Second wave escalates recovery risks

By Indranil Sen Gupta & Aastha Gudwani

We grow even more concerned that rising Covid-19 cases pose a risk to our still shallow recovery. Covid-19 cases have jumped 6x+ to 103,558 a day from 16,838 a day a month ago. While 5% of the total population has received the first dose, 0.8% have received both doses of the Covid-19 vaccine. It remains to be seen if the cases subside with the Maharashtra-type local lockdowns. Our base case sees real GVA rebound to 9% in FY22 from a contraction of 6.4% in FY21. We estimate that a month of national lockdown costs 100-200bp of annual GDP. Needless to say, this also aggravates fiscal risks. On balance, we continue to expect the RBI MPC to come out with another dovish pause on Wednesday. It will likely remain on hold through FY22 and hike rates by 100bp in FY23.

RBI should focus on funding the already high fiscal deficit at reasonable yields to support recovery without adding to surplus liquidity/ M3 growth. We see a) $50 billion of OMO in FY22 combined with LTRROs, b) 3% hike in banks’ HTM limits, extended to FY26, and c) forward FX intervention.

Rising Covid 19 cases: Second wave surges

Covid cases have crossed the past peak. Covid-19 cases have jumped 6x+ to 103,558 a day on Sunday from 16,838 a day a month ago. It crossed the 2020 peak of 97,859. The pace is picking up. In 2020, it took three months for cases to rise from 10,000 levels in mid-June to 90,000 levels in mid-September. In this round, this has taken 6 weeks. An added concern is that daily cases are not higher due to improved testing per se. While daily tests averaged at 1 million over the last 7 days, daily cases have jumped from 68,000 to 93,000. Overall testing is still far from adequate. Death rates are still mercifully lower. Deaths, at 478 daily, are 42% of that seen when nationally daily cases hit 97,000 level last year. Vaccination has to pick up; 0.8% of the population have received the Covid 19 injections both times and 5% has received the first dose.

One month of national lockdown costs 100-200bp of GDP

It remains to be seen if this second wave of Covid 19 cases subsides without a national level lockdown. Our analysis shows that a month of nationwide lockdown costs 100-200bp of GDP. Given the high economic cost, we expect the Centre and the state governments to try to contain the spread with the tightening of Covid 19 regulations, night curfews and localised lockdowns. After all, 81.9% of total new daily cases come from 8 out of the 29 states. The Maharashtra government has already announced stringent restrictions.
9% FY22 GVA growth; 300bp risk if national lockdown

Our base case continues to see real GVA growth rebound to 9% in FY22 from a contraction of 6.4% in FY21. This was driven by a 13.6% jump in April–September assuming return to normalcy. This assumes a significant vaccine roll out by June. If this stretches to the December quarter, there would be a 300 bp risk to our 9% FY22 growth forecast. We assess that a shut down due to rising cases also poses a similar order of downside risk by reducing the jump in April-September growth we assumed.

Edited excerpts from BofA Global Research’s India Economic Watch report dated April 6, 2021

(Authors are India economists, BofAS India. Views are personal)