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Even after India’s second pandemic wave peaks, the economic costs could outlive the local lockdowns. Vaccination is important, but so are economic reforms.

Last year’s national lockdown hit growth sharply: gross value added in April-June was 23 per cent below the previous quarter. The second wave involves much cheaper local lockdowns, but it differs from the first by stoking economic uncertainty that could hurt the recovery.

First, while local-level measures may feel less stringent, there is huge uncertainty over which state will be next, how long they will last, the damage to interstate trade, and whether further lockdowns may follow.

Second, the new wave is concentrated on affluent households whose pent-up consumption demand may be less strong this time. But third, it is now spreading into rural heartlands that were exempt from much of last year’s lockdown and where growth remained robust as farmers supplied urban Indians.

Fourth, while low commodity prices and cost-cutting helped companies survive the first wave, rising input prices are now squeezing profits and raising consumer prices risks damaging domestic demand.

Even if the direct economic cost of this wave is contained in the April-June quarter, the economic cost of uncertainty could extend into the future as businesses stop hiring and investing or consumers save rather than spend.

However, global growth remains strong, supporting exports, and buoyant capital markets can provide funding when bank credit growth is soft. Firms have learnt to cope with lockdowns. And central government has the cash to cover falling tax revenues.

We think changes to government food-subsidies are distorting GDP figures, making Gross Value Added a better measure of economic growth. With about 15 states under lockdown, GVA growth in April-June is likely to be 13 per cent below the previous quarter – about half of the contraction in the same quarter last year.

But for July-September, despite lockdowns being lifted, the new uncertainties could mean a bounce back of just 9 per cent over the previous quarter – less than half the rebound in the same quarter after the 2020 national lockdown ended. Then in the next six months, as vaccine imports rise, vaccination rates should rise quickly, quelling some of the uncertainty, allowing growth to accelerate.

Bringing all of this together, we have cut our forecast of GVA growth for the year to March 2022 from 10.2 per cent to 7 per cent and our GDP forecast from 11.2 per cent to 8 per cent.

For 2022-23 we forecast GVA to grow 5.3 per cent and GDP 6 per cent. Although we expect India to return to pre-pandemic GDP levels by end-2021, it is likely to still be 12 per cent below the pre-pandemic path.

We estimated a weakened financial system and rising inequality caused by the first wave could drag down potential growth from 6 per cent to 5 per cent, but the new wave may deepen the scarring if banks become increasingly risk averse and India’s informal economy, covering 85 per cent of workers, shrinks.

Speeding up vaccination must be India’s priority but reforms are important too. Government should strengthen the Insolvency & Bankruptcy Code, sustain social-welfare spending, disinvest public assets, and choose export promotion over import substitution.

First published 13 May 2021.

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