Out of performance: COVID threatens India’s recovery Business and Economic News

Just two weeks ago, the International Monetary Fund raised India’s economic growth forecast to 12.5%, the fastest rate among major economies. Now, as the Covid-19 cases grow the most in the world, this sharp approach is increasingly in doubt.

Delhi, the political capital of India, is mostly empty and the markets have been left almost empty with almost all shops closed, in response to police officers put in place by the local administration to deal with the pandemic. The scene is not so different in Mumbai, a financial hub that accounts for 6% of national production.

Yet, for now, Prime Minister Narendra Modi is avoiding a national shutdown and is pushing states to keep their economies open. Therefore, economists express risks to their forecasts, but they do not yet throw them all together.

“This second wave of virus cases may delay recovery, but Fitch believes it is unlikely to unravel,” the rating company said in an April 22 note. It maintained its 12.8% GDP growth forecast for the 12 months to March 2022.

The Bank of India Reserve also maintained a growth estimate of 10.5% this month this year. But Governor Shaktikanta Das said the rise in infections provides greater uncertainty and could lead to a return to normal economic activity.

High-frequency data has already shown a sharp contraction in retail activity to April 18 of the week compared to the pre-January 2020 pandemic level, Abomish Gupta of Bloomberg Economics said. This is a key risk for an economy that consumes 60% of its gross domestic product.

Activity Hit

“Localized containment measures will drive growth,” said analyst Teresa John Nirmal of Bang Equities Pvt. In Mumbai, considering that 10 Indian states, which account for about 80% of the country’s Covid-19 cases, account for nearly 65% ​​of national production. Still, John left his “conservative” growth unchanged in the current 7% year.

The reluctance of economists to re-examine their growth forecasts stems from expectations that the crisis will soon continue. Boosting that confidence is a vaccine that covers more than 100 million people in the nation’s population of more than 1.3 billion, in addition to the promise that tax and monetary policy makers will continually help.

“While the speed at which the cases are growing is high, this wave is expected to be relatively short-lived,” said Kotak Mahindra Bank Ltd.’s Upasna Bhardwaj, one of the few who has slashed economic growth forecasts – from 50 percentage points to 10%. “However, the uncertainty remains,” he said.

That uncertainty doesn’t seem to be going away in a hurry. India had 349,691 new coronaviruses and 2,767 deaths on Sunday. With nearly 17 million cases, it is the second most affected nation in the world. Only Bloomberg’s Virus Tracker in the US shows behind it that only 11 out of 100 people in India have received a vaccine dose.

Although the outbreak has plagued the nation’s hospitals and crematoria, the economy, which began to recover from an unprecedented recession last year, has also affected consumer confidence.

“The rise in infections has led to the re-establishment of partial blockades in cities and states, and if the situation worsens it could lead to complete closures,” said Kristy Fong, chief investment officer for Asian equities at Aberdeen Standard. “This will have an impact on the reopening of the economy and opportunities for recovery.”

These concerns have helped make the nation’s benchmark stock index the worst in Asia this month, given the impact of the rupee, which has been the region’s worst performer in the last month, on traders ’growth in economic growth.

[Bloomberg]

Although policymakers have indicated that they are ready to take steps to support growth, failing to flatten the virus curve could put pressure on monetary and tax policies that have exhausted most of the usual space already available to them.

The government has lowered the fiscal limit, writing 12.1 trillion rupees ($ 162 billion) in loans almost on record this year to boost spending on the economy. For its part, the RBI has held back since it lowered interest rates to record last year. Instead, it has relied on unorthodox tools, such as the Government Securities Acquisition Program or GSAP announcement, to keep borrowing costs under control.

Sovereign bonds also have more opportunities to offer if the government has to spend more to deal with the second wave. Demand is warm at auctions and the market uses the help of central banks to help ease supply pressure.

“Given the large debt program and the growing macroeconomic situation, growth concerns are back again due to the second wave of the pandemic, and on the other hand, inflation could be stuck, we believe bond yields will be softened despite RBI’s commendable efforts,” said B. Prasanna, Head of Global Markets, Trade, Sales and Research at ICICI Bank Ltd.

With or without blockages, some economists see the pandemic as weighing on consumer confidence – the backbone of the economy.

“The increase in the number of cases could be a negative distraction from the growth momentum and economic recovery,” said Shubhada Raok, founder of QuantEco Research in Mumbai, who sees great success in the service sector, especially the kind that is hard to relate to. “Potentially that growth could be one percentage point. This remains a developing story.”