It is raining cuts on economic forecasts for India as a second wave brings back lockdowns, supply chain disruptions and worse, uncertainty. The consensus among analysts and even policymakers is that the country needs high-speed vaccination to embolden its citizens to begin working and spending like before. In essence, this would lift the economy from the depths of recession sooner.
The pace of vaccination has fallen in recent weeks, sending ripples of worry among investors. As such, the economy has suffered due to the pandemic and the strict lockdowns last year, shrinking roughly 8% in FY21. The contraction was despite a string of monetary and fiscal measures to mitigate the lockdown impact.
The second wave is more damaging, even though lockdowns are less stringent and the link between reduced mobility and economic activity seems to have weakened slightly.
What is different this time is the increase in uncertainty due to regional lockdowns, a potential disruption of supply chains yet again and a threat to the rural economy as the virus spreads there. In short, the second wave may look visibly less threatening to economic activity but it is not necessarily so.
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Even as the government is patching together a vaccine strategy, the economy needs other things to fall in place for FY22 to be a less painful year.
Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets (India) Pvt. Ltd, lists four measures that are necessary besides speedy vaccination for the economic recovery to strengthen. “Beyond that (vaccination), we see four key policy steps for government focus: strengthening the Insolvency and Bankruptcy Code, sustaining social welfare spending, getting disinvestment done urgently and choosing export promotion over import substitution. These, we think, can help heal some of the pandemic scars,” Bhandari wrote in a note.
Economists believe that the government has a bigger role to play this time and monetary policy may have to play second fiddle. “With India witnessing a much ferocious second covid wave, the major lesson for the government is to loosen its purse strings and support the household sector directly via income transfer/employment guarantee,” a Motilal Oswal Financial Services Ltd report said. As such, the Reserve Bank of India is willing to expand its balance sheet to accommodate the government in its finances. In fact, the central bank may begin to hike interest rates owing to inflation.
“In our baseline, we expect a reverse repo rate hike in Q4 and 50 basis points of repo rate hikes in H1 2022,” wrote analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd in a note.
Meanwhile, the economy is expected to contract sequentially in the June quarter against earlier expectations of growth. Bhandari expects a contraction of 13% in gross value added in seasonally adjusted terms.
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