COVID 19 Wave 2.0 likely to halt FY22 GDP India Growth

Vaccination to Shave Off 30bp from FY22 GDP Growth 

India Ratings and Research (Ind-Ra) believes the second wave of COVID-19 infections will be less disruptive than the first wave, despite the case load per day reaching more than 3.0x of the peak level attained during the first wave. This is because the administrative response is likely to be confined to .the regional/local lockdowns and containment zones. 

Moreover, unlike the first wave, the administrative response is not abrupt, and is unfolding gradually in a graded manner, also, households. Businesses and other economic agents are better prepared and there is a significant amount of learning by doing, which can help them withstand and navigate through the second wave of COVID-19 crisis. Lastly, the roll-out of COVID-19 vaccine since 16 January 2021 would enhance safety and reduce the fear element among the vaccinated economic agents. 

Till 21 April 2021, 132.33 million vaccine doses have been administered. Since 1 May 2021, all people aged 18 years and above are entitled for vaccination. According to Ind-Ra’s estimate, this would require 1,768 million vaccine doses (including 5% wastage), which will cost the union government 0.12% of GDP and state governments 0.24% of GDP. Both vaccination production and the pace of vaccination are key in controlling the pandemic as well as for growth recovery. 

Ind-Ra has, therefore, revised its GDP growth forecast for FY22 to 10.1% from earlier forecasted 10.4%. The revision assumes the second wave of COVID-19 to start subsiding mid-May 2021 onwards. The demand-side component of GDP namely private final consumption expenditure, government final consumption expenditure and gross fixed capital formation are now expected to grow at 11.8%, 11.0% and 9.2%, respectively, in FY22, as against our earlier forecast of 11.2%, 11.3% and 9.4%, respectively.

Real GDP in FY22 is estimated to come in at INR148.2 trillion, which is 10.7% lower than FY22 GDP trend value. Consumption slowdown is estimated to contribute 63.4% of the decline, followed by investment 47.7%. 

Rural demand is likely to remain resilient in view of good Rabi harvest and the prospects of a near normal monsoon forecast for the 2021 by India Meteorological Department. According to the India Meteorological Department, monsoon rainfall in 2021 is likely to be 98% of long period average with a model error of +/- 5%. This will be third consecutive year of normal rainfall. 

Although urban demand is still recovering and may get adversely impacted by the second wave of COVID-19 infections, the demand from the contact-intensive sectors is likely to strengthen due to the ongoing vaccination drive. The union government’s capex has been budgeted to grow at 26.2% yoy in FY22. Ind-Ra believes this likely accelerated public investment will prepare the necessary ground for crowding-in private investment in the due course. Another supportive feature is the RBI’s guidance, which vows to keep systemic liquidity comfortable over the foreseeable future, despite elevated spill over risks from global financial markets. 

More than growth outlook, the worrying signs are emerging on the inflation front. Retail inflation in December 2020 declined to 4.6%, after remaining in excess of 6.0% since April 2020. It rebounded to 5.0% in February 2021 and further to 5.5% in March 2021. Core inflation, which excludes food and fuel, remained elevated and came in at 6.0% in March 2021. 

There are already signs of the increase in industrial raw material prices being passed on to output prices. The RBI’s industrial outlook, services and infrastructure outlook surveys and purchasing managers’ indices suggest firms are regaining pricing power as demand is normalising. 4QFY21 round of the RBI’s industrial outlook survey expects further input cost pressures from raw materials in 1QFY22. 

Ind-Ra expects the retail and wholesale inflation to average 5.0% and 5.9%, respectively, in FY22. A higher inflation not accompanied by a commensurate increase in wage growth could mean lower disposable income/consumption demand, which in turn could adversely impact the private corporate investment revival in the economy. 

Since fiscal arithmetic of the FY22 budget is more convincing than earlier years, Ind-Ra continues to believe the budgeted fiscal deficit of 6.8% of GDP is achievable. However, the success of this number hinges on the government’s ability to achieve FY22 disinvestments target of INR1.75 trillion. Although it is too early to visualise that the second wave of COVID-19 could jeopardise the disinvestment process, the same cannot be ruled out. Some of the public sector units whose stake sales are at an advanced stage are Air India Limited, Bharat Petroleum Corporation Ltd, Shipping Corporation of India and Bharat Earth Movers Ltd. 

Current account surplus of FY21 will give way to the current account deficit of 0.4% of GDP in FY22. But the evolving domestic and global macro conditions will continue to keep Indian rupee volatile. The Indian rupee was under pressure till mid-November 2020 due to COVID-19-related uncertainty, risk aversion and capital outflows. Thereafter, it started appreciating on the back of domestic demand recovery, a decline in the number of COVID-19 infections, vaccine rollout, and the measures announced by the government in the Union Budget FY22. 

However, it has again depreciated against the US dollar in April 2021, amid renewed growth uncertainty due to the abrupt rise in the COVID-19 case load, firming of the US bond yields and strengthening of the US macroeconomic landscape. Ind-Ra expects the depreciating bias of the Indian rupee to persist in the near term and the Indian rupee to average 77.1 per USD in FY22.