Indian Economy – Post Covid19 Second Wave

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) held its bi-monthly meeting last week in the backdrop of the COVID-19 pandemic.

The MPC, as was expected, left the repo rate and the reverse repo rate unchanged at 4% and 3.35% respectively, keeping in mind the exponential surge in infections during the second wave and its impact on the economy. A few of the other data and measures released by RBI are listed below.

·   Real GDP growth for FY 22 has been revised downwards to 9.5%.

· CPI inflation is projected at 5.1%.

· To mitigate the hardships being faced by the services sector such as hotels and restaurants, tourism, car rental operators, events/conference organizers, and other service providers a special liquidity window of Rs 15000 crores at the repo rate is being opened till 31st March 2022 under which banks can provide lending support to such industries.

·   To support the funding requirements of MSMEs, a special liquidity facility of Rs 16000 crores is being extended to SIDBI at the repo rate for on-lending/refinancing.  

While the measures introduced by the RBI would serve as a booster shot for the economy, it is necessary to look at certain critical performance indices to have an overview of the current status of the economy and the factors that may impact the future trend.

Covid infections – After hitting an unprecedented 4 lakh plus cases in the beginning of May the numbers have started declining steadily and have since dropped below the 1 lakh mark. The figures in the coming days/weeks would indicate if the second wave is behind us.  However, health experts have predicted a third wave sometime during Q3. Vaccination and scrupulously following COVID protocols appear to be the only way to beat the virus.

Lockdowns – Unlike the previous year, the lockdowns this year have been localized and state/region specific and thus not having the same kind of impact on the economy as was felt last year. With several states starting “Unlocks” operations it is expected that the impact may not be as severe from June onwards as in the previous months.

Performance of Manufacturing Sector – As per the IHS Markit Purchasing Managers Index (PMI) the performance during May slid to 50.8 from 55.5 in April showing a loss of growth momentum. While the companies foresee increased output this year the overall level of positive sentiment has dipped.

Performance of Services Sector – As per the IHS Markit Purchasing Managers Index (PMI) the performance during May slid to 46.4 from 54.0 in April. This is the first time since September 2020 that the index has dropped below 50. The drop was on expected lines as hotels and hospitality industries, tourism, travel, and other services have borne the brunt of the lockdown impact.

Job Losses – As per the data released by the Centre for Monitoring Indian Economy (CMIE) the total unemployment number was 390.8 million against 375.5 million in April. This is the fourth consequent month of fall in employment.

GST Collections – Total GST collections in May were at Rs 1.02 lakh crore against Rs 1.40 lakh crore in April.

 Forex Reserves – India’s forex reserves stood at $ 598.2bn as of 28th May 2021.

GDP Forecast – Most of the credit rating agencies had, during Feb/Mar 2021, forecast double-digit GDP growth for FY 22. However, post the second wave of the pandemic all the agencies have made a downward revision in the forecast which is now expected to be in the 9.3% to 9.5% band. 

Considering all the factors stated above, one could safely assume that the possibility of the Indian economy clocking a 9.3% growth during FY22 is very much on the cards. However, the following three factors would play an important part in achieving this number:-

1. The vaccine manufacturers can scale up their production to meet the target of vaccinating the entire country, with at least one dose, by the year-end.

2. The second wave dissipates by July.

3. The third wave does not turn out to be as devastating as the second wave.  

 We keep our fingers crossed.


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