A subdued outlook

Lockdowns in second wave are less restrictive, yet economic momentum is softening, growth can’t be taken for granted

The ferocity of the second wave of Covid has led to heightened uncertainty over the state of the economy. However, considering that the lockdowns being imposed by state governments this time are less restrictive than those imposed last time, and businesses have adapted better, the RBI believes that the impact of the second wave on the economy will “be limited” in comparison to that of the first. While that may well be the case, the momentum in economic activities seen towards the end of the last financial year has already softened. Analysts are paring down their estimates of growth for this year from the forecasts made before the onset of the second wave.

Recent data makes for grim reading. Nomura’s India Business Resumption Index has fallen to 61.9 for the week ending May 16 — it is now at levels last seen in June 2020. The unemployment rate has risen sharply according to the CMIE surveys. Electricity generation has moderated. Other indicators such as GST e-way bill generation, vehicle registration, railway freight traffic, all indicate a slowdown in momentum. The year-on-year numbers will look better considering the base effect — economic activity had collapsed in the first quarter of last year — but the slowdown in momentum suggests that a recovery to pre-Covid levels is still some time away. For instance, the Index of industrial Production, despite growing by 22.4 per cent (year-on-year) in March 2021, is lower than its March 2019 levels. A flicker of good news is in export growth. India’s exports to major economies have recovered to pre-pandemic levels. A faster recovery in the developed economies, benefitting from a swifter rollout of vaccines and greater government support, provides a fillip to India’s exports.

The economic trajectory going forward depends on the duration and stringency of the lockdowns which, in turn, depends on the journey of the virus. While new cases have declined, there is reason to be concerned. First, with infections spreading through the rural areas, parts of the economy which may have been relatively insulated from the first wave may now be affected. Second, this wave of infections in urban areas is seemingly concentrated in the relatively affluent areas — as per the Brihanmumbai Municipal Corporation, over 90 per cent to the cases were concentrated in high-rise buildings. To the extent that these households account for significant spending power, household consumption will be subdued. Both households and businesses are likely to continue to be risk averse. Vaccine availability remains the binding constraint on economic activities.

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