CRISIL Cuts India's Base-case GDP Growth Forecast by 150 basis points to 9.5%
Moneylife Digital Team 07 June 2021
The second wave of coronavirus (COVID-19) has thrown cold water over the Indian economy that was beginning to warm up after the most severe contraction since Independence. The rash of afflictions that followed forced states to lock down, hurting consumer and business confidence yet again. Consequently, ratings agency CRISIL has lowered its gross domestic product (GDP) growth forecast for India to 9.5% for the current fiscal, compared with 11% expected earlier.
In a report, it says, "The downward revision is premised on the clear hit to the two engines of growth - private consumption and investment - by the second wave. Our new base forecast assumes that COVID-19 restrictions will continue and mobility will remain affected in some form or other, at least till August. The pace of economic recovery will also be a function of what the pace of vaccination is in the coming months."
Mercifully, daily cases seem to have peaked for now, though they remain above the peak of the first wave. But the risks of another wave and tardy vaccinations mean states would be chary of fully unlocking anytime soon.
"That is unlike what we saw last fiscal, when a largely uniform and calibrated reopening spurred quite a sharp recovery," CRISIL says. 
The ratings agency says, it finds that countries with over 40% of their population vaccinated are seeing a faster and more broad-based economic recovery.
The government plans to vaccinate India’s entire adult population of about 68% of total population by this December – a tall order even if there are sufficient vaccines available.
CRISIL’s base case is 70% of the adult population vaccinated by December. "A third wave would pose a significant downside risk to the growth forecast, as would a slower-than-anticipated pace of vaccination. In such a pessimistic case, we see GDP growing at 8%," it added.
India’s GDP bounced back to the pre-pandemic level by the fourth quarter of last fiscal, after a sharp contraction in the first quarter. However, the second wave has likely erased those gains in the first quarter of this fiscal. 
Consequently, CRISIL says, it would take more than a quarter to revisit the pre-pandemic levels. "In our base case of 9.5% growth, that could happen after the second quarter. Assuming restrictions ease after August, recovery could strengthen and become more broad-based from the third quarter of this fiscal. In our pessimistic case of 8% growth, quarterly GDP would surpass the pre-pandemic level only in the third quarter," it added.
Commenting on the difference between the two waves of COVID, the ratings agency says, the second wave has presented a humongous health challenge, overwhelming the health infrastructure. Cases at the peak of this wave, at over four lakh daily, were more than four times that seen at the peak of the first wave in September 2020, at about 97,000. 
Even as daily cases are declining (they were at about 1.3 lakh as of 3rd June), they are still much higher than that at the peak of last year’s wave. Cases have also penetrated faster and more extensively in rural areas, it says.
Further, states most impacted during the first wave, in terms of share in all-India cases, – Delhi, Maharashtra, Karnataka, Kerala, Tamil Nadu and Uttar Pradesh – have suffered a heavy blow the second time as well, but over different periods. For instance, Maharashtra saw a sharp rise in new cases towards end-March and a peak in April, while Tamil Nadu’s case surge was in May.
Rising cases necessitated curbs and social distancing measures. Last year, a stringent nation-wide lockdown for two months was followed by a calibrated opening. By the time cases peaked in September, India was already in the fourth phase of unlock, and pent-up demand had started reflecting in faster rebound in economic activity.
"This time around, states announced restrictions of varying degree and duration, as they faced increasing caseloads at different periods. While current restrictions are not as strict as those imposed during the first nationwide lockdown, they are stretching longer. In their third month now, they are being further extended for example, in Maharashtra, Bihar, and Delhi, as states have been cautious in reopening, given the devastating impact of this wave, uncertainty of vaccine supply and possibility of a third wave.," CRISIL says. 
During the second wave, mobility has taken a sharp hit despite less stringent restrictions, given risk-averse behaviour. In early May, retail mobility had dropped to June 2020 levels, though there was a slight uptick – of seven percentage points – in the last week of the month.
CRISIL says, "With supply constraints for vaccines expected to persist due to limitations in scaling up production, a gradual coverage of vaccination implies mobility would recover slowly. The pace of vaccinations will thus be the key to consumer confidence and, in turn, economic recovery."
The only bright spot amid the persisting uncertainty is India’s exports, the ratings agency says, adding this has been due to the rebound in its major trading partners like the US, UK, and east Asia. 
"This is unlike the first wave, when global trade had crashed. Recovery, particularly in advanced economies, is expected to accelerate from the second half of this calendar year, aided by a larger vaccination coverage and stimulus packages. This, in turn, will support India’s exports, even as imports may be muted given the second-round hit to domestic consumption in this wave," CRISIL added.
According to the ratings agency, not just urban, but rural demand, too, may soften this time. It says, "Even as urban demand remains weak in the absence of any urban-focused policy support and given that urban areas account for about 70% of the services economy – the most-affected segment, rural demand, which was buoyant last year, may have come under threat this time around."
Further, when the pandemic hit last fiscal, people turned cautious and started saving more to take care of future employment and income uncertainties. Accordingly, household savings shot up to 21% of GDP in the first quarter of last fiscal from 9.8% in the preceding quarter.
But as the pandemic abated and the economy opened, the household savings trend normalised and people started spending again and household savings ‘unwound’ to 10.4% in second quarter and further to 8.1%2 in the third quarter of last fiscal.
"But that pattern appears to be different during the second wave," CRISIL says, adding, "Growth in deposits with scheduled commercial banks, a proxy for household saving, having about 50% share in households’ overall savings portfolio, has declined starting April 2021. Last year, in contrast, deposit growth had moved up."
"This could be indicative of pressure on incomes and a simultaneous rise in medical expenditure given the heightened ferocity of the second wave. This, in turn, implies that that the prospects of a pent-up demand could be bleaker this time," the ratings agency says.
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