Q: India’s second virus wave has been much more ferocious than the initial outbreak last year. Has the economy been hit harder too?
A: Actually, real-time mobility and activity data suggest the economic damage from the second wave has been less severe than it was last year. Restrictions have been more targeted, firms appear to have adapted better to this round of restrictions and external demand has held up well. One other point worth making is that the economy was much closer to full health last year, so GDP had scope to drop much more sharply. That being said, we're still expecting the economy to shrink by around 5% over the second quarter.
Q: Are there any signs of improvement?
A: Fortunately, the outbreak is retreating as quickly as it surged. This has come alongside a bottoming out in economic activity too. There’s also some evidence that voluntary social distancing has become slightly less prevalent.
Q: The Indian economy recovered quickly after the initial outbreak subsided. Can we expect a swift rebound this time as well?
A: It's going to depend on how quickly localised restrictions are lifted. Most states governments currently sound more cautious about lifting restrictions, perhaps because they've learned lessons from the past few months. On the other hand, many are still extending lockdowns. And even in the small number of places where restrictions are being eased, the steps taken so far have been incremental. So the economic rebound is likely to be more gradual this time.
Q: What if restrictions are scaled back quickly?
A: Doing so would pave the way for a faster initial economic recovery. But it may come at the cost of a relapse further ahead. The slow vaccine rollout means that rapid reopening would increase the risk of renewed virus outbreaks, potentially with more transmissible variants.
Q: How have policymakers been responding?
A: The Finance Ministry hasn’t responded directly to the second wave but it did substantially loosen fiscal policy just prior to the outbreak. Meanwhile, the RBI has done what it can to safeguard the financial system and help struggling borrowers. We're telling clients that the RBI will likely keep policy very accommodative for the foreseeable future by keeping policy rates low and ramping up its purchases of government bonds on the secondary market.
Published 7 June, 2021 |