An insight into the cost of lockdowns, how long drag to growth continue, and what next after the second wave.
To use a cricket analogy, if the first wave of Covid-19 was the collapse of the opening batting order, the second wave would be akin to the middle order collapsing just as the run rate was recovering. Unfortunately, in terms of both fatalities and lockdowns from April onwards, the intensity of the second wave quickly put an end to the nascent recovery that had been picking up pace from mid-2020. With states taking their first steps towards relaxing lockdown restrictions in June but vaccinations yet to truly accelerate, what will happen to the growth run-rate next?
None of these have straightforward answers and considerable unknowns dog all. However, as we enter into June, we have the benefit of two months’ worth of “unconventional” daily and weekly data on economic activity (e.g., mobility trackers, power demand, rail traffic, GST e-way bills etc.) since the second wave struck. We also have a near-full deck of “conventional” monthly data for April, and the first flush of the data for May. All in all, they go some way in clearing the fog around these questions.
How much is the second wave hurting growth currently?
Despite states entering lockdowns from April onwards, economic data for the month have been relatively resilient. Nevertheless, by the end of April, the country had drifted mainly into a quasi-national lockdown, with most states announcing curbs to control the pandemic.
This suggests that the more pronounced impact of the second wave will most likely materialise in the May economic data. The first set of these data were released this week, including manufacturing and services PMI’s, preliminary readings of auto and diesel sales, and provisional merchandise trade data.
These data show that consumption and services have taken a larger hit, although robust prospects for the agricultural sector could explain why tractor sales have been doing better. Strong global growth and easier lockdown restrictions have led to a dichotomy between the outturn of exports and imports. We estimate that, while exports remained ~19pp above their pre-pandemic (January-February 2020) levels in May, the slowdown in domestic demand led to a sharper fall in imports to 2pp below their pre-pandemic levels.
However, regardless of which growth indicator we study, one trend clearly emerges: the hit during the second wave is significantly less than the first. This corroborates with our analysis of countries that have gone through second and third waves and suggests that the fall in mobility leads to a much smaller fall in GDP growth. This is a testament to the more flexible and fragmented nature of lockdowns this time around and also reflects the more pandemic-ready economy, where firms, workers and consumers have adjusted to the new normal.
How long will the second wave continue to overshadow growth?
This depends entirely on how soon the state-wide restrictions are lifted, whether the pandemic curve remains in check thereafter, the fear factor among individuals and the pace of vaccinations.
Already, states are slowly embarking on a calibrated easing of restrictionsto balance lives and livelihood. The majority of the states are likely to implement a phased relaxation of restrictions this month. This implies that mobility and actual activity data should gradually improve.
This looks to be underway already. Since the last week of May, we have observed an inflection in the trajectory of the ultra-high frequency indicators. After falling by around 40pp for the past eleven consecutive weeks, our weekly tracker of economic activity – the Nomura India Business Resumption Index (NIBRI) – registered its first uptick in the week ending May 30, driven by a bottoming of mobility indicators and an improvement in power demand. If the NIBRI continues to inch up from here, it will support our view that the worst-hit to activity is limited to May, and a sequential improvement will follow in June.
Nevertheless, two risks bear monitoring. First, mobility is a real-time measure of activity, and the improvement in the broader economy will likely be more gradual. In rural India, where the virus has been particularly destructive this time around, we may see a twin-track recovery, with the farm sector doing well (due to good monsoons, high procurement etc.), while the non-farm sector recovers more slowly.
The second risk is the virus itself. For the broader slowdown to be localized to Q2 (April-June), the pace of vaccination must continue to pick up (and lockdown relaxations do not result in cases resurging again). Our analysis of the vaccine supply pipeline suggests that the pace of inoculation should pick up this month and rise at a much faster rate from July. As existing vaccine makers increase their capacity and new vaccines enter the market, we project that around half of the total population should be fully vaccinated by the end of 2021 (assuming two doses). Thus, India’s ‘vaccine pivot’ point is getting closer.
What’s next after the second wave?
The second wave had taken a significant humanitarian toll, besides serving yet another blow to the informal economy, even before it recovered from the first wave shock. Households had accumulated precautionary savings during the first wave but have largely spent that corpus by the time the second wave struck. Despite these apparent negatives, many cyclical tailwinds are waiting in the wings. This is turning out to be a blockbuster year for global growth, which has historically synced with domestic upcycles. Financial conditions are at their easiest levels in years, making it an excellent launchpad for interest sensitive sectors to recover. The FY22 Budget already has a strong capex focus which should offer some counter-cyclical buffer.
The match-clincher batsman of this match, though, is ultimately going to be vaccinations. If India indeed manages to vaccinate half of its population by year-end, then a win is in sight. If not, then recurring pandemic waves would have greater scarring effects. So from our perspective, we see the glass as half-full.
Sonal Varma is the Chief economist for India and Asia ex-Japan at Nomura, Aurodeep Nandi is the India economist at Nomura.