COVID-19 Second Wave – Understanding the Impact on Indian Economy [Part I]

Overview:

Wave-1

• COVID had a devastating impact on Indian economy, when it struck out of the blue in March 2020.The government imposed the strictest lockdown, which resulted in almost complete stoppage of businesses in the country. The lockdown was necessitated by the urgent need to control the spread of COVID, as the fragile health infrastructure of the country was inadequate to treat and manage the expected large number of infected cases.

• The government faced the Hobson choice of saving the lives of its citizens or to save the economy. The government opted for the former for the right reason that if life is there, earnings can be recouped later.

• As expected, the economy slipped into a record negative GDP growth of more than 21% in Q1 2020. Active cases started coming down from July, 2020 onward, with almost full lifting of lockdown in October 2020. This resulted in gradual recovery of the economy which peaked in Q1, 2020.

Wave-2

• Just when everyone started feeling that India had successfully tamed the pandemic, wave-2 of the COVID-19 pandemic struck, which was more lethal and virulent.

• Infections spread at a break-necking speed. The extent and the speed of spread shocked the nation and the government, which had become complacent by then. Most people stopped following Covid appropriate behaviour and the local authorities and governments were lax in enforcing these behaviours.

• India's health infrastructure went into a tailspin and was unable to manage an unprecedented rise in cases. Apart from the fact the virus was more lethal and was not responding effectively to norms of treatment followed in wave-1, shortages of beds, ICUs, Oxygen supply, essential medicines etc., resulted in tragic deaths of infected people, which was significantly more than wave-1.

How the Government responded to control the impact of wave-2?

On the health infrastructure front

• The government’s initial responses (both central and state) in controlling the virulent viruses were tardy.

• However, though belatedly, the Central government started taking various steps such as increasing the availability of beds, ramping up oxygen supplies in a record time from 900 MT to 9000 MT with the help of industries. Foreign governments also pitched in to send oxygen, concentrators, essential medicines etc, which also helped in managing shortages.

• After reaching a peak of around 4 lacs cases per day in Mid May 2021, cases are now down to less than 50000 per day. Consequently, the situation is now under control the health infrastructure front.

 On the economic front

• Learning from experiences of wave-1, the government resorted to a limited lockdown, which ensured that most of the industries were running, essential activities were open though for a limited time, supply chains were not disrupted, factory employees were able to go to work etc.

• These restrictions are now being gradually being eased by state governments depending on reduction in active cases and availability of beds, oxygen supplies etc.

Overall impact on corporates:

• As per ET report, according to a nationwide survey of businesses conducted by FICCI and Dhruva Advisors, 58% of the companies saw a ‘high impact’ on their businesses due to the state-level lockdowns, 38% reported a ‘moderate impact’ on their operations. 58% of the surveyed companies reported weak demand as the biggest challenge they are facing under the current environment. This was followed by ‘managing costs’ (56%) and ‘tight financial liquidity’ (43%) that emerged as other significant issues companies have to deal with in the present situation.

• As per ET survey of top CEOs of the country, 56% said that demand for their products or services had been adversely impacted by the second wave. 46% of CEOs see modest recovery over next two quarters,10% none and 49% see less than 10% revenue growth in Q1,2021-22 (ET report of 28th June,2021)

• Around 39% of CEOs see the economy bouncing back sharply, and 38% see over 20% revenue growth in FY22.

Impact on the rural economy:

• Wave-1 left the rural economy almost untouched due to lower case load in rural areas and less strict lockdowns. As a result, the agriculture sector, which provides employment to 58% of the population, continued to grow, aided by good monsoon and cheaper and higher availability of labour due to reverse migration from cities. Agricultural economy grew by 3.4% as against a contraction of 7.7% in the overall economy during the financial year 2020-21.

• In the second wave, rural areas were also impacted and the number of cases reported were more than urban ones from the second month onward, resulting in stricter lockdowns.

• In many districts, Mandis, vegetable vendors, and processing industries have also been hit. The average wage growth for the agriculture sector for the period of November 2020 to March 2021 has reduced to 2.9 percent (2nd wave) from 8.5 percent in April to August 2020 (1st wave).

Impact on the manufacturing sector:

The impact on the manufacturing sector (which contributes to around 17% of GDP) was lower in wave-2 than wave-1, as factories across India were allowed to open, though with lower capacity with a view to control the spread of the virus. The impact was mainly on account of lower capacity utilisation, off and on shutdowns, lower demand, particularly of non-essential items, and supply chain constraints. As per the IHS Markit India, Manufacturing Purchasing Managers’ Index (PMI) in May 2021, PMI slumped sharply to 48.1% in June 2021 from 50.8% in May 2021and 57.5% reported in February 2021, which is at a ten-month low. This resulted from falling new orders, reduced input purchases, business closures due to lockdowns, which triggered a reduction in output among the Indian manufacturers.

Impact on the service sector:

• The IHS Markit India Services PMI declined to 46.4 in May of 2021 from 54.0 in the previous month.

• Impact on the service sector, which contributes approximately 55% of GDP growth, in wave-2 is expected to be lower than wave-1. Service companies can operate smoothly as employees of most of the companies in this sector continued working from home. Learning from wave-1, companies were able to further ramp up infrastructure and other facilities required for ease of working from home. Employees have also become relatively comfortable working from home.

• Worst affected businesses in services were travel,  tourism, civil aviation, hospitality, multiplexes, mails, restaurants etc. which resulted in the overall negative growth of the sector in the financial year 2021. It is expected to continue in Q1 and Q2 of the current financial year, depending on the opening of lockdowns. However, a relatively short period of lockdowns as compared to wave-1, is expected to assist in faster recovery.

Impact on GDP:

• As per the latest data released by the Indian government, GDP contracted by 7.3 percent during the financial year 2020-21, which is the severest since Independence.

• As per the data available in public domain, manufacturing and constructions had lost almost two years of Gross value added (GVA). Core industries such as steel, cement, refinery had reached the level achieved in 2017. Sales of passenger vehicles had gone down to levels achieved 5 years ago. Sales of two wheelers had reached the levels achieved 10 years ago. The above data shows the gravity of the impact of Covid on the economy, which may take years even to reach back to normal level.

• RBI had predicted growth of 9.5% during the financial year 2021-22, downgraded from more than 10% projected earlier. Rating agencies across the globe have also downgraded projections made prior to wave 2. Moody’s from 13.7 percent to 9.3 percent, S&P Global Rating from 11 percent to 9.8 percent in case of moderate impact of the second wave, and for a worst-case scenario, would be 8.2 percent. As per ET survey of CEOs referred above, 56% of CEOs forecast 7-10% GDP growth in FY 22.and 26%, forecast growth of 26%.

Areas of concerns:

High Inflation:

• High inflation rate is a significant matter of concern. As per the data released for the month of May, 2021,theconsumer price inflation (CPI) stood at 6.3 per cent, which is considerably higher than RBI target rates of  4% .

• Wholesale price inflation (WPI) has touched a record 12.94%, and core inflation is also at a significantly higher level. All key sectors of the economy are in high inflation zone, particularly, fuel, food and vegetables, health care, metals, and other commodities etc.

Key reasons for high inflation rate are as under:

• Rise in global crude oil prices (mainly due to supply cut by producing nations and increasing global demand) and higher taxes (more than 50% of final costs to the consumers) which is being passed on to consumers. This in turn increases cost of transportation of key products used by consumers and increase in prices of food and vegetable oils used by consumers.

• Increase in global commodity prices including vegetable oil consumed. (India imports almost 70% of vegetable oils consumed in the country)

• Rise in metal costs due to increase in global demands triggered by recoveries of economies aided by lifting of lockdowns and opening of economies.

• Depreciation of rupee against USD, which has increased the cost of the above key imported products.

• Supply side constraints due to lockdowns and partial closure of business.

As mentioned by MPC, the current high inflationary trends may be transitory as:

▪ It is not driven by increased consumer demands, who are cutting their spends on account of lower earnings or due to uncertainty of further trajectory of Covid. Due to gradual lifting of lockdown restrictions and resumption of normal business activities, supply constraints are expected to ease, which in turn will bring down inflation rates.

▪ Monsoon is expected to be normal this year, which in turn may result in increased supplies and reduction in prices of foods, fruits, and vegetables, which together form more than 50% of CPI index.

To quote RBI governor statement in MPC:

CPI inflation for 2021-22 is projected to be at 5.1 per cent, which is well within the mandated tolerance band of 2-6 per cent; however, we would need to keep a close watch on the evolving trajectory considering the uncertainties, both on the upside and downside, to the baseline path. Given the predominant role of supply side factors in the recent inflation movements, active and timely supply side policy measures about petrol and diesel, edible oil, and pulses, among others, would be critical to bring about a durable softening of price pressures.

As of now, RBI seems to be discounting the danger of inflation because of the context of the pandemic and need to prioritise growth, Central banks across the world are facing the same dilemma. Accommodative policies cannot continue forever, and RBI may be looking for firm signs of revival of economy before it starts changing the priorities back to inflation targeting.

Human and social costs of Covid:

• Covid had inflicted huge human costs, in terms of loss of human lives (around 4 lacs as of date), as many families having old age people, children (school or colleague going) lost earning members. Unlike, wave 1, virus this time around had touched every family. Medical treatment costs had also taken a heavy toll on the household savings. Many families had to sell their assets or borrow money by pledging gold and their assets or otherwise at high rates of interest. This also applies to people who recovered from the infection. It will a long time before these families are able to recover from the financial stress.

• As per a recent RBI report:

▪ Growth in savings fell sharply from 21 percent of GDP in Q1FY21 to 8.2 per cent in Q3FY21. The savings growth after the second wave is expected to be even lower.

▪ Loans against gold by banks rose from ₹33,476 crore in April last year to ₹60,726 crore in March 2021. This figure is expected to increase substantially due to the impact of wave-2.

▪ As per press reports, people who are pledging the gold are unable to redeem it. Malappuram Finance in Q4 of FY21 auctioned-off gold worth ₹404 crore as against ₹8 crore in the previous three quarters put together.

▪ Manufacturing and constructions had lost almost two years of Gross value added (GVA). 

▪ Household financial liabilities had gone up to 38% of GDP as of December 31, 2021, from around 32% as at April 1, 2019.

Impact on the middle class:

Indian population has a large segment of the middle class, and a good part of GDP growth is driven by consumption demand from this segment. This segment is also affected financially due to high medical costs and job losses.

 According to Pew Research Centre Report, the nation’s middle class shrank by 3.3 crore in 2020 even before the second wave. The same report said that 7.5 crore people have been driven to poverty (earning less than ₹120 per day). These numbers would be much higher as of now due to bigger impact of wave 2.

Significant job losses:

• As per estimates of CMIE, salaried jobs lost in FY21 due to the pandemic are estimated to be 9.8 million. Overall job losses, after the second wave, are estimated at 120 million (which includes 15 million jobs lost in the month of May 20121). This figure represents 30 percent of the total population employed across all sectors. As of June 6, 2021, unemployment rate was a high 13 per cent. 

• Almost 80% of Indian working class is working in the informal sector and job losses in this segment are larger than the formal sector as smaller business, self-employed, street vendors, daily wagers etc. Have suffered the most due to the Covid, which also contributed to increase in poverty.

• As per National Bureau of Economic Research Paper, there was a large drop in income due to Covid through December 2020.Income of salaried class workers fell by 35% and for daily labourers by 75%.

• As per Azim Premji university report, an additional 230 million individuals fell before the poverty line due to Covid shock. After the lockdown, workers came back into more precarious and informal forms of employment. Nearly half of formal salaried workers moved into informal work, either as self-employed (30%), casual wage (10%) or informal salaried (9%) workers, between late 2019 and late 2020.

• Because of the move into informal work, as well as due to depressed economic conditions, monthly earnings of workers fell on an average by 17% during the pandemic. Self-employed and informal salaried workers faced the highest loss of earnings.

• Had the pandemic not occurred, poverty would have declined by 5 percentage points in rural areas and 1.5 percentage points in urban areas between 2019 and 2020, and 50 million would have been lifted above this line.

• The above data is an eyeopener and reflects aptly the severe damage caused by wave-1 to the households and the economy. The second wave virulent impact would have further dented the financial conditions of households, aggravated by loss of many lives of earning members of the families, which would be reflected in the data as and when it is available. The country sustained and successful efforts to lift the larger population have received a severe setback and will take a longer time and significant efforts by the government to recover even to the pre-covid levels.

Significant dip in the consumer confidence and sentiments:

• Cumulative impact of the above factors is that consumer confidence as measured by RBI (May 2021) is at an historic low. The survey revealed that household spending has weakened considerably with people not only cutting back on non-essential expenditure but also moderating essential spending.

• With the threat of a probable third wave which is predicted to be still more potent, likelihood of revival of consumer confidence in the near term is uncertain. People are conserving funds to save instead of spending money aggressively. 

Silver linings:

There are some early green shoots which are visible from recent data points releases (as listed hereunder), suggesting that the impact of the second wave of the pandemic on economic output and activity has not been as severe as was initially expected.

Positive indicators of recovery:

• Advance tax collections of personal and corporation tax in the first quarter of the current fiscal year compared to the quarter of the previous year (in which the initial nationwide lockdown) grew almost 150 per cent. Collection, net of refunds, grew by 100.4 per cent till June 15 to Rs 1.85 trillion compared to Rs 92,000 crore in the same period last year. 

• The GST collections in May, at Rs 1.02 trillion, was more than expectations, though lower than the previous month. The data of e-way bills generations, so far in June (33.7 million till 20th June as against 39.9 million in May,2021) suggests the collections will further pick up to pre-wave-2 levels, depending upon normalisation of business activities.

• AS per the RBI’s recent report, the hit caused by the smaller, staggered, and regional lockdowns during the second wave was mostly to demand, and not to supply and “several aspects of aggregate supply conditions” including agriculture are holding up.

• Early arrival monsoon which has been 28% per cent above normal (till the middle of June 2021) is expected to aid quicker recovery. If the progress continues as forecasted, India can expect another year of good crops and agriculture growth. This will give impetus to rural demand and consumer spends.

▪ Exports in the Q1 2021-22 had shown robust growth, unaffected by lockdowns. Exports during the said 21 have jumped to $95.36 billion as against $51.44 billion in the same period last year.

▪ Imports during the said were at $126.14 billion, an increase from $60.65 billion in the corresponding three months last year, which is strong indicator of the revival of the growth.

▪ The global economy is in much better shape than last year, which is a positive sign for continuing revival of exports.

▪ Key sectors of the economy are bouncing back, compared to May 2021, as per the latest available data: (Source of data-ET news report)

• Consumer electronics-70-80% during June1-21, compared to the corresponding period of May, 2021.
• Credit cards, debit cards transactions are up between 12 to 19% during the same period.
• Sale of fuels is up by 12% to 13%.
• Power consumption is up by 7% on year-to-year basis.
• FMCG market expanded by 15% in the first half June from May. 
• With more than 80% of automobile retail outlets now operational, passenger vehicle (PV) sales in June are expected to recover to 75% of the 270,000 units sold each month before the second Covid wave.
• Smartphones and PC/laptop sales are showing significant signs of bounce back in demand.
• Hospitality, aviation, and real estate sectors are showing positive signs of uptick.

• As per the latest Moody's report, impact of the second wave is expected to be restricted to June 21 quarter.

• Industry Experts expect further recovery going forward as vaccinations improve consumer sentiment. However, overall growth in FY22 will be lower than initially estimated due to a washout of business activity for over a month.

To quote Nilesh Shah of Envision Capital 

“You probably could have another round of Covid infections, but they are unlikely to be disruptive. I do not see businesses and factories seeing the same pain wherein they had to completely close their stores. There could surely be lockdowns, but they would be patchy and pretty much localised,” 

Mr. Deepak Parikh has the following views on the recovery of the economy.

I personally expect the economy to bounce back as the effects of the second wave continue to subside. The Indian economy in my view will recover briskly and mirror its performance from last September. 

Risk of a strong third wave is a big hangover.

• Experts are predicting a much more viral third wave as is happening in the UK, Japan, EU countries, Russia, Brazil, Israel, Malaysia, Singapore, South Africans, and some other countries.

• The resurgence of Covid, which if happens, may again adversely affect recovery, depending upon virulence, extent, and speed of vaccinations, which is now gathering momentum.

Crucial role of vaccinations:

• In the absence of any proven treatment of COVID and continuing threat of more waves, as is happening in other countries, revival of the economy is critically dependent on speed of vaccination of the major part of the population of the country.

• After various flip flops in vaccination policy and supply constraints, the vaccination programme started gathering momentum from June 21,2021, when free for all vaccinations (except private hospitals) were started. As of July 3^rd,2021, India has administered more than 35 crores of doses (largest in the world). India needs to administer at least 1 crores dose per day to vaccinate its adult population of 90-95 crores by end of the year.

• India has demonstrated its capacity to reach that level by administering 86 lacs on June, 21 2021. Key to achieve that target the availability of vaccine supplies (as estimated by the government) from manufacturers.

Stimulus to revive economy:

The Finance Minister had recently announced 8 stimulus measures, impact of which I will cover in Part 2 of the article. along with some other aspects which are relevant for the revival of the economy., impact on performance of listed entities etc.

***Click here to access Part II and here to access Part III.