The fast-rising second wave of COVID-19 in India is threatening economic recovery, and if the virus is not contained at this juncture, the consequences could be severe, said experts.
An exponential rise in cases over the last few weeks has crippled the healthcare and medical infrastructure of the country. Regional lockdowns and restrictions have once again come to haunt the unorganised sector just as it was recovering from a fierce round one with the virus.
As a result, several rating agencies and economists have lowered their economic growth target for FY22. However, the vaccination drive and proactive policymakers can cushion this fall. Experts feel if the second COVID wave peaks in May, there could be a marginal impact on economic growth, but beyond the same, the impact could be severe.
"The trend of positive news alternating with negative news continues. President Biden's decision to back waiving intellectual property rights on vaccines is a big positive. This will quicken the vaccination process enabling countries like India to come out of the pandemic faster. But data on daily infections indicate a rise. Also, lockdowns & restrictions on mobility are increasingly impacting the economic recovery," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
He feels now there are two broad views regarding the peaking of the second wave: One, peaking by mid-May; two, peak by July.
"If the first scenario plays out, the hit to economic growth will be marginal, say, 1 percent decline from the estimates of 11 percent growth in FY22. In the second scenario, it will be much worse," he explained.
Ambareesh Baliga, Market Analyst and Independent Consultant feels the second wave could have a disastrous effect on most of the small and micro-entrepreneurs who are not listed as providers of essential services or products. "After a tough FY21, though there were Government sentimental booster and some sops for this segment, they were trying to get back on track when again got struck by the pandemic. I wonder how many of such businesses will wind up, further creating further pressure on the financial sector," he said.
Already economists have reduced the growth forecasts by 1-2 percent. "I will not be surprised if there is a further downgrade of 3-4 percent on the forecasts made at the beginning of CY21," Baliga said.
S&P Global Ratings on May 5 slashed India's GDP growth forecast for the current financial year to 9.8 percent saying the second COVID wave may derail the budding recovery in the economy and credit conditions. The US-based rating agency in March had a 11 per cent GDP growth forecast for India for the April 2021-March 2022 fiscal on account of a fast economic reopening and fiscal stimulus.
Barclays also reduced its GDP growth projections, and now sees economy growing by 10 percent YoY against 11 percent YoY earlier in FY22.
"With more than 4,00,000 new COVID-19 infections per day, India has become the centre of the global pandemic, an unwelcome position it looks set to hold for some time. The economic costs of the current surge in cases is much lower than last year's national lockdown, but the bill is rising. In our base case, we now estimate economic losses of $38.4 billion, with restrictions likely in place until the end of June," said Barclays.
In a more pessimistic scenario whereby the pandemic is not brought under control soon, the economic losses could be much higher, the brokerage added. If mobility restrictions remain in place until the end of August, this could point to another 120 bps of downside to annual real GDP growth, dragging FY22 growth to 8.8 percent.
The market so far corrected more than 5 percent from its peak in mid-February and has been in the range on the hope that the economy may not see much impact from the second COVID wave given the current data points.
"If the markets are holding up despite expectation of a weakening corporate performance as a fallout of the second wave, we would be creating a bubble powered by liquidity. Liquidity is a friend of the trend, but it comes at a price," Baliga said.
Baliga said a correction beyond 10 percent will create panic as most people have been playing momentum with overconfidence. "We could close in the negative in FY22," he said.
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