The second wave of the Covid-19 pandemic has decisively triggered a raft of downward revisions to India’s economic growth projections. While the Reserve Bank of India (RBI) is yet to revise its forecast for FY22, a slew of international rating agencies, brokerages and analysts have already slashed their projections. They are unanimous in their view: India’s growth engine is unlikely to catch up the distance it lost in the last fiscal.

After revising the growth forecast to 9.3% from the earlier 13.7%, Moody’s Investors Service, cautioned that risks from deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength. Barclays has trimmed its projection to 9.2% from 10% earlier and 11% before the outbreak of the second wave, with a worst-case scenario of 7.7% if India faces a third wave of the pandemic, going forward.

S&P Global Ratings expects the country to grow at an annual rate of 9.8% under its moderate scenario, with a worse-case scenario of 8.2%. Brickwork Ratings revised its FY22 economic growth projection a couple of weeks ago to 9% from the earlier estimated 11%, adding that its earlier hypothesis of a V-shaped economic recovery is unlikely to hold water.

The Reserve Bank of India (RBI) annual report 2020-21, which was released on May 27, said the consensus among leading economists is gravitating towards its earlier projection of 10.5% for the year 2021-22. Interestingly, the projection is based on the 26.2% growth predicted for the first quarter (April-June) and 8.3% in the second, since the third and fourth quarters were expected to see a relatively slower growth rate of 5.4% and 6.2%. Despite the fact that Q1 growth is likely to be higher due to the low base, it is unlikely to report a giant leap as predicted earlier.

The central bank said the duration of the second wave is the biggest risk to the outlook. “Yet, upsides also stem from the capex push by the government, rising capacity utilisation and the turnaround in capital goods imports,” said the annual report.

For April and early May 2021, available high frequency indicators have shown a mixed picture, according to the central bank. While mobility and sentiment indicators have moderated, the RBI counts on several activity indicators that have held up and shown resilience in the face of the raging pandemic. “GST collections crossed the ₹1 lakh crore mark for the seventh consecutive month in April and notched up the highest level on record, suggesting that manufacturing and services production has been maintained. On the other hand, e-way bills moderated, pointing to mobility restrictions and possible slackening of GST collections in ensuing months. Slowing down of mobility is also reflected in toll collection,” said the report.

On its part, Moody’s has warned that the disruptions and the decline in growth would exert further pressure on the credit profile of Asia’s third largest economy. However, it does not expect the impact to be as severe as the first wave. Unlike the nation-wide lockdown for several months in 2020, the measures such as micro-containment zones in the second wave have been handy since they are localised and targeted. According to Moody’s, businesses and consumers have grown more accustomed to operating under pandemic conditions. Unlike the RBI’s projection, Moody’s expects a strong rebound in the second half of the year.

“The economic costs of the recent surge in cases are rising rapidly. After a reasonably stable April, the economy experienced a sharp decline in activity in May, as is evident in high-frequency data. While we continue to believe the lockdowns will last only until the end of June, in our new base case, we now estimate economic losses of $74 billion or 2.4% of the GDP, all of it contained in Q2 21 (April-June),” said Rahul Bajoria, chief India economist at Barclays in the report co-authored with Shreya Sodhani.

After factoring in recent developments, the brokerage has pegged the economic cost of the latest shutdowns at $8 billion per week in May, up from $5.3 billion per week in the last two weeks of April. “We believe these economic losses will remain steady at $8 billion a week through the month of May, but expect them to ease from June,” said the analysts.

Under a pessimistic, bear-case scenario, Barclays said it has estimated that the growth may be lowered by a further 150 basis points, dragging FY22 growth down to 7.7%. It hopes that the bulk of the economic loss will be felt in the first quarter (April-June).

“Our pessimistic tail-risk scenario assumes another wave of infections and a two-month period of restrictions that disrupt economic activity in the second half of calendar year 2021 (H2-21), evenly split between the third and the fourth quarters. In this scenario, we estimate that the total economic loss would rise to $117 billion, or around 3.75% of GDP,” said the economists at Barclays.

While the Economic Survey pegged the growth at 11%, the Union Budget on February 1, 2021, predicted a 10.5% annual growth.

An economist with a private bank said the RBI, in all likelihood, would revise the growth forecast for FY22 soon. “The first quarter is pretty much a disaster. It is not going to be anywhere close to their earlier expectations,” he said.

There are concerns over the rising inflation too. However, some analysts believe that the current increase in WPI inflation is primarily due to the existing supply-demand mismatch, and that the weak demand would minimise the inherent pressure on inflation, going forward.

In its annual report, the RBI has stressed that a sustaining revival in private consumption and investment demand is critical for a self-sustaining GDP growth trajectory post-Covid-19, as they account for around 85% of GDP. “In view of the limited share of government consumption demand in GDP (at around 13% in 2020-21), a rebound in private demand is essential to sustain the recovery. Typically, post-crisis recoveries have been led more by consumption than investment. However, investment-led recoveries can be more sustainable and can also lift consumption in parts by better job creation. In either case, private demand plays a pivotal role,” said the central bank.

According to CARE Ratings, the worsening pandemic situation, localised lockdowns and slower than expected pace of vaccinations have darkened prospects of a nascent economic recovery and accentuated business uncertainty. In a survey on the impact of ongoing lockdowns on economic prospects, the rating agency said at least 80% of the respondents, totalling over 300, expected the consumer demand for non-essentials as well as investment demand to be severely impaired, and the non-performing asset situation to worsen, in the coming months.

“The economic recovery is beginning to lose steam with infection rates scaling record highs. Almost 7/10 respondents expect India’s GDP growth to be below 9% for 2021-22,” says the rating agency.

The second wave has taken the target of a $5 trillion economy further away by a few more years.

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