India is currently experiencing a massive second wave of Covid-19 infections. An HT analysis of seven-day average of cases shows that the current wave is nowhere near its peak. The weekly moving average of daily new cases has increased 14 times since February 11, when it started rising again after declining for five months. India’s first Covid-19 wave rose for 29 weeks (or 33 if the first case reported on January 30 is taken as the starting point) before it peaked. As has been pointed out in an HT analysis by Abhishek Jha, the second wave is far steeper in nature than the first wave.
The curve of Covid-19 cases and mobility trends will have a direct bearing on the level of economic activity. India’s GDP went down by 24.4% in the quarter ending June 2020. According to the second advance estimates, 2020-21 is expected to suffer a GDP contraction of 7.96%. The 2021-22 Budget projected a nominal GDP growth of 14.4% for the year. In its latest meeting, the Monetary Policy Committee (MPC) of RBI, had the following to say about the growth outlook of the Indian economy, “the projection of real GDP growth for 2021-22 is retained at 10.5 per cent consisting of 26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per cent in Q3 and 6.2 per cent in Q4”.
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Assuming these growth rates hold, the 2021-22 GDP will have a distribution of 23%, 24.1%, 25.8%, and 27.2% in each quarter in terms of contribution to the whole. In comparison, the 2019-20 GDP had a distribution of 24.5%, 24.4%, 24.8%, and 26.3% and the 2020-21 GDP had a distribution of 20.1%, 24.6%, 27%, and 28.3%. This suggests that any adverse effect on economic activity in the first quarter of the current fiscal year will affect a significant portion of the year’s GDP.
The effects of any significant economic disruption, if it were to happen, will not be limited to the first quarter itself. It can have a cascading effect through both demand and supply channels. If supply chains get hit and inflation starts rising — it has already been on an upward trajectory — purchasing power and therefore demand is bound to come under squeeze. Similarly, any cutback in economic activity, especially in sectors which are being forced to do so because of social distancing requirements, will adversely affect incomes and hence demand.
It is to be expected that the worst affected quarter in fiscal year 2021-22 because of the second wave will be the one ending in June 2021. Because, unlike the first wave, we have vaccines this time, it is reasonable to expect that the pace of new infections will slow down as vaccinations pick up. An HT analysis by Jamie Mullick showed that if India administers vaccines at the current pace of 4 million doses a day, it will take until the end of May for it to vaccinate 100 million people or 10.6% of the population over the age of 18, according to 2021 population projections by the National Commission on Population. Given the fact that the government has granted emergency use authorisation to many more vaccines which are being used in other countries, the pace of vaccination can be expected to be faster.
Still, it is unlikely that the ongoing quarter will be able to escape the adverse economic effect of the sharp spike in Covid-19 infections. This will have a bearing on GDP levels, and therefore tax revenues, in the current fiscal year. While the official revenue figures for 2020-21 will only be available by April end, media reports have said that both direct and indirect tax collections have exceeded the Revised Estimate (RE) targets for 2020-21. To be sure, the 2020-21 RE targets were scaled down significantly from the Budget Estimates (BE) which were presented before the pandemic erupted. What is more important is the fact that even the 2021-22 BE targets assume lower tax buoyancy compared to previous numbers. When GDP declined in 2020-21, the government expected the fall in tax revenue to be 1.28 times the fall in GDP, but it has estimated tax revenue to grow only 1.16 times the GDP growth in 2021-22. Indirect taxes, which were expected to grow 3.6% in the RE despite a contraction in GDP, are expected to grow less than the GDP growth in 2021-22. One reasons for this could be the dominance of petroleum taxes in the indirect tax basket, which is more a function of increased tax rates rather than a sharp rise in consumption of petroleum products. In fact, consumption of petrol and diesel is likely to be lower than 2019-20 in 2020-21.
Whether or not India’s favourable GDP revisions undergo a downgrade will depend on how fast vaccinations pick up, which will determine the time it will take to flatten the second wave.
Experts believe that the second wave will extract a significant economic cost. A research note by Pranjul Bhandari, Chief Economist, India HSBC Securities and Capital Markets (India) Private Limited, said the following.
“It is likely that reported year-on-year GDP growth in the quarter ending March will dip into negative. Even before the second wave struck, the Statistics Office was forecasting GDP growth at -1.1% year-on-year for the quarter. And now with GVA likely to be weaker, GDP growth for the quarter ending March could come in even more negative. Furthermore, the q-o-q sequential momentum in the quarter ending June will likely come in negative. Led by favourable base effects, the year-on-year growth number will be a large positive (over 20% y-o-y versus –24.4% in the June quarter last year). But what matters more is the seasonally adjusted q-o-q momentum. That we think will dip into negative after consecutive positive prints over the last three quarters, led by weaker momentum in high-touch services like trade and tourism, as well as construction”.
“To be fair, once the second wave subsides and a larger proportion of the population are vaccinated, pent-up services demand could push GDP growth back up. But that is likely to be delayed to 2HFY22,” the note added.