The State Bank of India’s economic research wing has revised its GDP forecast for 2021-22 downwards, highlighting the adverse effects of the commodity price increases in the last few months as well as the impact of the second wave of the pandemic on not just urban but also the rural areas.
It now expects real GDP in the year-ending March 2022 to trend at 7.9 per cent, compared with its earlier expectation of 10.4 per cent. While it has maintained an upward bias to its forecast with the “fervent hope” of one crore vaccinations per day from mid-July as per government projections, it doesn’t expect a significant pickup (compared with its growth expectations).
“Our analysis shows a disproportionately larger impact on economy this time and given that rural is not as resilient as urban, the pick up in pent-up demand is unlikely to make a large difference in FY22 GDP estimates and hence, it could only be a modest pickup,” said Soumya Kanti Ghosh, group chief economic adviser at SBI.
Several states imposed lockdowns of varied degrees in the wake of the second wave of the pandemic. This will have an impact on demand as well as overall economy in the April-June quarter. Prices of raw materials like steel, cement and oil have also seen a big increase over the last six months. Petrol prices topped Rs 100 per litre in Mumbai last week. All this will also have an impact.
“For the current financial year, GDP outlook will be impacted by the trajectory of international commodity prices that have risen sharply during the year. Further, the pass-through impact of higher commodity prices will be visible in domestic prices thus impacting consumption during the year,” the report said.
It pointed that international experience suggested that intensity of a third wave of COVID was as severe as the second one and therefore, vaccination should be the key priority now, especially for children, who could be the next vulnerable group, it added.
Hit hard by the COVID-19 pandemic and the nationwide lockdowns in 2020, India’s GDP shrank 7.3 per cent in the year ended March 31, 2021. The Jan-March quarter GDP growth stood at 1.6 per cent.
Even as the fourth quarter growth was a positive surprise, Madhavi Arora, lead economist at Emkay Global Financial Services, says “asynchronous and slow state-wide unlocking process and slower-than-expected vaccine drive” will weigh on this year’s GDP growth. It revised its GDP growth forecast downwards for 2021-22 by 90 basis points to 9.0 per cent.
“We reckon the nascent and patchy K-shaped growth recovery post Covid-I came with a potentially scarring and divided labour market amid sub-optimal effective fiscal policy stimulus. The recovery ahead (just as last year) may also be led by capital and profits and not improving labour markets and wages,” said Arora.
Clearly, factors such as better adapted firms and policy response, stable financial conditions and robust global growth spillovers create growth buffers back home, but a “credible” vaccine drive is vital, added Arora.
Sonal Varma, chief India economist at Nomura Securities, though, feels that while the second COVID wave has derailed the growth momentum seen in the Jan-March quarter, the impact of the second wave will be less than what was being feared.
“Although the second wave will likely constrain sequential growth momentum in Q2 (April-June), we expect the damage to be significantly less than during the first wave and less than currently feared. Already, states are taking the first steps towards relaxing lockdowns, which suggests the peak hit to growth is behind us (in May), with June to be better in sequential terms,” said Varma.
Nomura expects 10.8 per cent GDP growth in the year ending March 2022, while growth should be around 9.8 per cent in the calendar year ending December 2021.
“Beyond Q2, we expect a mix of the ‘vaccine pivot’ point, strong global growth and the lagged impact of easy financial conditions to enable a faster pickup,” said Varma.
Delhi-based DMI finance expects a GDP growth of 9.9 per cent in the current financial year.
“The second COVID wave is expected to weigh on economic recovery in Q1 FY22. However, the prospects of a quick rebound are strengthening with a continued downward trend in daily COVID cases and expected pick-up in vaccination pace,” said Pramod Chowdhary, chief economist at DMI Finance.
Due to the second wave of COVID19, the recovery of contact intensive services is likely to be delayed to the second half of the year, feels DMI Finance. However, construction, manufacturing, electricity, and public administration activities should show resilience and are expected to resume recovery relatively quickly, assuming the ongoing downward trend in COVID cases continues and the pace of vaccination picks up in the coming weeks, allowing states to gradually lift relaxations, it added.
Ratings agency Fitch has said that the second wave will have a less severe impact on corporates than in 2020, despite a higher infection rate.
“Weaker domestic demand is a key channel of risk transmission for businesses. However, lockdowns in 2021 have been less stringent and more localised, and business/societal behaviour has adjusted, supporting activity,” said Fitch.
Fitch expects the greatest demand impact within its rated portfolio to be felt by Oravel Stays Private Limited (Oyo Hotels) and Future Retail Limited, as weak consumer sentiment affects discretionary spending in fields like hospitality and non-food retail. Technology and telecom companies are the least likely to see weaker demand, it added.
