Covid-19: Indian Economy Finds Itself On The Edge Amid Second Wave

The second wave has delivered a one-two punch to contact-intensive services but impact on the goods sector is seen limited.

A police officer stands at Nariman Point in Mumbai, India, on Wednesday, March 31, 2021. Photographer: Dhiraj Singh/Bloomberg
A police officer stands at Nariman Point in Mumbai, India, on Wednesday, March 31, 2021. Photographer: Dhiraj Singh/Bloomberg

The second wave of the Covid-19 pandemic has not destabilised India’s economic recovery yet but localised lockdowns, such as the one announced in Maharashtra, may impact growth in the April-June quarter.

Fresh infections of the virus have been on the rise for the last few weeks, with some states hit worse than others. On Sunday, India reported 93,249 new cases — the highest since Sept. 19. Maharashtra, Karnataka and Kerala have the highest number of active cases, forcing state and city administrations to announce localised restrictions.

High-frequency data, available until March, is not showing significant signs of stress. Though the eight core industries index saw the sharpest contraction in six months in February, e-way bill collections and exports held strong. However, the April-June quarter may show weaker-than-expected sequential growth as large states like Maharashtra start to impose restrictions, particularly on high contact services, economists say.

Alarm Bells In Critical States

The latest Google Mobility Report shows that mobility across places of retail and recreation has dropped 30% between February 14- March 28 compared to the baseline. Between January 30- March 13, mobility in this segment was 22% below baseline. However, mobility to workplaces and within residential areas remained strong until the end of March.

States with a wider spread of new cases are showing sharper drop mobility. In Maharashtra, Karnataka, Gujarat and Delhi mobility was significantly below national aggregates across categories.

In the week ended April 4, the weekly Nomura India Business Resumption Index fell sharply to 90.4 from 94.6 a week before. This is its steepest weekly decline since mid-April last year, Nomura said. “The fall was driven by a sharp deterioration in mobility data.”

The impact across Maharashtra will worsen after the state government, on Sunday, asked a large section of private offices to move to work-from-home. Restaurants, except for delivery services, malls and other high contract services will also shut until the end of April.

Maharashtra accounts for about 14% of the country‘s nominal GDP.

Covid-19: Indian Economy Finds Itself On The Edge Amid Second Wave

Abheek Barua, the chief economist at HDFC Bank, said that despite the selective spread of covid-19 in the second wave, the situation is concerning because of the high contribution of these states to India’s GDP.

Not just Maharashtra, but Karnataka and Delhi too are critical from an industry perspective, he said. Also, the problem with an integrated supply chain is that problems in one state can transmit to other states, Barua said.

Goods Sector May Withstand Pressure

To be sure, daily electricity data is yet to suggest any downturn in economic activity. Power demand remains robust and railway freight revenues continue to rise, suggesting no impact on the industry, Nomura said.

Even in Maharashtra, where the strictest lockdown has been imposed, manufacturing facilities are being allowed to function.

“Consumer and businesses have adapted to the new normal, lockdowns are likely to be localised, the goods sector should continue to recover and vaccinations are gathering momentum,” Nomura economists Sonal Varma and Aurodeep Nandi said. “The lagged impact of easy financial conditions, fiscal activism and strong global growth remain cyclical tailwinds.”

The sectors of the economy that seem most at risk from a second wave are hotels, restaurants and transportation, Varma and Nandi added.

One-Two Punch To Contact Intensive Services

In the services sector, business is already starting to see a slowdown. Sectors most at risk from a second wave — hospitality and transportation services — account for about 5.7% of GDP.

While footfalls at the start of the year were close to 60-70% of pre-covid levels, they have fallen by 40% since then, said Kumar Rajagopalan, CEO of the Retailers Association of India, pointing to the restrictions placed in Mumbai.

Even before the new restrictions were announced, Mumbai’s municipal corporation was conducting randomised Covid tests at crowded locations. The move deterred visitors, bringing retailers back to square one, Rajagopalan said.

“In other states, the impact is not as much yet but the association remains in a wait-and-watch mode,” Rajagopalan said.

Across the restaurant sector, the impact is similar.

Pranav Rungta, head of the Mumbai chapter at the National Restaurant Association, said business has reduced to 15-20% of pre-covid times compared to 75-80% in January and February. This will likely fall further as in-person dining is restricted starting this week.

Rungta added that the uncertainty and volatility will also make consumers conservative about spending once again.

While much of the impact is still limited to Mumbai and Maharashtra, footfalls in Bengaluru and Delhi are likely to have dropped by 10-15% compared to what they were in the early part of the year, Rungta said.

For the film theatre business, which was among the last to recover even from the first wave of Covid cases, new infections will mean a fight for survival.

Nitin Datar, vice president of the Film Federation of India, said that the position of single-screen theatres amidst the second wave is even worse than it was in the first wave. The duration of the pandemic has led to the exhaustion of all resources and the new curbs will push a number of single-screen theatres closer to bankruptcy, Datar said.

Assessing The GDP Hit?

Pent-up goods demand had led the economic recovery so far, and our expectation was that pent-up services demand will be the key driver henceforth, said Pranjul Bhandari, chief India economist at HSBC in a note dated March 31.

It is now likely that the services-led rebound will be realised in its entirety in H2 FY22 instead of H1. In that sense, this is a case of recovery delayed, not denied. In fact, the GDP growth numbers in FY22 will now be more uniformly spread. Earlier H1 was benefitting from both low base effects and pent-up services demand. Now base effects are likely to support H1, and pent-up demand saved for H2.
Pranjul Bhandari, Chief India Economist, HSBC

Since the second wave intensified towards the end of March, an impact on January-March GDP growth is unlikely, said Varma and Nandi who estimate the economy will expand 1% year-on-year in the final quarter of the financial year.

“However, if the second wave worsens further, causing more state-level restrictions and a moderation in contact services, then the sequential momentum in April-June quarter will likely be close to zero or marginally negative as compared to the previous forecast of 0.5% on a quarterly basis,” the Nomura economists added.