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Second virus wave in India sparks economic concerns

Coronavirus India second wave
Medics in Guwahati, Assam, India (Source:

India, the world’s largest vaccine producer, is under the grip of a nationwide public health emergency. The second wave of coronavirus infections has sparked concerns about whether an economic revival can be achieved quickly in India, which saw the highest rise in Covid cases in the world on daily basis.

India’s second wave of virus surge has led to a shortage of critical care beds, oxygen supplies, and key medicines in hospitals and overwhelmed cremation and burial grounds in most states. According to World Health Organisation (WHO), five states in India – namely Maharashtra, Kerala, Karnataka, Tamil Nadu, and Andhra Pradesh – contributed more than 55% of total cases. Foreign nations like the US, UK, Singapore, and Hong Kong have also tightened travel curbs on India.

The sharp hike in new Covid-19 cases to more than 2,00,000 cases a day clears signs of an imminent second wave in the nation, that began in mid-April 2021, considerably higher compared to the first wave last year.

What caused surge in coronavirus cases in India?

Unlike the world’s largest lockdown last year, the response by Modi’s administration for the second wave of a surge has been muted with no nationwide lockdown. Further, India thought it had beaten the pandemic, with the government’s Vaccine Maitri initiative kicking off at the start of the year. As per critics, the government used the vaccination drive as an excuse to remove lockdowns and travel restrictions.

Criticism mounted over the Indian government as religious festivals and election rallies were being attended by thousands. Non-compliance with physical distancing, mask-wearing, and other public health measures also contributed to the current surge.

The new variant of Coronavirus which has a so-called double mutation is thought to be spreading faster than pre-existing variants, despite containment efforts in India. Aggravating India’s coronavirus crisis further, a third mutation in this B.1.617 strain has now been identified in at least four states (Maharashtra, Delhi, West Bengal, and Chhattisgarh).

To counter the spread, the Indian government unveiled plans to provide financial assistance for accelerating the manufacture of antiviral drugs and the production of medical oxygen.

The latest efforts to vaccinate all citizens above the age of 18 from May 1 (earlier restricted to only citizens aged above 45) could also provide some relief from rising cases as well as a prompt recovery rate.

As per health experts, the second wave of coronavirus can last up to 100 days and such waves will keep coming till 70% of the population is vaccinated and herd community is achieved.

Economic contraction unavoidable?

The second wave is rolling over the economy. Across the country, cities are beginning to lock down again, weakening business activities and forcing tens of millions of workers to migrate back to their home states. This has fuelled fears of poverty and an even greater spread from community transmission.

Many top-notch banks and brokerage houses like Moodys, IRCA Rating, S&P Global have downgraded India’s Gross Domestic Product (GDP) forecasts for FY22. While the International Monetary Fund (IMF) forecasted that India will grow 12.5% from 11.5% in early April, the Reserve Bank of India (RBI) kept its growth 2021-22 estimate unchanged at 10.5%.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, “the targets of around 11% GDP growth and above 30% earnings growth for FY 22 decided at pre-second wave period are likely to fall short.” 

As vaccines run short in supply for many states, the economic effect of the current wave is expected to be significant at least until the end of June 2021. India’s crisis of unemployment has been further exaggerated, marred by rising coronavirus infections across states.

As per data by the Shopping Centre Association of India (SCAI), businesses have been severely impacted, with the revenue falling by 50%. India’s banking liquidity surplus has also widened sharply during the first week of FY22, pressured by rising concerns over asset quality. 

“Amid cost rationalization by large firms, the first wave had an impact down-the-line suppliers/vendors like SMEs/MSMEs. They are particularly vulnerable now to this second wave”, Atanuu Agarrwal, Co-founder, Upside AI said. “Most of them are probably already on the brink and will not be able to survive another sustained lockdown without focused assistance from the government. If they are allowed to fail, this will have a cascading impact on employment numbers and non-performing assets.”

Further, economists are expecting India’s debt burden to be higher than the current IMF forecast. The Fund said India’s debt to GDP ratio increased from 74% to 90% on a yearly basis during the pandemic period. “In our baseline forecast under the assumption of healthy economic growth in the medium term, we see debt returning to about 80% over time,” Paolo Mauro, Deputy Director, IMF’s Fiscal Affairs Department told reporters recently in April.

Long-term outlook for Indian markets not to be underestimated

The second wave of coronavirus in India has also dampened investor sentiment and led to massive across-the-board selling in Indian equities, with Sensex and Nifty dropping by almost 4.5 to 3.3% respectively, this month. Foreign portfolio investors (FPIs) pulled out 1 bn USD so far this month from Indian markets. Meanwhile, India’s currency benchmark, Rupee plunged about 2.4% against the dollar this month.

However, India’s GDP per capita is 29x and 4x lower than the USA and China as per the World Bank, giving investors the immense potential for a catch-up in income over the next decades.

The stage may be set for a recovery in following years of lackluster movement in India’s corporate earnings, said Anand Gupta, Portfolio Manager at Eastspring Investments, adding that India offers active investors significant stock-picking opportunities and room to add alpha.

Calling India as one of the most diversified equity markets in Asia, he added, “While short term risks such as another wave of Covid-19, a botched vaccine rollout or sudden inflationary pressures bear monitoring, the diversity of India’s equity market suggests that there are opportunities, regardless of whether there is a bull or bear market at home.”

Also Vincent Mortier, Group Deputy CIO of Amundi Research, sees a huge potential in the Indian stock market, “There have been several developments that could help reshape the economy and unlock its long-term potential. The equity market is liquid and fast-growing. It includes among the highest number of stocks with market caps above $500m and among the highest number of stocks that quintupled in the last 10 years.”

Mortier furthermore sees opportunities in the Indian fixed income market. “It is under-developed compared to the equity market and is dominated by government securities. Recent reforms to improve liquidity and depth are paramount to make it more attractive to global investors”.