Amidst the second pandemic wave, May was crucial for the Indian economy

Many companies are beginning to feel the impact of the total or partial lockdowns in many states as their supply chains are getting disrupted. This could lead to a downgrade in earnings projections. But the long-term impact of the pandemic will depend critically on how successful the country is in flattening the Covid curve in the coming month.

With Covid 19 cases spreading like wildfire across the country – on April 25, the daily cases in India were upward of 352,000 – many companies are grappling with shortages in supplies of raw materials as total and partial lockdowns in more than 11 states hit the logistics and supply chains of many industries.

Then, the total ban on use of industrial oxygen, and the diversion of capacities to the production of liquid medical oxygen (LMO) is worsening the looming crisis. Companies said their sales could begin to take a hit from next month unless the Covid situation changes for the better.

30-100 bps impact on GDP growth possible this year

Many experts are worried that rural demand, which remained robust even at the peak of the first wave of Covid on the back on a good monsoon and proactive steps by the Modi government to put money into the hands of farmers, could take a hit during Covid 2.0.

This could impact India’s growth prospects by as much as 30 basis points to 100 basis points (100 basis points or bps = 1 percentage point).

Rural demand helped temper impact of first wave of Covid

It was this robust consumption demand from the rural segment, which accounts for almost 46 per cent of the economy, that considerably tempered the effects of the recession, which saw the Indian economy contract 8.5 per cent in 2020-21. But even as the overall economy was reeling under the impact of the Covid-19 pandemic, the rural and allied sectors expanded 3.4 per cent at constant prices.

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Even as some analysts have begun downgrading earnings estimates of some of India’s largest bellwether companies, such as Hindustan Unilever, Tata Motors, UltraTech Cement, Bharti Airtel and others, in the wake of full, partial and local-level lockdowns in key states, experts said the way to tackle the problem is not rise above it by taking proactive measures, instead of reactive ones.

Resilience, maturity and planning to tackle pandemic

It is important for the corporate world and the rest of the country to show the same resilience when Covid first hit. As it happened a year ago, they advocate displaying the same level of maturity and planning to ensure there is no long-term impact on the economy. But most importantly, people of the country have to show more acute awareness of the crisis at hand, failing which it will become difficult to arrest the slide.

Several companies said their supply and logistics chains had been affected by lockdowns imposed in several states. This, they added, would impact their ability to deliver goods to their point of sale in the coming month.

Labour crunch feared as migrant workers return home

Supply chain constraints apart, many companies are particularly concerned about the possibility of a labour crunch as there are reports from many corners of the country of migrant labour returning to their places of origin, leaving their employers high and dry.

In this context, a statistical modelling exercise by scientists at the Indian Institute of Technology (IIT) Hyderabad and Kanpur, is giving some hope. The model has predicted that the second wave of Covid-19 will peak by the middle of May before declining steeply by the end of the month.

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An earlier model, which projected a Covid peak by April 15 didn’t turn out as per predictions. “This time, I have also computed minimum and maximum for predicted values and posted it. I am reasonably confident that the actual values will be within the min and max values mentioned,” Professor Maninder Agrawal, of the Department of Computer Science and Engineering, IIT-Kanpur, told PTI.

RBI forecasts give rise to optimism

Industry is also drawing confidence from the Reserve Bank of India’s policy review earlier this month. Following a meeting of the Monetary Policy Committee (MPC), RBI Governor issued a statement saying he expected the country’s GDP to grow 10.5 per cent in the current financial year.

The projected growth rate was left unchanged from earlier forecasts, indicating that the RBI does not expect the current round of Covid-related disruptions to last long or have any lingering impact on the economy.

May will be critical for the Indian economy

The next month will, therefore, be crucial in determining the trajectory of the Indian economy for the rest of the current financial year. If the second wave of Covid, indeed, begins to taper off sharply by the end of next month, then all the rosy projections of high double-digit growth will stand.

If the peak does not flatten, then policy makers and analysts alike will have to go back to their drawing boards to rechart the way out of the crisis.

The government is closely monitoring the situation and the Prime Minister himself is helming the efforts to lead India out of this health and economic crisis. The government’s sure-footed handling of the crisis last year gives hope that the current spike will also pass without too much permanent damage to the economy.