The economic impact of the second wave should be localised to April-June 2021-22. The sharp drop in the virus caseloads has enabled states to embark on a gradual reopening of the economy. This is helping the economy turn a corner. With people out shopping and driving, mobility has perked up. Power demand has picked up, after a steep fall in May. As shops and factories reopen, the labour market is also gradually on the mend, with the unemployment rate lower.
We have combined such indicators into an aggregate index called the Nomura India Business Resumption Index to measure the state of business resumption. Pre-pandemic, in February 2020, this index stood at 100. It dropped to a low of 45 during the first wave, before nearly fully normalising in mid-February 2021. The second wave derailed the swift V-shaped economic normalisation, pushing the index back down to 60 in the third week of May, but the reopening in June has already led to a sharp rebound in our index to 81 as of June 20, with a further rise on the cards.
Other high-frequency data, such as railway freight and passenger revenues, goods and services tax e-way bills – all point to a similar story: A sharp drop in May, but also a swift revival in June, so the economic impact of the second wave should be limited to this quarter.
In addition, unlike the sledgehammer approach last year, the lockdowns during the second wave have been more nuanced with many sectors allowed to operate. Global growth is much stronger today, whereas the world was in a synchronised slowdown during the first wave.
So, exports will likely be able to partly offset the slowdown in domestic demand. Businesses and consumers are better prepared to handle the supply chain disruptions and have adapted to the new normal with greater digitisation and online shopping.
What this suggests is that while the second wave has been a big humanitarian crisis, its economic impact will likely be much less than feared.
Of course, we are not out of the woods yet. The intervening period between the end of the second wave, but before widespread vaccinations will be a tricky path to navigate. The virus has receded precisely because of the lockdowns and as states reopen and mobility increases, there is a risk of further waves. The virus continues to mutate into riskier variants, and our vaccinations have not yet reached a critical threshold.
Until we reach that point, balancing lives and livelihoods will be crucial. This means continued restrictions on sectors and events that could turn into super spreaders, while allowing the rest of the economy to operate.
The bad news is that the economic outlook will remain hostage to the health policy for some more time, but the good news is that there is light at the end of this long, dark tunnel.
Vaccinations are finally taking off. The scorching pace of nearly 6 million daily vaccine doses given last week may not be sustained in the next month, because there are still supply constraints, but the pace is set to rise further in July and can be sustained at over 8 million per day from August.
Higher domestic production of already approved vaccines, new vaccine approvals and imported vaccines will significantly improve the domestic vaccine supply outlook. By the end of 2021, our estimates suggest that total vaccine supply will equal 1.7 billion doses, enough to inoculate half of the total population, assuming two doses.
Vaccinations are key to unlocking economic recovery. The pandemic recovery has been uneven, with contact-intensive services unable to fully normalise due to the virus threat. Vaccinations offer hope for these services. They will also have other spillover effects that are often under-appreciated, especially the uncertainty premium.
The fear factor due to recurrent virus waves has pushed consumer confidence to rock bottom. Uncertainty over the durability of the growth recovery is holding back both businesses and the financial sector from taking any long-term decisions. Vaccinations will lower this uncertainty, boost consumer and business confidence, reduce risk aversion, and oil economic wheels again. We will learn to live with the virus over time.
There are two other growth boosters. Domestic financial conditions are already very accommodative with ample liquidity and low interest rates. These should support stronger demand from the interest-rate sensitive sectors. Plus, the upswing in the global growth cycle will be a plus.
Historically, India’s exports and investment cycles have moved in tandem, so our forecast of global GDP growth of 6.4% in 2021 and 4.7% in 2022, versus a 10-year average of 3.7%, will be supportive of a cyclical investment recovery in India.
As we traverse the coming months, policy priorities should continue to be aligned with these economic needs. Until the economy fully reopens, targeted support for survival is still essential for households and sectors worst affected by the intermittent lockdowns. A more durable growth recovery still requires a serious multi-year push on infrastructure investments, so that the decline in India’s trend growth can be arrested. But the biggest fiscal stimulus that the economy needs right now is a simple one: A health policy stimulus.
The writer is the Chief Economist for India and Asia (minus Japan) at Nomura
