The economy of India, one of the largest in the world, has been severely impacted by the second wave of COVID-19. This health crisis, which has escalated into a national catastrophe, has brought not only a surge in COVID-19 cases and deaths but also a series of devastating impacts on various aspects of the economy. From the decline in GDP, reduced oil demand, and rising unemployment to supply chain disruptions, the current situation mirrors one of the worst-case scenarios that many feared at the onset of the pandemic.
The Unstoppable Wave of COVID-19 and Its Impact on India’s Economy
In recent weeks, the relentless spread of COVID-19 has created significant uncertainty regarding the state of the Indian economy. To curb the outbreak, several states have started imposing restrictions on economic activities, albeit not as severe as those implemented in 2020. However, the impact of these restrictions is already being felt across the economy. According to the Nomura India Business Resumption Index, economic activity has significantly declined, dropping to 83.8 in the week ending April 18, compared to 99.3 just a month earlier. To put this in perspective, the index had fallen to 83.3 in October 2020, indicating that the economy is operating at levels similar to those observed late last year.
Downward Revisions in Growth Projections
Given the severity of the situation, analysts have already begun revising their growth projections for the fiscal year. Care Ratings, a credit rating agency, has lowered its GDP growth expectations to 10.2% from an earlier range of 10.7% to 10.9%. Similarly, economists at the State Bank of India (SBI) have revised their projections down from 11% to 10.4%.
It is crucial to note that while economic data might appear better due to the low base effect, this could be misleading. Year-on-year comparisons may show improvement due to the extremely low levels reached during last year’s lockdown, but quarter-on-quarter recovery may not materialize as expected.
The Impact of the Second Wave: Beyond the Numbers
After an abrupt and unplanned two-month lockdown in 2020 that pushed the Indian economy into a technical recession, Prime Minister Narendra Modi’s government has made it clear that it does not plan to reimplement such stringent measures. Even in the midst of the brutal second wave of COVID-19, Modi has urged state chief ministers to use lockdowns as a last resort to curb the spread of the virus.
However, the decision to avoid lockdowns does not mean the economy will be spared significant damage. In fact, several indicators already show that the Indian economy is under considerable pressure due to the ongoing pandemic wave. While part of this impact is due to restrictions imposed locally by state governments, another part is due to citizens’ behavior, who choose to stay home out of precaution.
Rail and Road Transport: An Indicator of Economic Activity
Rail transport is a crucial component of the Indian economy, with over 30% of all industrial goods in the country moving by train. Therefore, the volume of rail freight is considered an important indicator of economic activity.
With many parts of India, including major metropolitan cities like Mumbai and Delhi, under lockdowns imposed by state governments, the average daily volume of rail freight has decreased by 11% in April, according to data from Indian Railways. This drop in freight volume not only reflects restrictions in logistics but could also be an indicator of declining demand in some parts of the country.
Reduced Mobility: The Effect of Curfews
Mobility has been one of the most affected aspects due to the restrictions imposed in several cities. With partial and total curfews in place, the number of people moving from their homes has drastically decreased. The Apple Mobility Index, which measures the number of direction requests in Apple Maps, shows that citizens in India’s major cities are moving much less in April compared to the previous three months. This reduction in mobility has a direct effect on sectors like retail, transportation, and services.
Rising Unemployment: A Persistent Problem
One of the most significant impacts of the 2020 lockdowns was the abrupt rise in unemployment, especially in the unorganized sectors. In April 2020, India’s unemployment rate reached an alarming 23%, pushing millions of people into poverty.
As the country began to reopen, the labor market showed signs of recovery, and by February 2021, the unemployment rate had fallen to 6.9%. However, with the resurgence of COVID-19, the employment situation has deteriorated again. In April 2021, the unemployment rate rose to 8.4% once more. Urban areas, in particular, are experiencing a job crisis, with unemployment rates exceeding 10%.
Weakening Business Activity
These challenges are reflected in the Nomura India Business Resumption Index, which shows a significant weakening of business activity in the country. The index considers parameters like Google Mobility Index, Apple Mobility Index, power demand in India, and labor force participation rate. On April 11, the index dropped to 90.4 from 99.3 in the first week of February, indicating a slowdown in business activity.
Government Concerns: A Difficult Balance
The Indian government faces a complex dilemma. With the steady rise in COVID-19 cases, there is a possibility that even stricter restrictions will be implemented to curb the virus’s spread. However, this could have severe economic consequences, including supply chain disruptions, which, along with rising commodity prices, could put pressure on inflation.
Additionally, the rising unemployment and declining economic activity are raising concerns about the financial sustainability of state and central governments. With economic growth slowing down, tax revenues could decrease, forcing governments to increase their borrowing levels, putting pressure on bond yields.
An Uncertain Future
The economic uncertainty in India is palpable and is unlikely to dissipate in the short term unless the COVID-19 case load begins to decrease significantly. In this context, it is crucial that the government and health authorities work together to expand economic relief and ensure the availability of basic medical supplies. Moreover, it is essential to accelerate the vaccination program to contain the spread of the virus and mitigate the economic impact.
In conclusion, India’s economy is navigating through one of its most challenging periods. The second wave of COVID-19 has not only strained the healthcare system but has also put immense pressure on the country’s economic fabric. The road to recovery will require coordinated efforts, strategic policymaking, and an unwavering commitment to safeguarding both lives and livelihoods. The future remains uncertain, but with resilience and prudent decision-making, India can overcome this crisis and emerge stronger in the post-pandemic world.
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