Covid-19: Maharashtra’s Economy Braces For The Second Wave
Palm trees sway in the wind as visitors walk along the promenade at night in the suburb of Bandra in Mumbai. (Photographer: Karen Dias/Bloomberg)

Covid-19: Maharashtra’s Economy Braces For The Second Wave

Maharashtra, the country’s largest state in terms of contribution to the national economy, is bracing for the economic impact of tighter restrictions imposed by the local administrations amid rising Covid-19 infections.

On Tuesday, the state government restricted movement to essential needs, while adding strictures on manufacturing opertaions alongside high-contact services. This could mean that the economic impact of the second Covid-19 wave will encompass the goods sector alongside services, albeit in a smaller way compared to a year ago.

Maharashtra’s economy contributes 14.2% to the country’s gross value added. In FY21, the state’s economy contracted 8% in real terms, in line with India’s GDP decline, according to the state’s Economic Survey. In nominal terms, the state’s economy contracted 5.6%.

Given Maharashtra’s large share across most segments of the economy, restrictions across the state will have wider ramifications, said Madan Sabnavis, chief economist at CARE Ratings. While current restrictions may be for a short period of time, there is uncertainty about whether these measures will have to be extended if the spike in Covid cases doesn’t settle by the end of the month. This uncertainty itself has an impact on consumption and production decisions, Sabnavis said.

The State’s Economy

Maharashtra’s economic composition isn’t very different from that of India. The services sector contributes 55.7% to the state’s nominal gross value added, while industry contributed 32.6% and agriculture makes up 11.7%

In FY21, the agriculture and allied activities segment grew 11.7%. Industry contracted 11.3% while services output declined 9%, the Economic Survey shows.

In the restrictions announced so far, the agricultural sector remains unaffected. Essential services, along with their dealers and supply chains, have also been exempted. This will include financial services, telecommunications, transport services, which make a large share of earnings from services. High-contact services such as restaurants, except for delivery services, offline retail, gyms, beauty parlors etc. are under restrictions but these contribute a relatively smaller share in terms of gross value added.

In the manufacturing sector, the state government has permitted the following categories to continue:

  • Units required for manufacture of essential items.
  • Export-oriented units.
  • Units that include processes which cannot be stopped and started without considerable time requirement can function but with 50% of workers.
  • Units that provide accommodation to their labour, with less than 10% of managerial staff coming from outside.

According to Sabnavis, small business may be impacted first not just due to the restrictions but volatile demand conditions. Even if it is the services sector that is impacted, it does have an impact down the food-chain into manufacturing, he said.

Aditi Nayar of ICRA shared that view.

The extent to which restrictions are imposed across multiple states on manufacturing will have a critical bearing on the supply disruptions that may emerge. With sentiment souring, there may be some loss of demand in H1 FY22, especially in the contact-intensive sectors, and some shifting of demand from H1 to H2 FY22.
Aditi Nayar, Chief Economist, ICRA

Impact On State Finances

The restrictions can also have a fallout on the local government’s finances, although it is early to judge the extent of impact.

In FY21, the state’s fiscal deficit increased to 3.3% of gross state domestic product against the budget estimate of 1.7% for the year and 1.9% in the last financial year. It’s estimated at 2.2% of the GSDP for FY22 as per budget estimates.

Maharashtra saw the highest fiscal deficit since FY06, as per revised estimates of FY21, according to an analysis by Anuradha Basumatari, associate director at India Ratings and Research. A sizeable shortfall in revenue receipts, compared to what was budgeted, contributed 175.2% to the slippage in fiscal deficit, according to Basumatari. After taking a hit due to the lockdown, revenue collections picked up starting October 2020, but weren’t enough to adequately compensate for the shock, she said.

While the situation could change because of the second wave, India Ratings expects Maharashtra to be able to maintain the fiscal deficit at below 3% of GSDP in FY22.

The state’s revenue receipts fell 17% in the revised estimates of FY21 compared to budget estimates, according to analysis from PRS Legislative Research. The state’s own tax revenue fell 18% last year compared to what was budgeted.

For the current year, the state has budgeted for a rebound across categories, with own-tax revenue seen rising 32% in FY22 compared to the revised estimates of FY21, PRS data shows.

Second Wave & The National Economy

Economists have cautioned about the rising risks of the second wave but not many have cut their growth forecasts so far.

Nomura, which had a higher than consensus estimate for FY22 growth, is among those that have pared their expectations.

“We now project negative sequential GDP growth momentum in April-June (-1.5% quarter-on-quarter, seasonally adjusted), although the y-o-y growth rate will remain strong (32.5% year-on-year), owing to base effects,” said Nomura economists Sonal Varma and Aurodeep Nandi in a note this week. Nomura has reduced its FY22 GDP growth forecast to 12.6% from 13.5% earlier.

ICRA now expects Indian GDP to grow by around 10-10.5% in FY22. For Q1 FY22, ICRA had earlier expected a GDP expansion of 27.5%, boosted by the low base. With the surging cases and evolving restrictions, the pace of GDP growth in the ongoing quarter may be tempered to 20-25%, Nayar said.

“The second wave of infections presents a risk to our growth forecast as the reimposition of virus management measures will curb economic activity and could dampen market and consumer sentiment,” said an April 13 note from Moody’s Investors Service, which had in February forecast 13.7% GDP growth in FY22. “However, given the focus on ‘micro-containment zones’ to deal with the current wave of infections, as opposed to a nationwide lockdown, we expect that the impact on economic activity will be less severe than that seen in 2020,” Moody’s said.

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