Surge in Covid-19 cases weighing on India outlook

Daniel Richards - MENA Economist
Published Date: 20 April 2021


The outlook for India’s economy this fiscal year (April-March) has become more clouded in recent weeks amidst a surge in Covid-19 cases and renewed restrictions on activity. While the IMF recently projected real GDP growth of 12.5% this year, we are somewhat more bearish with our projection of 10.4%. The IMF acknowledged in its latest World Economic Outlook the high levels of risk associated with its global growth forecasts this year, which are open to setbacks as the Covid-19 pandemic ebbs and flows. Its growth forecast for India was formulated before the current wave of the virus, and even at its press conference on April 6 it conceded the new and ‘severe’ risks to the economy. Bloomberg consensus is for 11.0% growth this year.

There remain grounds for optimism…

Our more bearish growth outlook is not to discount what we still believe will be a fairly robust turnaround in India this year, following a contraction of -7.5% in 2020/21. India’s manufacturing PMI survey has been consistently positive (above 50.0) since August last year, and averaged 56.9 over January to March, levels not seen since 2011. While the nature of the pandemic crisis meant that services were slower to recover from the April 2020 slump – when they hit just 5.4 – they have been positive since October, and averaged 54.2 over the past three months, and we do not expect that this positive momentum will be immediately derailed given the high level of fiscal and monetary support.

India Markit manufacturing PMI

Source: Bloomberg, Emirates NBD Research

The government announced sizeable fiscal stimulus in October last year which includes higher capital investment by the government amongst other ongoing support measures for businesses and households, and officials have said that it is prepared to do more as it combats this new surge. This government action will be supported on the monetary policy front by an accommodative Reserve Bank of India (RBI) which has embarked on formal quantitative easing for the first time. At its April meeting the central bank pledged to purchase as much as USD 14bn of bonds this quarter in order to keep borrowing costs low and support the economic recovery.

…but a resurgent pandemic will weigh on growth

However, while the overriding outlook this year is for strong growth, even in February data show that the new surge in cases was starting to weigh on industrial production, and the near-term outlook has only got worse. That month, industrial output was down -3.6% y/y, missing expectations of -3.0%. In the middle of February, the seven-day moving average of new Covid-19 cases in India was 129,000; on April 19 it had risen to 219,000, far surpassing the earlier September peak of 93,000, and the trend is decisively upwards. In this environment, there have been renewed lockdowns which will weigh on the economy through April at the very least. The state of Maharashtra, the biggest state economy which accounts for around 14% of GDP and comprises the commercial hubs of Mumbai and Pune, has already seen new curfews, and a new total lockdown is being mooted. There have also been new restrictions imposed in New Delhi and other major cities around the country.

India Covid-19 cases (7dma) surging

Source: Bloomberg, Emirates NBD Research

Meanwhile, the actions by the RBI and the surge in cases is exerting renewed pressure on the rupee, which broke the INR 75/USD level for the first time since August on April 12. While it has come back to 74.75 at the time of writing on April 20, this is a reversal for a currency which had been an EM outperformer in the preceding months. Alongside higher oil prices, this will keep inflationary pressures in India salient: CPI inflation came in at 5.5% y/y in March, moderately outpacing expectations of 5.4%, and up from 5.0% in February. While the RBI has signaled it will look through these levels and a hike to the repo rate is unlikely, at the same time a rate cut is an equally slim prospect, and an extended hold at the current 4.00% is now the most likely scenario.