the Bank of America Securities has estimated that a month-long national lockdown would cost 100-200 bps of GDP.
A surge in new COVID-19 cases in Maharashtra and many large states poses risks to economic growth, even though a national lockdown looks unlikely. Localised shutdowns will be disruptive for economic activity and can cause short-term shortages not just in a specific state but elsewhere. On the positive side, India is better equipped with experience, medicines, healthcare infrastructure and vaccines to deal with the fresh outbreak than it was a year ago.
Yet, banks, brokerages and rating agencies have sounded caution on India’s growth prospects in research notes to their clients. They note that industrial output had faltered in January. The output of core sectors had fallen at its fastest pace in six months in February. Investors have become nervous about stock market returns over the past two months and foreign investors have been selling Indian equities.
The Likely Impact
In a late March note, ING Bank warned that the resurgence in cases was beginning to undermine economic recovery.
“Although the low base effect should sustain GDP growth on an upward path in the next couple of quarters, the balance of risks remains tilted to the downside,” it read. Rating agency ICRA, in a note around the same time, echoed similar views. It said that the fresh surge in cases would temper the extent of the base effect led recovery anticipated in the immediate term and may lead to some supply-side disruptions.
ICRA has forecast 10-11 percent growth in real terms for the current fiscal year, which is about the same as the Reserve Bank of India’s forecast of 10.5 percent. It added that the key upside of its projections was a faster than expected rise in government spending. Its list of risks to growth included the spread of the current surge to more states, a spike in commodity prices to a level that hurts demand and the likely ineffectiveness of the existing vaccines to the new variants of the virus.
Nomura has projected that growth will temper to 12.2 percent year on year (YoY), from its baseline projection of 13.5 percent if the second wave worsens and necessitates state-level restrictions. It does not expect harsh measures that would adversely affect the economy.
In a research note on April 6, the Bank of America Securities has estimated that a month-long national lockdown would cost 100-200 bps of GDP. Given such high economic costs, the authors expect that the Centre and state governments will prefer to tighten COVID-19 regulations and impose night curfews and localised lockdowns.
Is There A Pattern?
The fresh outbreak has spread more aggressively in many states compared to the first round, but there are no uniform trends across states. The second wave spread across Kerala as early as mid-September of 2020, peaking in October when the daily count crossed 10,000 in a few days.
Since then, the number of new cases reported has declined gradually to less than 3,000 cases a day. The second wave in Maharashtra took an aggressive turn in late March, after appearing in February. The state reported over 57,000 cases on Monday and might experience a peaking of cases soon given the restrictions put in place. States such as Chhattisgarh, Karnataka, Uttar Pradesh, Delhi and Punjab are among those reporting a surge in numbers in recent days.
The lockdown of the kind imposed by Maharashtra will affect the services sector the most– chiefly, retail trade, hospitality sector, recreation activities, fitness and grooming services. Effectively, sections of the economy that were among the last to be allowed to normalise will see their businesses disrupted once again by the restrictions in the state.
Transportation services would also suffer a loss of income, as they have run at 50 percent capacity. Daily wage earners, mostly migrant workers, working in these establishments and at construction sites, will once again suffer. Maharashtra contributes about 14 percent of the national GDP, with a large industrial base and so a lockdown in the state will impact the nation’s growth.
The damage to the services sector will get accentuated if the infection surges in other states as it did in Maharashtra, necessitating similar restrictions on the movement of people and the running of businesses. Meanwhile, the Delhi government has - on April 6 - announced that night curfew would be in place till the end of the month.
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While the second wave appears to be in the early stages, calibrated measures to contain the spread of the virus will protect the economy from shocks. A standstill kind of lockdown is not an option as neither the Centre nor the states can afford another contraction in their revenues.
All budget projections for revenue growth and expenditure in 2020-21 had to be drastically cut as the economy contracted due to the harsh lockdown. The Centre needs robust revenue growth to implement infrastructure projects announced in the budget and the previous years, provide for welfare schemes, lower its borrowings and pay compensation to states for shortfalls in Goods and Services Tax revenue growth.
The Centre has committed to compensate states for tax shortfalls for five years from the date of the implementation of the tax regime (July 1, 2017). The Centre would not want to disturb trends in revenue growth seen in the past quarter and so it will tread carefully on imposing curbs.
Change In Tack
It's also important to note that there has been a change in strategies adopted by the Centre to tackle the impact of the pandemic. The priority has shifted from saving maximum lives to achieving a balance between saving lives and livelihood. Thus, Maharashtra allowed factories to continue operating even as it has ordered several businesses to stay shut for a month.
That will ensure factory workers do not rush back to their villages fearing loss of livelihood. The Centre’s recent instruction to states to contain the spread of the virus includes enforcing test-track-treat protocol, COVID-19 appropriate behaviour, and standard operating procedure (SOP) on various activities. States are allowed to impose local restrictions where required.
Lockdowns of any form can prove to be disruptive. It can affect supply chains, create shortages and affect production cycles in the state that imposes restrictions and elsewhere in the country. It might even affect India’s recovering external trade, which has grown in the past few months, despite container shortages.
Worry Lines Remain
Widespread, through localised, lockdowns together with rising prices for crude oil and base metals continue to cause concern for growth. High crude oil prices push up costs for everyone while rising commodity prices raise inputs costs for manufacturing units. In its monthly economic report for March, the department of economic affairs (DEA) in the ministry of finance has flagged risks to growth such as elevated oil, commodity and food prices.
India’s basket of crude oil prices had climbed to $65 a barrel in March, inching up over the months from a low of under $20 a barrel a year ago. Metal prices are at their highest since 2011. Yet, there is optimism in the DEA’s monthly economic report that the country will ride out the current surge as “India is now well armed to combat any downside risk posed by the recent surge in COVID-19 cases”.Click here for Moneycontrol’s full coverage of the coronavirus pandemic