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 Indian Economy in Second Wave of COVID-19
Indian Economy in Second Wave of COVID-19

May 4, 2021

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The coronavirus situation in India is getting worst day by day. India had crossed the mark of 3.5 lakh new cases and 2.5 thousand deaths per day. The number of cases is 3.5 times and the number of deaths two times more than that of the first wave. Niti Ayog said that India could face more cases about 5 lakh per day if the situation doesn’t improve. The crisis has put heavy pressure on our healthcare system with a shortage of beds, ventilators, oxygen, medicines, and injections reported across the country. Many cities and states have adopted restrictions ranging from lockdowns to night curfews to control free movement (excluding essential services). The Indian economy had started recovering from the first wave which dipped the country for the most part of last year.

After recording negative GDP growth in Q1  and Q2  of FY 2020-21, India’s GDP turned positive in Q3 (Oct-Dec) registering a growth of 0.4%. There is more discussion among economists that the impact of the second wave on the economy would be lesser due to:

(i) Slightly better preparedness in terms of availability of vaccines

(ii)  More knowledge about how to handle the virus, and

(iii) An unlikely event of a national lockdown

However, there is disagreement as well as uncertainty on the intensity of impact. Many economists have said that more focus should be given to micro containment zones to deal with the current wave of infections, Rather than imposing nationwide lockdown, as it will have a lesser impact on the economy. According to a recent survey by RBI that consumer confidence has taken a massive hit, falling from 55.5% in January to 53.1% in March 2021. Lower consumer confidence impacts the spending decisions of households directly impacting the demand curve and ultimately affect business operations and economic recovery.

The second wave has interrupted hiring plans of corporates, increased business uncertainty, scrambled operations, and led to reverse migration in key industrial states. The curbs placed have led to business activity collapsing since the second week of April as per a Nomura report and the economic situation could get worse due to stricter lockdowns. The Nomura India Business Resumption Index slipped from 88.4% to 83.8%. If supply chains get disturbed and inflation starts rising, it has already been on an upward movement, purchasing power, and therefore the demand is bound to contract.

The travel, tourism, and hospitality sectors are the first ones to hit hard by COVID-19 restrictions. Other important sectors like the construction, real estate, and retail sector could start facing losses if the situation does not improve within the first quarter.

The economic research wing of SBI has cut India's real GDP growth forecast from 11% to 10.4% for FY 2021-22. It estimates that the total loss of the current lockdown in various states is around 1.5 lakh crore.

Similarly, India ratings and research now forecast India’s GDP growth rate to be 10.1% as against 10.4% earlier. While the impact is still depending upon which states impose lockdown and for what time period, the loss to the economy could be destructive. Some states which were badly impacted had already imposed lockdown. Neither the central bank nor the central government is in a position to match the relief measures announced last year during the first wave. The PM has announced a two months free ration for more than 80 crores families. With inflation rising upwards, RBI doesn’t cut interest rates.

To conclude, the economic impact of the second wave on the economy would be lesser than the first wave. As there is increasing concern that the intensity of impact could be higher than earlier as GDP downgrades. From here onwards, the speed of vaccination will be an important factor, along with the imposition of a nationwide lockdown and micro-containment zones.

 

Image credit- IIM Udaipur


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