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BW Businessworld

Economy: Return Of Unknown

How adverse the impact of the deadly second wave of the pandemic on the economy would be is a key question before the experts

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Indian economy finds itself on shaky ground yet again. A record surge in Covid cases coupled with crumbling health infrastructure, and partial lockdowns as a result thereof, are giving rise to a creeping atmosphere of uncertainty and panic. Manufacturing industries have started reporting shortage of semi-skilled labour. Lockdowns across major cities and some of the states have led to another round of labour migrations — from metros and Tier-I cities to the hinterland.

India’s largest bank State Bank of India has revised its growth projection for 2021-22 downward by 60-70 basis points. A SBI research report pegs India’s real GDP for FY22 at 10.4 per cent (from 11 per cent forecast earlier) and its nominal GDP at 14.3 per cent (from 15 per cent earlier) respectively, citing the second wave of Covid-19 and the spate of ongoing partial, local, and weekend lockdowns in almost all states.

As per an initial estimate, India stands to lose around Rs 1.5 lakh crore owing to the various partial, semi-partial lockdowns. However, with some of the states extending the lockdown by 7 to 15 days, with a good chance of a further extension, the financial loss could very well double. The surging Covid-19 caseload has forced Goldman Sachs to downgrade India’s GDP growth forecast for the full year to 10.5 per cent from 10.9 per cent, apart from pegging down stock indices valuation and earnings.

An EY analysis says: “Indications are that the GDP growth projections by the RBI at 26.2 per cent for Q1 FY22, which is dependent on a strong base effect, would be challenged by the adverse impact of Covid-19’s second wave.” But some of the key economic parameters were on a shaky ground much before the second wave. For example, PMI manufacturing fell to a seven-month low of 55.4 in March 2021. PMI services also saw a decline to 54.6 in March 2021, down from 55.3 in February 2021. Index of Industrial Production or IIP contract ed (-) 3.6 per cent in February 2021, its second successive contraction in the final quarter of FY21. Core IIP had also contracted (-) ed (-) 3.6 per cent in February 2021, its second successive contraction in the final quarter of FY21. Core IIP had also contracted (-) 4.6 per cent in February 2021 as compared to a growth of 0.9 per cent in January 2021. “Reflecting supply-side constraints and the upsurge in the global crude and commodity prices, CPI inflation in March 2021 reached a level of 5.5 per cent while WPI inflation shot up to a 96-month high of 7.4 per cent,” said D.K. Srivastava, Chief Policy Advisor, EY India, in his analysis.

Amidst all this, the GST revenue collection for April 2021 had set a new record. “The gross GST revenue collected in the month of April 2021 is at a record high of Rs 1,41,384 crore of which CGST is Rs 27,837 crore, SGST is Rs 35,621, IGST is Rs 68,481 crore (including Rs 29,599 crore collected on import of goods) and cess is Rs 9,445 crore (including Rs 981 crore collected on import of goods),” an official statement said. “Indian businesses have once again shown remarkable resilience by not only complying with the return filing requirements but also paying their GST dues in a timely manner during the month,” it added.

RBI To The Rescue
Amidst a raging pandemic the worst of which India is facing, Reserve Bank of India Governor Shaktikanta Das, on May 5, announced a number of schemes and measures so as to apply a soothing balm to India Inc’s concerns related to loans and debt. These included second round of loan restructuring and various other relief measures. For example, announcement of a term liquidity facility of Rs 50,000 crore to ease access to emergency health services under which banks would be able to provide fresh lending support to those engaged in manufacturing/ import/supply of vaccines, medical devices, oxygen, ventilators, Covidrelated drugs, path-labs, among others, till March 31, 2022.

“There will be a three-year Special Long-Term Repo Operations (SLTRO) of Rs 10,000 crore at repo rate for small finance banks (SFBs) to be deployed for fresh lending of up to Rs 10 lakh per borrower. This facility would be available till October 31, 2021,” Das said, adding that the SFBs lending to micro finance institutions would be categorised as priority sector amid the ongoing Covid-19 pandemic.

“The three-year facility, which the banks can advance to the tune of Rs 50,000 crore, is a good measure to immediately help ramp up medical and healthcare facilities. The smaller entities like micro finance institutions also benefit from the current package, which will bring some relief to them too which is one of the worst affected sectors as of now,” says Joseph Thomas, Head of Research, Emkay Wealth Management.

Aviation Hit

The second wave has severely dented the recovery trajectory of the Indian aviation sector which otherwise was on a strong growth c ur ve be tween October 2020 and March 2021 with some airlines witnessing doubledigit increase in their respective passenger load factor (number of passengers as a percentage of total seating capacity of an airplane).

Significant recovery in passenger traffic in the third quarter of FY20 (October-December quarter) coupled with strict costcontrol measures were seen as major positives in the domestic aviation business. But a strong surge in Covid cases, especially at the top six airport locations —Delhi, Mumbai, Bengaluru, Kolkata, Chennai and Pune — that account for over 55 per cent of the overall passenger traffic, has now virtually shut the doors on any chance of a turnaround for the domestic carriers.

As per a report by India Ratings & Research, a Fitch group company, “Delays in vaccination rollouts remain the key constraint to a strong aviation recovery.” However, there is some hope if the Covid cases start decreasing significantly over the next three months. “Rising fuel expenses, returning cost inflation and the need for balance sheet repair (for some players) in FY22 make the case for a healthy yield trajectory. This however could be partially offset by the desire of airline companies to realign market shares to pre-Covid times. Also, players such as Go Airlines, in a bid to re-invent themselves in line with a changing market, have announced plans to become an ultra-low-cost carrier which could further impact yields,” it said.