Covid surge likely to take toll on the GDP recovery

Several indicators show the economic recovery is becoming sluggish in the wake of the second Covid surge

In spite of the raging second wave of Covid in this country, global credit rating agencies as well as the International Monetary Fund are confident that it will continue to grow at double-digit levels this year. Moody's Investor Services has kept its projection of 13.7 per cent unchanged while Barclays continues to expect 11 per cent growth in 2021-22. The IMF has even revised its projection upwards from 11.5 to 12.5 per cent though the chief economist has clarified the assessment was made in the first week of March. The Japanese brokerage Nomura, on the other hand, has pegged its growth estimate lower from the original 13.5 to 12.6 per cent.

Despite the positive outlook of these agencies, several indicators show the economic recovery is becoming sluggish in the wake of the second Covid surge. Industrial output is not rising as was expected after positive growth was recorded in November and December 2020. The Index of Industrial Production (IIP) has shown a contraction for two months in a row, 0.9 per cent in January and now 3.6 per cent in February this year. During this month, it was the critical manufacturing sector that accounted for a decline of 3.7 per cent while mining output slipped by 5.5 per cent. Overall, the IIP contracted by 11.3 per cent in the first eleven months of 2020-21 (April to February) as compared to one per cent growth in the corresponding period of 2019-20.

Another indicator of business activity, the IHS Markit Purchasing Managers Index which is based on a survey of business managers in the private sector showed a dip in both domestic demand and output. It fell to a seven month low of 55.4 in March from 57.5 in February. It indicates growth is continuing as a reading of 50 or 50 per cent indicates expansion over the previous month. But the impact of the renewed Covid surge is clearly being felt by industry as demand growth has been constrained by the altered circumstances.

The outlook worsened considerably after the announcement of a two week lockdown in Maharashtra, one of the biggest industrial and commercial hubs. In addition, Mumbai is the financial capital of the country. Movement curbs have also been declared in several other states including Delhi which has now opted for a weekend curfew as well. Night curfews have been imposed in some states in a bid to check the chain of transmission. The problem is, such curbs have a direct impact on country-wide supply chains. Transporters federations are concerned over restrictions on night operations as this ensures sustained cargo movement during the daytime. Migrant workers are moving out of key industrial centres as commercial establishments are either closed or face restricted hours. The result is that manufacturing units are beginning to face labour shortages. This has, in turn, pushed up wages of temporary or contract workers though this is likely to be only temporary phenomena.

One must recall and learn from the experience of last year in relation to migrant workers. It was in April last year that the Centre for Monitoring Indian Economy (CMIE) estimated that 122 million jobs had been lost suddenly. Most of these came back but its surveys showed that ultimately about 9 million jobs were lost during the pandemic in 2020. Imposition of lockdowns and movement curbs could mean a repeat of last year's scenario. Currently, restrictions in some form have been imposed in Punjab, Odisha, Gujarat, Haryana and Puducherry. Uttarakhand has gone in for night curfew but at the same time is hosting the Maha Kumbh which is being attended by lakhs of pilgrims. In other states, economic operations will be derailed in export hubs like Jodhpur and Ludhiana which are centres for furniture and apparel manufacturing.

The cumulative impact of these curbs will be visible only after a few months. According to an assessment made by Barclays, the active new cases may stabilize by May as recoveries should catch up by then. It has also envisaged that there would be some shaving off of the expected GDP growth for the current fiscal due to the second Covid wave. But it has retained its projection of 11 per cent growth in India for 2021-22.

The US based Moody's Investor Services has also retained its projection of 13.7 per cent growth but warned that the steps taken to contain the second wave pose a "credit-negative threat to economic recovery". At the same time, the agency has argued that the absence of a national lockdown like last year and the focus on localized containment measures will reduce the impact on the economy. It pointed to other mitigating factors such as the progress on vaccinations which is now the fastest in the world as well as the relatively low death count as compared to other countries. Nomura, on the other hand, has less confidence in the resilience of the economy and has reduced its projections for the current fiscal.

The fact is the prospects of a V-shaped recovery are now receding slowly. It may be more realistic to envisage a K-shaped recovery that is slower and more uneven, given the fact that the second Covid surge is having a disruptive effect on economic activities across the board. Other indicators like Goods and Service Tax (GST) collections, power generation, railway freight earnings and even oil products consumption may have reached pre-pandemic levels in the last few months, but this upswing is not likely to last long. For the time being, it can only be said with certainty that there is no certainty of what the future holds on the pandemic front. It is thus time to pause as projections for the current fiscal can only be made with greater clarity after the current Covid scenario takes a turn for the better.