The localised impact of the fresh wave of rising Covid-19 cases could potentially dent the uptick in business activity, especially in the services sector. High frequency indicators have begun to reflect some moderation due to administrative clampdown in a bunch of districts including Maharashtra and Gujarat.
Mobility indicators, such as the Apple mobility index, which capture the impact of rising cases at a localised level, indicate that while movement has normalised across all major cities through February and March 2021, there has been a slight blip in locations such as Mumbai and Pune.
The Google mobility index, which too reflected a steady improvement over the last few months, shows a moderation in the retail and recreation sectors this March, partly tied to the increase in infections and the resultant administrative restrictions, according to data compiled by the Reserve Bank of India.
Transport indicators tracked separately by the central bank too reflect some moderation in growth in February 2021, coinciding with the surge in fresh Covid-19 cases in states like Maharashtra and Kerala.
Data earlier released by the government showed that the output of the eight core infrastructure sectors in February has contracted 4.6 per cent. It had jumped 6.4 per cent in February last year.
Pronab Sen, former Chief Statistician of India and IGC country director, said the projections for the next fiscal were primarily based on the assumption that the services sector will rebound to 2019-20 levels, but that looks uncertain now. “The really big issue is about what happens to services because all the estimates that were projecting 12-13 per cent growth for FY22, all of them assumed services would get pretty much restored to 2019-20 levels. That’s in jeopardy now,” Sen told The Indian Express.
The impact, he said, will not be much for the manufacturing sector. The services sector will be affected far more, catching the end result of lower consumption because incomes would be affected. “The government can’t do much except recognise that it is likely to happen and that demand stimulus has to continue so that the multiplier effect of slowdown in services sector doesn’t impact other sectors,” Sen said.
Six states — Maharashtra, Punjab, Karnataka, Madhya Pradesh, Tamil Nadu and Gujarat — continue to report a surge in daily cases, accounting for 78.56 per cent of the new cases. Maharashtra, the worst-hit, has indicated lockdown-like restrictions but has refrained from announcing a complete lockdown. It has instead chosen to impose localised restrictions for public places like restaurants, gardens, parks, malls and beaches and stricter rules are expected from April 1. States like Chhattisgarh and Gujarat have imposed night curfews, while Uttarakhand and Gujarat have made Covid testing mandatory for those entering the regions from outside.
The surge in cases comes at a time when optimism had returned on the possibility of a service sector rebound. Buoyed by a sharp increase in new orders, the services PMI recorded the fastest pace of expansion in a year, rising to 55.3 in February 2021 — the pace of expansion being higher than January’s 52.8, and it being above the long run average of 53.3.
The roll-out of Covid-19 vaccines generated optimism over future growth prospects and business confidence improved, as mirrored in the business expectations index. The Nomura India Business Resumption Index eased to 95.1 for the week of March 21 as against 95.4 in the previous week and 98.5 as on February 28. Activity is now 4.9 percentage points short of pre-Covid-19 levels.
“The knock-on effect of the second wave on mobility suggests a likely sequential dip in contact-based services and a near-term delay of normalisation. However, we expect the impact to be more transitory and muted (than in Q2 2020), as factory operations remain uninterrupted and consumers and businesses have adapted to the new normal; the latter overhauling their supply and sales chains to become more resilient to the second wave,” Nomura said in its report.
In its recent report, Barclays India said that if the current restrictions remain in place for two months, this could shave 0.17 percentage points from the nominal GDP growth. “The growth rate in active cases is likely to be sounding alarm bells. The current seven-day moving average of active case growth is around 6.2 per cent, the highest since early May 2020, when India was at the beginning of its long first wave… Maharashtra was responsible for around 13.5 per cent of India’s GDP pre-Covid, and is economically the largest state in the country, both from consumption and production standpoints. Still, with the severity of restrictions being fairly benign relative to the lockdowns in March-June 2020, we believe the economic fallout from the new lockdown will be small. We estimate that a week of the current restrictions might cost the economy $0.28 billion, hence over a period of two months, the loss of activity could amount to around $2.5billion, or around 0.08 percentage points of nominal GDP,” Barclays said.
Four states — Gujarat, Punjab, Karnataka, and Maharashtra — generate around 32 per cent of the country’s GDP. “If these other states implement the same level of lockdown as Maharashtra for two months, we estimate this would trigger a total loss of around $5.2 billion, or about 0.17 percentage points of nominal GDP,” it said.
A senior government official said though the surge in Covid cases is a matter of concern, it will be fought with vaccines. “This year we aren’t going to work on lockdowns. It is a matter of worry but we will fight it out with vaccines. The pandemic should be handled far better, so it won’t take us that long. In spite of the rising cases, GST numbers are showing good rise, a sign of resilience,” the official said.
In its latest report, State Bank of India’s economic research division said that the business activity Index based on high frequency indicators has declined in the week ending March 22 at 101.7, the lowest in one month, from 104.6 in the previous week. “Localised lockdowns/restrictions have not resulted in controlling the spread of infection. This is visible in case of many states including Maharashtra and Punjab… increasing the speed of vaccination is the only way to win the battle against Covid-19 pandemic,” it said.
The rise in cases in some of these states has now impacted mobility and poses a near-term localised risk. As per the services PMI release, while transport and storage were the best performing segments, information and communication was a sub-sector that posted contraction in sales and business activity in February.
The 13th edition of the Retail Business Survey by the Retailers Association of India indicated retail sales were 93 per cent of pre-Covid-19 levels in February 2021, driven by consumer durables and quick service restaurants. The concern here is that the surge in Covid-19 cases could potentially impair nascent revival. Added to that is the concern over rising input costs, which surged amidst reports of higher freight, fuel and retail prices.
In its second advance estimates, India’s GDP was estimated to have contracted 8 per cent in 2020-21, deeper than 7.7 per cent contraction estimated earlier. Most global economic agencies have projected a double digit growth rate for India for the next fiscal.
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