Deep Dive

How the surge in Covid cases is impacting growth projections

Mumbai | Updated on April 29, 2021

Low base effect to give a boost in theMarch quarter, vaccination to hold key

With lockdowns in more than half a dozen States and surging Covid cases of over three lakh on a daily basis, expectations of a stellar recovery this fiscal now hang in the balance.

It’s not only economic activity on the ground that has been impacted but with infections more widespread across the country’s geography, consumer sentiment, too, has been impacted, especially after the normalisation of economic activities, to some extent, in the last few months.

Bankers and analysts say that both corporates and customers are now on a wait-and-watch mode and the sentiment will change back to positive as and when the second wave of Covid comes under control.

Better Q1

The first quarter this fiscal will be better than the first quarter of 2020-21, mainly due to a base effect but improved sentiments are now expected only after mid may or June depending on how the second wave plays out.

In its April 2021 Bulletin, the Reserve Bank of India noted that economic activity is holding up against Covid -19’s renewed onslaught.

“Apart from contact-intensive sectors, activity indicators largely remained resilient in March and grew beyond pre-pandemic levels,” it said, but warned that the resurgence in infections, if not contained in time, risks protracted restrictions and disruptions in supply chains with consequent inflationary pressures.”

Impact on economy

Not surprisingly then, rating agencies and brokerages have begun to cut down on India’s growth prospects for the fiscal. While growth is still likely to be in double digits, many have shaved off at least 100 basis points from earlier estimates.

“An immediate threat to India’s 2021-22 growth prospects would arise if the current but sharp upsurge in the incidence of Covid due to the second wave is not brought under control quickly. The longer the second wave lasts, the more severe would be the adverse impact on the economy,” noted DK Srivastava, Chief Policy Advisor, EY India.

“Until the virus spreads are contained, and a substantial proportion of the population has been vaccinated, the sectors that are impacted by social distancing norms and those adversely affected by supply disruptions, labour shortage and demand reduction will continue to trail and may take longer to return to sustained growth path. The revival in sectors that fall under discretionary spending may also be further delayed due to the second wave,” said M Govinda Rao, Chief Economic Advisor, Brickwork Ratings.

The agency has revised its GDP growth outlook for 2021-22 to nine per cent from the earlier estimate of 11 per cent.

Global rating agency S&P has also said that a drawn-out Covid-19 outbreak will impede India’s economic recovery. This may prompt us to revise our base-case 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 its pre-pandemic path, suggesting a long-term production deficit equivalent to about 10 per cent of GDP,” it noted.

Inoculation is the key

Apart from control of infections, the availability and pace of vaccination will also hold the key to a return to normalcy.

Published on April 29, 2021

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