NOIDA, INDIA – APRIL 11: A woman holds a pot at a food distribution by Noida Authority in Morna Village in Sector 35, closing on day eighteen of the 21 days to curb the coronavirus, on April 11, 2020 in Noida, India . (Photo by Virendra Singh Gosain / Hindustan Times via Getty Images)
Hindustan Times | Hindustan Times | Getty Images
A second wave of Covid-19 infections is expected to slow India’s economic recovery in the three months between April and June, according to Goldman Sachs.
The investment bank on Tuesday lowered India’s growth forecast for the quarter from 33.4% year-on-year to 31.3%. It cites the lower consumption and service activity probably due to increased social constraints imposed by the Indian state and federal governments to tackle the new outbreak.
Goldman said it expects gross domestic product (GDP) to shrink by 12.2% year-on-year on a quarterly basis for the three months to end-June – India’s first quarter of fiscal year, which begins on April 1 and ends on March 31, 2022. Last year, India plunged into a technical recession after registering two consecutive quarters of contraction.
‘With virus cases rising to a new high of more than 100,000 a day over the weekend, and a number of states, including Maharashtra, announcing stricter closure restrictions that are likely to expand in the coming weeks, we expect GDP growth in the second quarter will be slower than we initially expected, ‘Goldman analysts wrote.
Record high cases
Business in India has been on the rise since mid-February, with the state of Maharashtra – home to India’s financial capital, Mumbai – particularly hard hit. On Monday, India reported more than 103,000 new cases over a 24-hour period, surpassing the levels seen in September when the first wave of infections peaked.
On Tuesday, the South Asian country reported 96,982 new cases, most of them in eight states including Maharashtra, Chhattisgarh and Karnataka.
Authorities in Maharashtra have tightened the restrictions, including the introduction of night-time rules when only essential services will remain open, as concerns arise about a possible shortage in hospital beds and doctors. Other states are also increasing restrictions to slow down the spread of the virus.
On the other hand, India has also intensified its vaccination efforts. As of Tuesday, government data said the country had administered more than 84 million doses since its massive vaccination program was launched in January.
Some analysts and investors have said that the impact of the recent increase in cases is likely to be limited if India can avoid a strict national exclusion like the previous year.
Sharp setback in subsequent quarters
Goldman expects operations to bounce back strongly from next quarters – July-September onwards – as India’s restrictive policies normalize and the vaccination rate accelerates. Yet the April-June quarter hit is likely to affect India’s overall growth projection for the financial year, which Goldman now expects at 11.7%, compared to an earlier forecast of 12.3%.
That said, the investment bank has warned that uncertainty surrounding its estimates remains high, and that the real impact could be greater or smaller, depending on how stringent India’s austerity policies appear to be, and whether it spreads to sectors such as construction and manufacturing.
The impact on GDP could possibly be mitigated by more targeted, localized restrictions on hotspots as opposed to a broad national exclusion, such as that undertaken by India last year, which, according to Goldman, had a significant socio-economic impact.
“Measures are also more targeted and skewed towards service sectors such as leisure, leisure and transport, with little or no impact on agriculture, manufacturing, construction and utilities,” the analysts said, adding that the bank’s analysis suggests that people are becoming more accustomed to a post-Covid environment, with a shift to e-commerce and working from home. As such, their response to childbirth policy is likely to be less sensitive.
Goldman also expects the Reserve Bank of India to keep its policy rate at 4%, as well as its accommodative stance and an environment with abundant liquidity longer than expected.