Published: 19th May 2021
COVID's second wave has caused humanitarian crisis in India, not economic: Japanese report
It is not an economic crisis. The report says the hit to mobility due to the rolling state-wide lockdowns has been steep, and the economic impact is likely to be most severe in May
India's second COVID wave is a humanitarian rather than an economic crisis, according to Japanese brokerage, Nomura.
"India's second wave has likely peaked, but in its wake, it has unleashed a devastating human cost. A more virulent virus strain and stretched hospital capacity have resulted in a sharp rise in fatalities," the report said.
It is not an economic crisis. The report says the hit to mobility due to the rolling state-wide lockdowns has been steep, and the economic impact is likely to be most severe in May. However, we expect the overall hit to sequential growth in Q2 (April-June) to be much less severe than last year and less than what the drop in mobility suggests, as lockdowns are more nuanced this time and consumers and businesses have adapted, a view supported by international evidence.
"We expect lockdowns to last for around six weeks and be followed by selective reopening in June, which should result in better sequential growth. We expect the pace of vaccinations to accelerate after June: Vaccinations are trailing currently, but our analysis of vaccine supplies suggests the pace will rise sharply after June. We expect half of the population to be fully vaccinated by end-2021 and India to reach its vaccine pivot point in Q3, which should boost domestic consumption," the report said.
As pandemic uncertainty ebbs and vaccinations rise, the full impact of easy financial conditions on growth should also become visible. Overall, we expect the second wave impact to be localized in Q2 (April-June), with GDP contracting by -3.8% q-o-q, much less than during the first wave (-24.6% in Q2 2020), and overall GDP growth likely at 9.8% y-o-y in 2021 and 10.8% in FY22 (year-ending March 2022).
Inflationary pressures appear set to intensify. Nomura sees cost pressures intensifying from supply chain disruptions, high global commodity prices and rising rural wages, some of which will likely be passed on to consumers. We believe core inflation will remain elevated at 5.3% y-o-y in 2021, topping the already-elevated 5.1% in 2020.
Despite the second wave shock, India's business cycle remains on an uptrend. The report says the second wave has exacted a large human cost, but we expect its economic impact to be localised in Q2 and muted overall.
Faster vaccinations after June, strong global growth and easy financial conditions are likely tailwinds to the ongoing business cycle recovery.
India's second wave likely peaked in early May. During this wave, a new 'double mutant' variant of the virus was discovered, which has been found to be more infectious than the variant that was responsible for the first wave; this likely resulted in the rapid transmission of the virus at a time when pandemic fatigue had set in and the economy was re-opening. However, in line with experts' expectations, the pandemic curve seems to be correcting, the report said.
The official daily death rate is tracking at around 4100 (7-day MA), which marks a slight moderation in the growth rate to 2.5% w-o-w from 6.9% last week.
The situation remains mixed: among the states with the top 6 case loads (15k-40k daily cases) currently, the pandemic curve for Maharashtra -- the epicentre of the second wave -- has clearly inflected, while Karnataka, and to a lesser extent Kerala, are starting to show incipient signs of flattening.
However, states like Tamil Nadu, Andhra Pradesh and West Bengal are at risk given their high case loads and inability to flatten their curves yet.
For the next five states (around 9,500-15,000 daily cases), most states have inflected, most significantly Uttar Pradesh. Odisha remains the outlier with an increasing pace of cases. For the next five states, again we find encouraging signs of flattening among most states, except for Punjab, where the curve has yet to flatten materially.
The case fatality rate -- daily deaths as a share of new infection cases -- under the second wave (around 1.1%) is lower than during the first wave (around 5% at its peak), but the mortality rate has risen over the last month due to overcapacity issues at hospitals. Given the mortality rate lags new infection cases by a few weeks, daily deaths, which have risen to an average of 4100 per day from 300 at end-March, may remain high, the report said.
The current supply capacity is unable to keep pace with the rising demand for vaccines amid the second wave, resulting in the daily pace of inoculation rising from less than 0.5mn doses per day in early February to a peak of close to 3.5mn doses per day in mid-April, but since slowing to 1.6mn per day as of 18 May (7-day MA), the report said.
The priority is now given to those scheduled to receive their second dose, with the pace of first dose starting to fall. More recent concerns include whether these vaccines are effective against the double mutant strain. Research is still ongoing, but a recent study by the Indian Council of Medical Research (ICMR) and the National Institute of Virology suggest that Bharat Biotech's Covaxin is effective against the Brazilian, British, and the Indian mutants of the virus.
The vaccination pace varies across states. The states with the highest vaccination rates (20-32% of population) are Himachal Pradesh (HP), Goa, Kerala, Chhattisgarh, Gujarat, Delhi and Rajasthan. Of these, HP and Goa appear relatively low risk (below 10k cases/day), Kerala is high risk, and others are in the medium-risk category.
The next cohort of vaccinated states (i.e., where 15-20% of the population has been inoculated), includes Maharashtra and Karnataka among the high-risk states, and Haryana and Odisha are among the medium-risk ones. Among the states with a lower proportion of population vaccinated, Tamil Nadu is concerning given its rising cases, as are states like West Bengal and Andhra Pradesh that have yet to materially stabilize their pandemic curves, the report said.