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Published: Dec 29, 2021
Updated: Dec 29, 2021

Covid Second Wave: Big Blow To Economy

A short-sighted government at the Centre thought the worst was over when the first wave of the deadly coronavirus seemed to have subsided. The Modi government - prematurely -- started singing the 'acchhe din' refrain all over again by citing higher direct tax collections, GST collections, open market operations and manufacturing operations from the second half of fiscal 2021. But those early indicators may amount to little as the second, and deadlier, Covid-19 wave has caught the Centre and states napping and is wreaking havoc, with the country registering the highest daily number of infections and deaths worldwide.

Almost unanimously, Indian and foreign rating agencies have cut the country's growth forecast for fiscal 2022 to single digits. And going beyond figures, the fall-out of the pandemic is certain to be felt worst of all by small-scale industries, the poor and the rural sections of the country.

Tough the government had been painting a rosy picture of the economy’s recovery during the first wave of Covid-19 Pandemic, several experts have started voicing serious concern over the second wave of the pandemic impacting economic recovery even more. It is widely feared that if the government continues to wear blinkers, the second Covid wave will administer a body blow to the country’s economy and the worst-hit sections will be the poor, the low-income group, farmers and the rural population, with rural women being hit hardest.

Even during this dark hour, the Modi government continues to chant its ‘acchhe din’ refrain. According to the Union Finance Ministry, “the impact of the second wave of the coronavirus pandemic on the economy is likely to remain muted as compared to the first wave.” Admitting that the second wave has blunted economic activity in the first quarter of fiscal 2022, a Finance Ministry report adds that there are reasons to expect a ‘muted’ economic impact as compared to the first wave. “Learning to operate with Covid-19, as borne by international experience, provides a silver lining of economic resilience amidst the second wave,” the report says with a false sense of optimism.

The report claims that the fiscal position of the Central government has witnessed an improvement in recent months, noting that during the second half of fiscal 2021, direct tax collections were 4.5 per cent higher than the revised estimates and 5 per cent higher than collections in fiscal 2020. GST mop-up also registered ‘satisfactory growth’ with collections exceeding Rs 1 lakh crore in each of the last six months. Domestic financial conditions continued to remain comfortable with support of the Reserve Bank of India to liquidity and open market operations worth Rs 3.17 lakh crore were carried out during fiscal 2021, the report says.

According to the Finance Ministry report, easy financial conditions enabled the corporate sector to raise substantial funds from financial markets, and the latest data on corporate earnings signals a manufacturing turnaround in the fourth quarter of fiscal 2021 with 12.5 per cent growth in net sales and 9.5 per cent rise in income for a sample of 213 companies.

FIGURES FLATTER

Of course, at the beginning of calendar year 2021, the air was full of hope. In April, GST collections hit their highest-ever monthly figure of Rs. 1.41 lakh crore. Meanwhile, India’s international merchandise trade reached $ 34 billion in March, the highest-ever, and stayed at over $ 30 million in April. Some short-term indicators like electricity consumption, highway toll collection, etc., were also pointing to an economic recovery after a crushing 2020 on account of the first wave of the coronavirus. And in February 2021, when S&P Global Ratings forecast Indian GDP growth at 11 per cent for the coming financial year 2022, the number looked eminently achievable.

The eminent British journal ‘Lancet’ has cinnebted that the Modi government slowed down its efforts against the pandemic, and that even as Covid-19 cases began to mount in early March, Union Health Minister Harsh Vardhan declared that India was in the end game of the epidemic. The government created the impression that India had beaten Covid-19 after several months of low case counts, despite repeated warnings of a second wave and emergence of new strains, falsely suggesting that India had reached herd immunity, thus encouraging complacency and insufficient preparation.

A sero survey by the Indian Council of Medical Research in January suggested that only 21 per cent of the population had antibodies against Covid-19. But the Modi government seemed more intent on removing criticism on Twitter than trying to control the pandemic. What is more, despite warnings about the risks of super-spreader events, the government allowed religious festivals like the Kumbh Mela to go ahead, drawing millions of people from around the country, along with huge political rallies that were conspicuous for their lack of Covid-19 mitigation measures. The message that Covid-19 was essentially over also slowed the start of India’s Covid-19 vaccination campaign, which has vaccinated less than 2 per cent of the population. At the federal level, the country’s vaccination plan has fallen apart as the government abruptly shifted vaccination goalposts without taking into account the declining supplies of vaccines, expanding vaccination to every one older than 18 years, draining supplies and creating mass confusion.

DEADLY MUTANTS

And just as the nightmare that was 2020 was fading in the rear view mirror with cases easing, and diverting everyone’s attention from the pandemic to politics, Covid19 came back with a vengeance in the form of a second wave and a new double mutant variant that is more infectious and less affected by vaccines. According to an expert, some 10,787 samples from 18 states have shown a number of cases of known variants – 766 of the UK, 34 of the South African and one Brazilian. A group of 10 national laboratories under the health ministry carried out genomic sequencing on the latest samples (genomic sequencing is a testing process to map the entire genetic code of an organism – in this case the virus). The genetic code of the virus works like its instruction manual. Mutations in viruses are common but most of them are insignificant and do not cause any change in its ability to transmit or cause serious infection. But some mutations like in ones in the UK or South Africa variant lineages can make the virus more infectious and in some cases even deadlier. According to the expert, “a double mutation in key areas of the virus’s spike protein may increase these risks and allow the virus even to escape the immune system.”

The new variant called B.1617 was initially detected in India with two mutations – the E4840 and L 452R. Some mutations weaken the virus while others make it stronger, enabling it to proliferate faster or cause more infections. So far, the second wave of the virus has taken a severe toll with around 4 lakh people getting affected every day and around 4,000 daily fatalities.

The Indian economy, battered by the first wave of Covid19, was on the path of recovery but the second wave is threatening to bring that recovery to a grinding halt.

SMEs WORST HIT

Maintains Dr VVLN Sastry, a passionate economist and far-sighted investment banker, "The entities that will be hit most by localised lockdowns are the small and mediumsized industries (SMEs), borrowers and low-income households, Of course, the pandemic has affected various sectors differently, but SMEs have been disproportionately hit and are potentially the biggest contributors to total non-performing loans for banks either this year or the next year." According to an expert, in the second wave, most of the worst-hit states appear to be nearing a peak in their infection curves within a month after cases started to surge in late March. In comparison, the first wave peaked almost six months after it began. The early signs of improvement follow strict lockdown-like curbs in most states in the past two weeks. States acted after the Centre, wary of the economic fallout, resisted calls for a national-level lockdown. But 'new sources of uncertainty' -- such as indefinite lockdown durations and weak consumer sentiment among affluent Indians --make the second wave different from the first, and some of these economic costs could "outlive the duration of local lockdowns", says a report by HSBC Global Research.

RS 1 LAKH CRORE BLOW

Mr Sabnavis foresees a disproportionately high impact if lockdowns/restrictions are extended. A very painful reverse migration will begin and there will be a permanent closure of some service establishments. "An economy that is on a recovery path after a severe drubbing last year can illafford that," adds Mr Sabnavis. While lockdowns will drag down economic output this quarter, the final GDP print may still look high due to a low base. The uncertainties, however, could temper the rebound in July-September compared with the sharp post-lockdown bounceback in 2020, the report adds.

According to Shankar Acharya, a former economic advisor, "the pattern of last year's GDP trajectory was different; it was a sharp fall due to the very strong national lockdown and then a reasonably strong recovery. But this time, uncertainties are very large, the pandemic is still there, we don't know much about the new variants, and one doesn't know if it's a peak or a plateau for a while."

'10% DROP IN GDP'

Care Ratings and Madan Sabnavis are not alone in cutting India's growth forecast for the current financial year. Global brokerage firm Nomura has slashed its GDP forecast by nearly one percentage point from the earlier projected 13.6 per cent to 12.6 per cent now. Leading investment firm Berdays too has warned of downside risks to growth following the recent surge in Covid-19 cases. Maintaining that "India's escalating second wave of Covid-19 infections poses serious downward risks to the economy and heightens the possibility of business disruptions in addition to the substantial loss of life and significant humanitarian concerns," S&P Global Ratings adds, "A drawn out Covid-19 outbreak will impede India's economic recovery. This may prompt us to revise our base care assumption of 11 per cent growth over fiscal 2021/22, particularly if the government is forced to reimpose broad containment measures. The country already faces a permanent loss of output versus the pre-pandemic path, suggesting a long-term production deficit equivalent to about 10 per cent of GDP."

RATINGS DOWN

Stressing that "the pace and scale of the post-crisis recovery would have important implications for India's sovereign credit rating," S&P adds, "The strong economic growth would be critical to sustain the government's aggressive fiscal stance and stabilise its high debt stock relative to GDP." Another well-known rating agency, ICRA, while pointing out that "the continuing resurgence in Covid-19 cases and proliferation of localised restrictions could dampen the pace of recovery for the Indian corporate sector," adds that "with sentiment souring, there may be some loss of demand in the first half, particularly in contact intensive sectors." Warning that "failure to rein in the surge in cases soon would worsen the adverse impact on the economy," DK Srivastava, a noted economist, adds, "The longer the second wave lasts, the more severe would be the adverse impact on the economy. There would be a race between the pace of Covid vaccination vis-à-vis the speed at which Covid19 including its new mutants spread."

DEMAND DOWN

Toeing the Centre's line of thinking that 'all is well', Reserve Bank of India Governor Shaktikanta Das is reported to have said that "people and businesses have learnt to live with localized lockdowns and that the impact on demand would not be as severe as last year." However, the reality is different. In fact, there has been a sharp drop in demand for FMCG products, consumer durables, automobiles and so on. A survey by Dan and Bradstreet reveals that business optimism for the second quarter of calendar year 2021 fell 23 per cent as compared to the first quarter.

Renowned global rating agency Moody's Investors Service has slashed India's FY22 growth forecast to 9.3% from 13.7% estimated earlier, as it joined other global rating firms in trimming growth expectations for India amid a devastating second wave of the pandemic. Moody's has warned that risks from deeper stresses in the Indian economy and financial system could lead to a more severe and prolonged erosion in fiscal strength, exerting further pressure on the country's credit profile. Maintaining that "the reimposition of lockdown measures will curb economic activity and could dampen market and consumer sentiment," the rating firm adds, "However, we do not expect the impact to be as severe as during the first wave. Unlike the first wave where lockdowns were applied nationwide for several months, the second wave 'micro-containment zone' measures are more localised, targeted and will likely be of shorter duration. Businesses and consumers have also grown more accustomed to operating under pandemic conditions. As of now, we expect the negative impact on economic output to be limited to the April to June quarter, followed by a strong rebound in the second half of the year."

NO-WIN SCENARIO

Crisil, a leading rating agency which had earlier predicted 11 per cent GDP growth in the current fiscal year, has now revised its forecast and talks of two probable scenarios. The first assumes the second wave of Covid cases peaks by endMay, with lockdowns having a moderate impact on business, leaving the economy growing at about 9.8 per cent. In the second scenario, the second wave peaks only by end-June, with lockdowns having a severe impact and GDP growth falling to 8.2 per cent. Pointing out that economic activity in the first half of this fiscal year will be clouded by the pandemic, Crisil adds that the second half should see growth, led by increased vaccinations and the public adapting better to lockdowns. Global growth in the second half of the year could support India's exports. Among corporate sectors, those most hurt will be airlines, hotels, media & entertainment, organised retail and firms dealing with discretionary products such as cars and two-wheelers. Overall, revenues in corporate India are expected to grow by about 15 per cent in fiscal 2022, compared to -8 per cent in the previous fiscal year.

In April 2021, Brickwork Ratings had revised its FY22 economic growth projection for India to 9% from 11% estimated earlier, holding that its earlier presumption of a Vshaped economic recovery is unlikely as the second wave of Covid has brought an abrupt halt to India's nascent economic recovery from the pandemic. In line with other rating agencies, global brokerage firm Barclays also cut its GDP estimate for India to 10 per cent from its earlier forecast of 11 per cent, pointing out the slow pace of vaccinations and the uncertainty around the true number of cases and deaths in the second wave were triggers. India's losses, it estimates, could be $ 38.4 billion if lockdowns continue till June. If restrictions are in place till August, GDP growth could fall to as low as 8.8 per cent.

9 MILLION JOBS LOST

Unfortunately, much attention has not been paid to the disastrous impact of the pandemic and the resultant lockdowns and other restrictions on employment situation. According to a study by the Centre for Monitoring Indian Economy (CMIE), a highly reputed independent research entity, the unemployment rate grew from 6 per cent in March 2021 to 8 per cent in April, with the country losing 3.4 million salaried jobs in April. With almost nine million salaried jobs lost over two months from February, employment dropped from 82.2 million in February 2021 to 76.7 million in March, and further to 73.3 million in April. Total employment is currently around 12.5 million, below the average for 2019-20 (85.9 million) before the pandemic first hit the country and just above the average for fiscal 2021 (72.5 million), the first year of the pandemic. This means that Covid-led lockdowns and other restrictions this year may already have wiped out the gains the job market saw at the end of last year. Studies show that more than 200 million Indians are expected to fall into poverty as a result of shutdowns and exorbitant healthcare costs.

According to an analyst, most experts predict the second wave to recede by June. But the government has to start now to rebuild the economy. There are three parts to this. The most immediate involves vaccinations: choosing which sectors of the population get inoculated first will mitigate the negative impact on GDP. A government spending boost will then help backstop the downslide. Finally, structural changes must be initiated to ensure that India's prowess in technology and manufacturing is leveraged to its highest potential.

VACCINE PRIORITIES

Maintaining that "right now, the focus must be placed on vaccinations in the 53 cities with populations of a million-plus each," an analyst with Bloomberg adds, "They are hubs of economic activity and need to be de-risked from a third wave. Second, workers in customer-facing businesses -- hospitality, restaurants, aviation, storefront retail, local transportation, commercial real estate -- should have priority. These sectors have all taken a hard knock, as in every other country; inoculations there will help build confidence for consumers to patronise them and move about again." Government spending must then follow. At the end of 2019, the government released a National Infrastructure Pipeline, outlining capital expenditures of Rs 120 trillion over five years. The announcement ran into the onset of the pandemic but this programme should be expedited. With a gradual glide path to a 3% fiscal deficit signalled in the Union budget and buoyant direct and indirect tax collections, the government has fiscal headroom for this expansionary spend. The aggressive spending plan is likely to face political opposition. A project to revamp New Delhi's Central Vista is currently facing criticism.

STRUCTURAL REFORMS

According to the Bloomberg analyst, the government should continue to push for structural market reforms. A recent Credit Suisse study talked about how 100 unicorns - firms with more than $1 billion valuation - have sprung up in India in just a few years. Political opposition, however, has delayed the tough reforms that would encourage even more enterprise. Easier and cheaper access to capital, faster land acquisition for marquee projects and new business investments, bureaucratic agility, administrative transparency and a nimbler judiciary will go a long way. Encouraging more digitisation of retail through simpler rules can further open the national market to small businesses. The government can further boost business confidence with the full privatisation of companies like Bharat Petroleum Corporation and IDBI Bank and Shipping Corporation this year. The scars of the second wave of the pandemic are certain to run deep but well-executed policy measures will help meet the challenge -- and decide how far India's rebound will go. The recovery ball, then, is well and truly in the court of the Narendra Modi government.