier expected.
Our base case for GDP estimates had assumed a lifting of the lockdown restrictions in Q1 FY21, said Aditi Nayar, principal economist at ICRA, in a research note dated July 1. While we have entered the unlock stage, new Covid-19 infections continue to rise and may delay recovery, she said.
The localised lockdowns being imposed in some states/cities suggest that the recovery that was expected to set in from Q2FY21 onwards, is likely to be delayed.Aditi Nayar, principal economist at ICRA
Nayar’s base case built in a decline of around 25% in GDP in Q1 FY21 and 2% in Q2 FY21, followed by a mild growth of 2% and 5%, respectively, in the subsequent two quarters. This would have resulted in a full-year contraction of 5% in the ongoing fiscal.
While she fears downside risk, a revised estimate from ICRA is yet to be released. More data is needed to reassess the extent to which our baseline forecast needs to be revised downwards, she said.
Madan Sabnavis, chief economist at CARE Ratings, also expects economic recovery to take longer than anticipated earlier. “Given that the nation is into a lockdown for July too with several restrictions on resumption of services in particular, as well as movement of people, the cut-off date for normalcy will spill into the latter part of the third quarter and more likely to the fourth quarter,” he said in a research note dated July 2.
Consequently Sabnavis revised his forecast for GDP growth in FY21 to a contraction of 6.4% from a contraction of 1.5-1.6% estimated in May.
Indranil Sen Gupta and Aastha Gudwani, Indian economists at BofA Securities, also downgraded their full-year estimates due to the extended lockdowns.
We expect FY21 GDP to contract by a further 100 basis points to 3% in our base case. This factors in extension of the national lockdown to mid-August with more relaxations from mid-July. With daily Covid-19 cases more than doubling to ~20,000 levels from May 31, we expect the government to extend restrictions under Unlock 2.0 to end-July from end-June.BofA Securities