India’s gross domestic product for 2020-21 has declined to 7.3% -- lower than the figure most agencies had predicted earlier. The recovery that began in the October-December quarter gained momentum in the subsequent three months. In the January-March 2021 quarter, GDP grew by 1.6% over and above a small rise of 0.5% in the previous quarter. The year that was marked by news of growth deceleration and rising Covid-19 fatalities, the economy’s resilience is a silver lining.
These figures were, however, related to the last fiscal that saw a visible economic recovery in the second half following a decline in new Covid cases and a sharp fall in fatalities. But things have changed with the emergence of the second wave since the beginning of the current fiscal. India added more than three lakh new cases every day in May. Restrictions on movement and in work places are being imposed from Delhi to Chennai to Mumbai to Kolkata and businesses are turning nervous.
Despite being battered badly by the national lockdown last year and continuing lockdowns in many areas this year, many key sectors had bounced back and were struggling to cope with the pent-up demand that had been unleashed. The second wave of the coronavirus pandemic, however, is threatening to bring that recovery bid to a grinding halt.
The second wave of Covid-19 has made economists less optimistic about India’s growth prospects. Most of the rating agencies have trimmed their GDP growth forecasts for India for the financial year ending March 2022. These agencies had initially estimated double-digit growth for the Indian economy due to a low base and revival of business activities in the country after the first wave of Covid in 2020.
For instance, Mumbai-based CRISIL, which had earlier pegged India’s economic growth for fiscal 2022 at 11%, has lowered its estimate to 8.2% in a worst-case scenario. Moody’s has revised the growth projection to 9.3% against 13.7% earlier. "The reimposition of lockdown measures along with behavioural changes on fear of contagion will curb economic activity, but we do not expect the impact to be as severe as during the first wave,” the agency has said. S & P Global has downsized their growth forecast from 11% earlier to 9.8% now while Icra has revised it to 10% from 11% earlier.
India's GDP forecast 2022
Source: News media
State Bank of India has downgraded its growth projections for this year from 10.4% to 7.9%, and stated the country’s economic recovery will now be 'W-shaped' instead of the ‘V-shaped recovery’ anticipated earlier.
The state of the economy
These sharp revisions in estimates come at a time when India’s grappling record Covid-19 deaths and new infections. In the monthly economic report for April, the Reserve Bank of India points out that the economic impact of the second wave of the pandemic was disproportionately felt by individuals eking out a daily livelihood and small businesses, both organised as well as unorganised.
This is reflected in the rising unemployment rate. In May 2021, India’s labour participation rate at 40% was the same as in April. But the unemployment rate shot up to 11.9% from 8% in April. Weekly estimates had foretold this increase. The weekly unemployment rate had touched 14.7% in the week ended May 23 as per CMIE data.
Unemployment rate in 2021 (%)
Employment declined from 390.8 million in April 2021 to 375.5 million in May 2021. This translates into a loss of 15.3 million jobs, or a 3.9% fall in employment in May. This is not as bad as the loss of 114 million in April 2020 but it comes second to only that draconian month of a complete nationwide lockdown.
Not surprising, for beginning with the second wave of Covid, the country has seen restrictions on movement and in work places are being imposed across the country. A large number of industries were closed or functioned partially.
In the wake of the second pandemic wave, around 25% of the business of the retail side across categories was lost, according to the Shopping Centres Association of India. Mall owners incurred a loss of around `3,000 crore during the eight weeks of the second wave of the Covid-19 pandemic due to lockdowns and restrictions imposed by various states across the country. Shopping malls have reportedly sought an extension over the moratorium on their loans.
The falling business of the retail sector had its impact on the production of goods it deals in. The list is enormous and so also the economic impact of the decelerating fall in retail sector turnover.
Amid a dramatic spike in the number of new Coronavirus cases in India, the demand for residential real estate in India might be thrown off track, says head of industry body CREDAI. Sales of residential properties across eight major cities grew 44% in the January-March period this year, according to Knight Frank India.
According to a recent research report by QuantEco Research, the second wave would hit Indian economy by prompting people to save rather than spend. This would particularly impact home purchases in the country that require big-ticket investments.
The automobile industry that suffered drastically in the first wave of Covid-19 last year seems to be set for yet another bad year in 2021. Hit hard by the second wave, the Indian automobile industry registered a fall of 30.2% in total domestic sales to 12,70,458 units in April 2021 from 18,19,682 units in March 2021 according to Society of Indian Automobile Manufacturers. The domestic passenger vehicle sales slipped 10.1% in April 2021 while that of two-wheelers declined by 33.5% in the same month.
Worse, the core sector witnessed a sharp decline in production in April 2021 compared to March 2021. Steel production declined by a huge 20.7% in April 2021 compared to March 2021, cement production fell by 15.2% during the same period. Monthly Electricity generation that reflects the movement of industrial activities declined by 3.3% in April compared to March 2021. Coal production declined by 46.0% in April 2021 compared to March 2021.
Index of production 2021
Source: Ministry of Commerce & Industry, GOI
The poor performance of the core sector led to a considerable loss in growth momentum of the manufacturing sector. Manufacturing PMI fell to a ten-month low of 50.8 in May – down from 55.5 in April, according to the monthly IHS Markit India Manufacturing Purchasing Managers' Index (PMI).
The major sub-component of the headline statistic, new orders, climbed at the weakest rate since the current period of expansion began in August 2020. The second wave of Covid-19 dilemma, according to panel members, stifled demand. The escalation of the epidemic and difficulties in obtaining raw materials, according to anecdotal evidence, slowed the recovery.
How to revive the economy?
The sharp revisions in GDP estimates, the rise in unemployment rate or the fall in Manufacturing Purchasing Managers' Index came at a time when India was grappling with record Covid-19 deaths and new infections.
However, strict measures and imposition of lockdown in many states saw a deceleration in new cases since the third week of May 2021. India witnessed a sharp decline in Covid cases and on June 4, 2021 some 1,20,529 new infections were recorded – a sharp fall from over 3 lakh daily cases recorded in May. The daily positivity rate fell to 5.78%, remaining below 10% for twelve consecutive days. Meanwhile, recoveries continue to outnumber the daily new cases for 23 successive days as India witnessed 197894 recoveries on June 4.
The decline in new cases has once again raised hopes of an economic recovery. In fact, the RBI has appeared optimistic and said that the second Covid wave’s macro-economic cost to the country could hopefully be limited to the June quarter with a possible spill over to July and expects a GDP growth better than what is now projected.
The central bank observed that banks would have sufficient capital at the aggregate level even in a severe stress scenario. From the three-year low of 5.1% till October 2020, loan growth of banks rose to 5.6% in the year till March 2021 and seems to be aided further by liquidity support, low interest rates and the government’s ‘growth-enhancing’ steps, the RBI noted.
RBI may look optimistic about India’s economy but the most macro fundamentals suggest the opposite picture. The Union Budget FY22 aimed to revive India's economy by investing in infrastructure and health care sectors, while relying on an aggressive privatisation strategy and robust tax collections to fund its spending in the fiscal year. However, the second wave of the Covid-19 pandemic took a vicious toll on public health and lockdowns were imposed and predictably, the economic toll has also been heavy, although not like the disaster seen in April-June quarter of FY21, when GDP growth crashed -23.9%.
The question is: What must the government do to bring back the economy to its growth track? 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.
The examples of other countries clearly suggest that India must speed up its inoculation drive. The sharp spike in new cases in the second wave has made it necessary to speed up India’s vaccination rate. India probably has done well in its vaccination drive so far considering the early glitches the programme had to face, but this now looks vastly insufficient against the requirement arising out of the rapid surge in new cases.
To ramp up the vaccination drive, the RBI has announced `50,000 crore on tap liquidity window using which banks can lend to vaccine manufacturers, importers and suppliers of vaccine and priority medical devices, hospitals and dispensaries, pathology labs, manufacturers and suppliers of oxygen and ventilators, importers of vaccine and Covid-related drugs, logistics firms and also to patients for treatment.
Whether or not India’s favourable GDP revisions undergo a downgrade will depend on how fast vaccinations pick up, which will determine the time it will take to flatten the second wave.
Today, India is in a completely different scenario, it is facing one of the biggest challenges at the moment, which is decreasing demand, a factor that could delay economic recovery for a longer period after the second wave.
In addition, consumer sentiments turned sour due to the loss crafted by the second wave that not only claimed thousands of lives but has also led to massive loss of livelihood among the informal working class, evident by the rising unemployment rate.
The smaller businesses including micro, small and medium enterprises have been severely affected and are forced to lay off more employees as demand, and sales have plummeted due to localised lockdowns. Center for Monitoring Indian Economy (CMIE) had said that the future employment outlook remains weak due to lockdown restrictions imposed.
How to improve the demand condition? The past experience shows that higher infrastructure expenditure by the government often helps in improving demand. In the speech of the budget for this financial year, FM laid down six pillars on which the budget stands. Infrastructure was given special emphasis and a huge chunk of money - approximately `5.5 lakh crore is also set aside for investment in the infrastructure sector. It’s now the time that FM fulfils her Budget promises.
FM trusts Budget schemes to revive the economy
In fact, FM believes that unlike last year there is no need for an immediate stimulus to deal with the impact of the Covid second wave as Budget schemes, including on spending, are yet to be fully operational - with just two months of the financial year having passed.
She also suggested that funds were not a problem and headroom was available under schemes, such as loans based on government guarantee. “The Budget, which is designed for a Covid-affected economy, will have to go down to the people...We are not even taking that on board, and we have started talking about 'where is the big deal stimulus'?... Many of the schemes which were announced during Atmanirbhar Bharat are still being used,” she has said in a recent interview in TOI.
The minister said while assessment of the full impact of the second wave is underway, sectors such as hospitality, tourism and contact-based industries have been hit harder than most. The government expects a dip in GST collections, but the decrease will be temporary with the mop-up expected to rise as the economy reopens.
Having said that, FM has reaffirmed the government's commitment to speed up the inoculation drive and said that money for vaccination would be provided from the `35,000 crore allocations made in the last budget for this purpose.
In a fresh round of Covid relief measures, the country's central bank, however, has once again stepped in. The RBI has asked banks to lend to contact-intensive sectors such as hotels, restaurants, tourism, bus operators and other services by opening a `15,000 crore liquidity windows for the lenders. The RBI provided another `16,000 crore to SIDBI to meet the short- and medium-term credit requirements of micro, small and medium enterprises. The twin moves came along with an expansion of the loan restructuring window for loans taken by individuals and MSMEs, with the eligibility limit for debt doubled to `50 crore.
Whether FM’s budget proposals will actually succeed in reversing the decelerating economy is doubtful, but what is certain is that, like last year, India’s farm sector will again hold the economy. The gross value added of agriculture grew by 3.6% last year against a 6.2% decline in the country’s total GVA.
The India Meteorological Department has recently upgraded its monsoon forecast and said the country would receive “normal to above normal” rainfall with “well distributed” showers in the June-September period. Quantitatively, the monsoon seasonal rainfall over the country as a whole is likely to be 101% of the Long Period Average. Indian agriculture is largely dependent on monsoon rainfall and an above normal monsoon is expected to help the sector.