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India’s Economy Begins to Feel Pandemic Second Wave Pinch

Just as the Indian economy was beginning to show signs of recovery following last year’s disastrous downturn, a second COVID-19 wave could undo the gains.

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India’s Economy Begins to Feel Pandemic Second Wave Pinch

A factory in Delhi, India.

Credit: Flickr/ILO Asia-Pacific

The second wave of the COVID-19 pandemic which struck India between the end of February and beginning of March continues unabated. The alarming rate at which it has spiraled out of control especially in the last four weeks has left citizens helpless, and also exposed the under-preparedness of authorities to deal with this unprecedented health crisis. While daily COVID-19 cases started to rise steadily since end of February, it was in the first week of April that India surpassed the first wave peak of 97,654 daily cases (on September 16 last year). Since then, the country has witnessed a huge surge in daily cases with the country hitting grim milestones each day (consistently over 300,000 cases since April 20).  The country now accounts for almost half of daily COVID-19 cases and almost 30 percent of daily deaths due to the disease globally. Many experts believe that the actual numbers of cases and fatalities are much higher than those being reported.

While the full-blown health crisis has destabilized the country’s medical infrastructure, leaving citizens scrambling helplessly for oxygen and hospital beds, economic activity has also started to feel the pinch. Despite the central government refraining from announcing a national lockdown, economic risks have been mounting amidst state-level restrictions and partial lockdowns, due to which sectors like travel, tourism, hospitality and retail are expected to take a massive hit. The first signs were visible in the IHS/Markit Services Purchasing Managers’ Index (PMI) which eased to a three-month low of 54 in April from 54.6 in March. As localized lockdowns across states came in phases, the full impact on the contact sensitive service sector will only be seen in May as most state governments have extended lockdowns further. According to the Shopping Center of Association of India, 90 percent of their pre-pandemic business revenue had recovered by mid-March 2021. However, with the second COVID-19 wave hitting hard, they are staring at huge losses. The service sector has significant backward linkages with other sectors as well which could lead to a negative multiplier effect going forward.

If things go downhill from here, India’s already fragile and uneven economic recovery may take a massive hit in the first quarter of this fiscal year (April- June 2021), signs of which are visible through some leading economic indicators. The manufacturing PMI is a composite weighted average index of new orders, output, employment, suppliers’ delivery times and stocks of purchases derived from a survey of private manufacturing companies. The manufacturing PMI remained largely flat in April compared to March levels of 55.4. However, growth for new orders and output eased to eight-month lows. Fuel demand also saw a downward trend in April compared to March. Petrol demand declined 6.3 percent while demand for diesel was down 1.7 percent in April on a month on month basis. Some of the largest car manufacturers in the country registered declines in sales of 7 to 9 percent in April compared to the previous month. The automobile sector has high backward and forward linkages with other sectors of the economy and is hence a credible indicator of underlying economic trends. Similarly, electronic e-way bills and permits needed for inter-state and intra-state transportation of goods fell 17 percent month on month in April indicating a decline in trade and transport activity.

On the employment front, too, indicators are not very encouraging. As per the Centre for Monitoring Indian Economy (CMIE), unemployment rates rose in April due to disruption in business activity amidst state-level restrictions. The impact in urban areas was higher where unemployment rate rose to 9.8 percent from 7.3 percent in March, while in rural areas it jumped to 7.1 percent in April from 6.1 percent in March. CMIE reports that 7.5 million jobs have been lost in April. Another useful indicator that is being looked at is the demand for the government’s rural employment guarantee (MNREGA) scheme as it can, to some extent, gauge the extent of reverse migration from urban areas to rural areas in pandemic times. Demand for MNREGA employment rose in April (37 million) compared to March (36 million) as more people demanded work under the scheme. This demand has remained high since the onset of pandemic. It had declined as India started relaxing lockdowns in August last year. This needs to be closely tracked in the next few months.

The sluggish recovery in broad indicators like the index of industrial production (IIP) and core sector performance has not brought any relief either. These indicators are released with over a month lag. Hence data is only available for February-March. In particular, core sector performance — representing eight infrastructure industries (like coal, cement, steel, petroleum, electricity etc.) — has been rather dismal, contracting 7 percent in fiscal year 2020-21 on a base of 0.5 percent in fiscal year 2019-20 (pre-pandemic year). The index of industrial production also slumped by over 11 percent in 2020-21 (averaged from April 2020 to February 2021 average with March numbers not being available yet) on a base of -0.6 percent. Going by the trend of leading indicators, we may not witness any substantial recovery in these indicators (in substantial terms as year on year growth numbers will be artificially inflated due to low base of last year) as the impact of partial lockdowns start impacting supply chains and domestic demand.

Some visible silver linings should also be viewed with caution. Goods and services tax (GST) collections (seen as a proxy for pick up in consumption demand and economic activity) hit a record high of 1.4 trillion Indian rupees (about $190.5 billion) in April, up 16 percent month on month compared to March collections. However, April collections account for sales in March; hence the real impact of the second wave may not be captured in these numbers. Also, conventionally GST collections see a pickup at the end of the financial year as companies close their account books. Export performance has also been encouraging in April underpinned by strong global growth. However, if the pandemic rolls over the next few months, we may see a ripple effect on all sectors of the economy.

The Reserve Bank of India has stepped up and announced a slew of measures to counter the economic crisis and support health infrastructure in the country. This includes a term liquidity facility of 500 billion Indian rupees (about $68 billion) to banks until March 2022 for priority lending to vaccine makers, hospitals, pathology labs, oxygen suppliers, medical equipment suppliers, and patients among others, support for micro and small enterprises, and restructuring of loans for individual and small borrowers for up to two years. While these measures will help ease some pressure on vulnerable sectors, the finance ministry will also have to chalk out a strategy in terms of fiscal support for vulnerable sectors to deal with the aftermath of health crisis. However, the biggest stimulus to the economy undisputedly remains stepping up of vaccination for all age groups across the country.  Currently only 2 percent of the population is fully vaccinated. In the end, an unprecedented crisis needs an unprecedented policy response. This is no less than a war, and India needs to fight this together to save the world’s largest democracy from the wrath of the deadly virus.