Experts Foresee Economic Revival After Q1

Market volatility will be short-lived

Experts Foresee Economic Revival After Q1
Experts Foresee Economic Revival After Q1
Yagnesh Kansara - 22 April 2021

The current battle between the virus and the vaccine is expected to be won by the vaccine and the volatility seen in the market will be contained shortly. The damage done to the market with the resurgence of covid-19 cases will be limited to the first quarter (April-June) of 2021-22.

This is evident from the fact that in the second wave of the Covid-19 the spread of people infected is 70 per cent faster and newer mutants are found, the solace is that the fatality rate is far low compared to the first wave seen last year. This is because mass inoculation is picking up across the globe including India and the governments have preferred localised restrictions rather than opting for nationwide lock down.

India's second covid wave has intensified and widened in regional reach within a short period due to mismatch between the demand and supply of vaccines as well as oxygen required for serious patients. This has raised uncertainties about the economic outlook. Compared to a blanket nationwide lockdown last year, the government's ongoing response is relatively calibrated and targeted to contain the virus spread and minimise the impact on economic activity.

However, if daily covid cases continue to climb up, overwhelming the health infrastructure, state governments may have to resort to stricter restrictions/lockdowns, weighing on the economy.

Based on recent developments, India Economic Monitor (IEM) in its report said, “We see downside risks to our real GDP projection of 12.4 per cent YoY in 2021-22 by 100-250 basis points. However, given the highly dynamic situation, we will wait for more data to quantify the extent of the required revision”.

The second covid wave is expected to weigh on sequential economic recovery, mostly in the first quarter of 2021-22. “The economy should rebound quickly in the following quarters, assuming the second covid wave peaks in coming weeks and vaccines remain effective against virus variants,” it said.

Several factors should support the faster resumption of economic recovery from the near-term impact of the ongoing covid wave. These factors include a rapid vaccination drive, adaptability to a ‘new normal’, somewhat improved corporate and household balance sheets, fiscal spending focused on investment, and better external demand.

Experiences of other countries also suggest that second/third waves are less likely to derail economic recovery despite higher covid cases. Moreover, India’s recovery momentum before the intensification of the current covid wave should add to resilience. While policy space is relatively less compared to last year, the government has the flexibility to front-load spending while the central bank could postpone the policy normalization process, IEM report said.

In its last Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) committed that the stance of policy will remain accommodative till the ‘prospects of sustained recovery are well secured’ while announcing an upfront government bond-buying acquisition programme to manage the orderly evolution of the yield curve.

Market observers also see a political angle to the controversy of rising covid cases and resultant shortage of vaccine and oxygen requirements for the covid patients. They also pointed that the number of covid cases has spurted in those states where non-BJP governments are in power. The examples are Maharashtra, Punjab, Rajasthan, Kerala, and Delhi.

Right now five states are undergoing state assembly elections - Assam, Tamilnadu, Kerala and West Bengal along with the union territory of Puducherry. In West Bengal, the assembly elections are carried out in eight phases of which five phases are over, while three more are expected to be completed by April 29. The election results for all the state assemblies will be declared on May 2, 2021.