Will India's soaring Covid infections derail its financial rebound?

The resurgence of Covid-19 infections threatens to derail India's monetary recovery, prompting the country’s central bank to intervene after industry leaders weighed directly into press the government for a nationwide lockdown.

There’s a feeling of urgency in Asia’s third major economy to save lives and livelihoods of individuals, but it remains to be observed if the federal government and central bank measures will be adequate.

“If the next wave persists for longer or if we get hit by an equally powerful third wave, then sectors and monetary activity will get more impacted and that subsequently could necessitate more supportive policies,” Anubhuti Sahay, head of South Asia economics research at Standard Chartered, says.

On Saturday, India reported 401,078 new daily Covid-19 infections and an archive number of fatalities, topping 4,000 previously a day, according to its health ministry.

The massive second wave of the coronavirus has pushed the country's healthcare system to the breaking point and has forced many state governments, including Maharashtra - home to the financial capital Mumbai - to impose local lockdowns, temporarily curtailing business activity.

Despite mounting pressure from health experts and worsening Covid-19 crisis, Prime Minister Narendra Modi's government has refrained from introducing another nationwide lockdown, citing concerns about its economical impact.

Last year's restrictions - among the strictest on the globe - pushed the united states right into a rare recession. India, however, emerged from the slump, using its gross domestic product growth edging up by 0.4 per cent in the last quarter of the twelve months. The country’s economy was projected to grow 12.5 % this season before tapering to 6.9 % in 2022, in line with the International Monetary Fund.

On Wednesday, the Reserve Bank of India (RBI) announced several steps, including loan relief measures for small businesses and 500 billion rupees ($6.82bn) of liquidity for banks to lend to healthcare companies including vaccine makers and hospitals to further support the economy.

“We believe the RBI has announced effective measures that will provide relief to the most afflicted borrowers following the resurgence in Covid-19 cases and the announcement of a lockdown in a number of states,” says Nitin Aggarwal, a study analyst at Mumbai-based Motilal Oswal Institutional Equities.

Economists say the impact of a lockdown will not be as severe as this past year.

“The next wave is far more intense than the first wave,” Ms Sahay says. “However, the effect on the economy is muted as yet in accordance with the national lockdown of early 2020.”

Better global growth and the government's expansionary fiscal budget are factors that are staving off a deeper negative influence on the economy and the RBI's announcements “complement existing measures”, which include lower interest rates.

Standard Chartered continues to be projecting India to post double digit monetary growth, however the bank has lowered its forecast from 11.5 % to 10.2 % for the current financial year before end of March. This growth also comes off the trunk of a minimal base, Ms Sahay says.

Several other financial institutions also have slashed their forecasts for India’s GDP growth, as the International Monetary Fund said it'll revise the outlook for the world’s second most populous nation by July.

S&P Global Ratings says the next wave “may derail a solid recovery throughout the market and credit conditions”.

In a moderate case scenario, India's GDP will grow at 9.8 % in today's fiscal year, down from its earlier projection of 11 %, according to S&P. In its extreme case scenario, the rating agency forecasts that the economy could possibly be hit by 2.8 percentage points on its earlier forecast, with growth of 8.2 per cent.

The opportunity of further local lockdown restrictions “may thwart that which was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues and bank operating system profitability”, according to S&P.

During the second wave, officials are also showing a preference for support measures from the central bank rather than additional fiscal spending from the government, the agency said. But should the second wave persist, “the federal government and the central bank will likely extend support to borrowers, albeit with much reduced fiscal capacity than during wave one”.

The steps taken by the RBI “towards restructuring of loans of small borrowers and MSMEs are timely and prudent”, Kiran Chonkar, a partner who heads the resolution advisory practice at BDO India, a network of accounting and tax firms, says.

“However, the pandemic has damaged [the ] industry across segments,” he says. “A roll-out of broader relief measures applicable to mid-corporate and large borrowers and towards sectors heavily influenced by the pandemic such as hospitality could have been welcomed.”

Consumer spending, the key driver of India's economy, can be the hardest hit by the pandemic.

Amuleek Bijral, the co-founder and leader of Chai Point, a sizable chain of cafes in India, said that prior to the second wave, “we started seeing green shoots come in the entire recovery of the meals and beverage sector [and] by January, we noticed walk-ins slowly but surely rising as more stores opened”.

But “as Covid gripped us again, the store business took popular as we'd to turn off a few as per [state] government restrictions”, Mr Bijral says, explaining a recovery has been pushed back by around three months now.

Many retailers which were just starting to reunite on their feet have been forced to shutter stores once more to adhere to local lockdowns.

“It [the second wave] has slowed up the recovery witnessed at the start of 2021,” says Harkirat Singh, the managing director of Aero Club, which owns the Indian footwear brand Woodland.

Although the economical impact of the next wave is “quite unpredictable, he remains hopeful that the impact will be transitory “and the sales will revive after the crisis subsides”, pointing out that the sector has recently demonstrated resilience.

“The Indian retail sector staged a decent comeback following the lockdown in 2020 and witnessed a 50 to 60 % revival in sales with the start of the yuletide season in October to November 2020,” Mr Singh says.

How deep a scar the next wave will leave on the economy would depend on its duration, and India’s vaccination drive - which is considered to be key to controlling the pandemic - also has a job to play in the economy’s heading, economists say.

Up to now, the pace of inoculation has been slower than expected as the united states runs low on doses, despite being the world's major manufacturer of vaccines. The vaccination drive is defined to get pace over the coming months, in line with the government.

For the present time though, Tanvee Jain, the chief India economist at UBS securities, says “we expect [economic] activity levels to sequentially weaken further in May as most states extend mobility restrictions to flatten the curve”.

If the next wave “flattens out by, say, June and there is absolutely no third wave, financial activity should grab in the next half of the financial year”, Ms Sahay says.

But given the uncertainty and depth of the Covid-19 crisis, many specialists believe that India's central bank and the federal government will be required to take more action to mitigate the consequences on the economy.

“We believe these measures are first in the series of the relief measures to be announced by the RBI and more should result from the RBI and government as the problem evolves,” according to a research note by analysts at Mumbai-based Emkay Global Financial Services.