Explained: How 2nd Covid-19 wave will impact India’s economy

 Economic activity in India has suffered due to localised lockdowns during the second Covid-19 wave, but the impact is unlikely to be as devastating as last year. Experts suggest that the economic impact will depend on how fast India manages to contain the second wave. Here is all you need to know.

An unprecedented rise in Covid-19 cases is likely to slow down India's economic recovery, but the overall impact will be milder in comparison to last year's devastation. Experts say that extent of economic loss during the second wave will primarily depend on how fast the chain of infections can be broken.

     While Covid-19 containment rules are less stringent compared to last year’s nationwide lockdown, economic activity is gradually declining as more states opt for stricter norms to contain rapidly rising daily cases.

At the moment, cases are rising sharply as India reported nearly 3.8 lakh cases and over 3,000 deaths on Thursday.

MODERATE IMPACT

    A number of retail and wholesale businesses have been deeply hurt by the localised lockdowns, but the fact that the movement of goods has not been stopped and industries are being allowed to function could significantly limit the economic loss.

    Ratings agency CRISIL recently said in a note that the impact on industrial activity during the second wave is smaller in comparison to the devastation witnessed in 2020. Japanese brokerage firm Nomura has also suggested that business activity has fallen, but it will have a limited impact on the economy.

“There are reasons to expect a muted economic impact. The experience from other countries suggests a lower correlation between falling mobility and growth. Parts of the economy like manufacturing, agriculture, or work-from-home and online-based services should be resilient,” Nomura said in a note. It added that the ongoing second wave will only result in a "short-term negative economic shock", adding that the medium-term growth outlook remains stable.

    Another positive indicator for the economy is that the second wave of Covid-19 could peak in the next 20 days. The prediction has been made by economists India’s largest public lender, the State Bank of India.

“Based on other countries experience we believe India might reach its second peak when the recovery rate will be at 77.8%,” the SBI report said.

The SBI report indicates that India could reach its peak by mid-May, following which active cases could start dropping if all precautions are followed strictly. The vaccination drive for adults that starts from May 1 is also going to help prevent more infections.

    In such a situation, India’s economic recovery is likely to slow down in the near term. However, it also means that companies will not face multiple quarters of business disruption.

Although most economists indicate that the impact of the second wave on the economy will not be as harsh as last year, there are several risks that can derail the economy. Some of them are rising income inequality, unemployment, sectoral impact, consumer confidence and inflation.

This has led to a downward revision of India's GDP by multiple brokerages and ratings agencies.

While the second wave has not impacted the livelihood of salaried employees to a great extent, it has again affected poorer households. Thousands of migrant labourers and daily wage labourers returned home when some states announced lockdowns in prominent cities. This has directly impacted the labour participation rate and unemployment numbers. While LPR is likely to decrease further, the unemployment rate has already gone up in April.

Unemployment witnessed a rise in April as many businesses that were operating on full-scale were hit by sudden lockdowns and restrictions. The hospitality, tourism and entertainment sectors have been hit hard during the second wave. Pressure is mounting on other sectors like consumer durables, aviation and real estate as well.

 

Most of these sectors have seen a reduction in business activity as consumer confidence has taken a knock due to the second wave. People are worried about their savings, jobs and health as the second wave rages on. Experts said that weak consumer confidence can hurt India's economy as reluctance to spend on discretionary items could lower demand.

Rising inflation is another factor that could upset economic growth and the Reserve Bank of India (RBI) is likely to take note of it in the next policy review meeting in June. The fact that there has been a rise in core inflation, which excludes food and energy costs, is worrying.

Economists are worried that the cost due to the ongoing public health crisis is one of the reasons behind the sharp rise in inflation. Meanwhile, a sharp rise in wholesale inflation was recorded in March and economists believe that wholesale inflation could lead to higher retail prices, which will ultimately impact household savings amid the Covid-19 crisis.