Economy
The world has moved from an ‘unknown unknown’ to a ‘known unknown’ in 2021. The pandemic and modes to contain the spread are largely known entities, but the virus’ progress and severity are still clouded in considerable uncertainty. We reassess India’s growth expectations by tackling four key questions.
Has the second COVID wave ebbed?
India’s case count has been steadily falling for the last two weeks, which has led local health experts to suggest that the second wave has peaked. This is, encouragingly, accompanied by easing aggregate positivity rate – sub-20 percent after three weeks – and R0 (reproduction rate) which has fallen below 1.0. Our analysis shows that the count in fifteen states is 50 percent below their respective peaks during this year’s wave, with the rest above, suggesting the pullback is not evenly distributed. Fatalities as a function of total cases are low, but the number of deaths per million basis is above the UK and the US.
This wave has ebbed but the retreat tracks higher stringency in lockdowns to break the transmission amidst choppy testing numbers. Experiences of other countries, the US, UK, South Korea, parts of Europe etc, reveal, even as the initial wave subsides, the subsequent waves have established fresh highs in the absence of vaccination reaching a critical mass.
Will vaccination be a quick fix to India’s pandemic concern?
The vaccination rollout has covered a fifth of the adult pool and 14 percent of the entire population by this month. Progress has, however, been stymied by the demand-supply mismatch, leading to a 30 percent drop in average daily doses dispensed in May versus April. Taking a conservative view, daily inoculations need to be more than doubled in the second half of 2021 for around 60 percent of the adult population to be vaccinated by at least one dose by the end of 2021. Until the vaccine rollout achieves scale, some form of restrictions is likely to remain in place, keeping activity sub-normal, in contrast to the sharp improvement from the unlocking in the first wave.
Does a peak in the daily caseload suggest a peak in economic costs?
The economic impact is likely to be most adverse in April-July 2021, but effects will linger for longer. State governments have gradually tightened restrictions over the past month, with 23 states accounting for nearly 75 percent of overall output rolling out relatively strict lockdowns. Q3CY21 might witness a guarded and staggered unlocking, but underlying caution will sustain. Higher rural infections increase the risk to farm and non-farm output (two-thirds of total). Higher allocations towards medical needs will weigh on disposable income as will an adverse hit to the consuming upper middle/middle class. Risks of subsequent waves, inadequate vaccination, and fears over higher mortality in the younger population are other factors expected to dampen demand for longer versus the first wave.
Is an inflation scare around the corner?
India’s inflation trajectory was elevated compared to its regional peers in FY21, largely due to domestic idiosyncrasies. Into FY22, the quasi-lockdowns have not disrupted supply chains and inter-state movements especially for (food) perishables to the scale in 2020. However, the pressure from rising input costs visible in PMI price indices as well as global commodity indices is likely to feed through to manufacturing inflation, eating into the corporate margins.
Notwithstanding favourable base effects, a drawn out rebound in consumption alongside narrower margins for the investing community prompts us to recalibrate our FY22 growth expectations. There are few potential tailwinds in the second half of the year, when the vaccination pipeline beefs up, demand might revive faster as was the case in other affected countries in the region and positive net exports lend an additional hand.
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