Moody's Investors Service estimates that the overall hit to India's economy will be softer than during the first wave last year.
However, the pace of recovery will be determined by (1) access to and delivery of vaccines, and (2) the strength of the recovery in private consumption, which could be hampered by the deterioration of balance sheets of low- and middle-income households from job, income and wealth losses.
The second wave of COVID-19 and the subsequent lock-downs came as India had been on a steady path toward economic recovery and double-digit growth. The virus resurgence adds uncertainty to India's growth forecast for 2021; however, it is likely that the economic damage will remain restricted to the April-June quarter. "We currently expect India's real GDP to grow at 9.6% in 2021 and 7.0% in 2022, it said.
The second wave was a shock to aggregate demand. "We expect the current lock-downs to have less of an adverse impact on economic activity than the nationwide lock-down in April 2020 because the latest restrictions have been more targeted, localized and less stringent. Also, consumers and businesses have adapted", it said.
The second wave has mainly affected aggregate demand, in contrast to last year when the national lock-down also constrained supply.
Stringent lock-downs in economically significant states will mar April-June economic activity. The 10 states that have been hardest hit by the second wave collectively account for more than 60% of the pre-pandemic level of India's GDP. Four states—Maharashtra, Tamil Nadu, Uttar Pradesh and Karnataka—contributed the largest shares among all states in financial year 2019-20.
Faster vaccination progress will be paramount in restricting economic losses to the current quarter. As of the third week in June, only about 16% of the population had received one vaccine dose; of those, only about 3.6% had been fully vaccinated. Mobility and economic activity will likely accelerate in the second half of the year as the pace of vaccinations pick up. The government recently announced a strategy to centralise vaccine procurement in order to boost vaccinations, which if successful, will support the economic recovery, it added.
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