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Explained Ideas: Will the Covid-19 second wave derail India’s economy?

Sectors at-risk account for less than 6 per cent of the economy, write Nomura economists Sonal Varma and Aurodeep Nandi.

Night curfew imposed in Mumbai on Friday. (Express Photo: Ganesh Shirsekar)

As India’s economy embarks on a new financial year, a dark cloud is on the horizon: The second wave. Every day brings further reconfirmation that the second wave is no longer a Maharashtra-centric phenomenon. With the daily run rate of cases surpassing the first-wave peak, it’s no longer just a wave, but a potential tsunami. The second COVID-19 wave comes at a time when India’s economy has made a resilient comeback.

But with the spectre of lockdowns again looming large, how much does the second wave threaten this recovery?

Nomura economists Sonal Varma and Aurodeep Nandi attempt to answer this question in their latest opinion piece in The Indian Express. They state that there are several reasons why they aren’t raising a panic at this point.


First, the lockdowns are far more benign than they were during the first wave. While select contact-based services and transportation are likely to be hit, they remain operational at lower capacity levels. The rest of the economy — agri- culture, industry and even services such as construction, communication, trade — should remain largely unaffected.

“Our estimates suggest that the sectors at-risk account for less than 6 per cent of the economy,” they write.

Second, firms and consumers have rapidly adjusted to the new normal and the relationship between (lower) mobility and (weak) economic activity has been weakening over time.

ExplainSpeaking |Will 2021 be a repeat of 2020 for the Indian economy?

“The ultra-high frequency data for March and early April, released since the renewed lockdowns were announced, seem to largely corroborate this,” they state. While power demand, ozone concentration levels, and railway freight revenues have remained relatively resilient, there is a dip in driving congestion and railway passenger revenues.

Moreover, there are some bright spots to look forward to over the coming quarters.

First, the pace of vaccinations is likely to accelerate further — we estimate that India is on track to vaccinate 40-45 per cent of its population by end-2021. As vaccinations pick up, they are also likely to result in an “ultimate unlock” of the economy as the services sector bounces back.

Second, they expect a synchronised global growth recovery to begin in Q2, led by the US, which should have some beneficial growth effects on India. Historically India’s growth cycle has moved in sync with the global cycle due to trade and investment linkages.

And finally, the lagged impact of easy financial conditions on the resilient formal sector households and firms is still to play out.

“We expect real GDP growth to remain positive and rise further in Q4 2020-21. However, a worsening second wave implies that sequential momentum in Q1 2021-22 would likely be weaker, although year-on-year growth will still be above 30 per cent this quarter and overall growth in 2021-22 should be above the RBI’s projection of 10.5 per cent,” they conclude.

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