There's a lot of uncertainty about near-term outlook: Aditi Nayar, ICRA

We are back in a situation where again the Covid-19 cases are rising rapidly. But we do not think we are going to get back into any kind of a major nationwide lockdown. We have learnt from the lessons of the pandemic, says Aditi Nayar, Principal Economist, ICRA to Tamanna Inamdar of ET NOW. Edited excerpts:

You have seen cases rising consistently since about the middle of February this year and now we have come to a situation where we are going back to what we saw a year ago, maybe even worse in terms of total number doubling days etc. Do you think this will have a similar impact on economic recovery?

Aditi Nayar: Absolutely. In the last few weeks – there has been a surge in Covid-19 infections and it is limited to some states but they are very important states as far as the overall economic activity is concerned. The fallout is that we are back in a situation where there is a lot of uncertainty regarding the near term output. It has been a year since the nationwide lockdown was announced and we had shut down completely as far as production was concerned. We had a very rapid recovery until about December 2020 and as a result of that, India was able to exit the recession.

After that, we had a bit of a stabilisation period in January and February and the expectation was that because of the very positive base effect, we will get this large improvement in volume growth in March but concomitantly, we are in a situation now where the Covid-19 infections are rising rapidly. Some states and some cities have started to re-impose localised restrictions as well and that is counteracting that base-effect led improvement that we were hoping to see. To sum it up, we are back in a situation where there is a lot of uncertainty about the near-term outlook and it has become a little difficult to predict how soon we will really return to our durable pre-Covid normalcy with the way things are standing right now.

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When you say uncertainty in near term outlook, would this extend to supply-side constraints? Which areas of business activity do you think would be most impacted?

Aditi Nayar: I agree we do not think we are going to get back into any kind of a major nationwide lockdown. We have learnt the lessons of the pandemic and that is a very unlikely situation to be repeated, So large scale supply-side disruptions is not something that we are looking at. What we have seen is that restrictions have been re-imposed and that has again led to a change in behaviour and a change in what can and cannot be done in different local areas. In the last couple of months – on one hand, we have rolled out vaccination and sentiment has improved but because that access has been limited to only a certain part of the population, we have not seen a very major improvement in the contact intensive sectors. With restrictions again going up and the cases going up, it will again be the contact intensive services that I suspect will be the worst hit in the near term and their recovery will possibly get pushed back even further.

I was going through your report and among the many headwinds to recovery that you listed, one of them is that the vaccines may not be as effective as hoped for against newer strains of mutations. How real is that fear right now?

Aditi Nayar: We have projected India’s GDP and GVA which is the two metrics that we are tracking. They are going to go back to about 10% to 11% in FY22 and this will be led by normalisation in economic activity, a bump up after the vaccines are widely available and a low base factor as well. That is what we expect will lead to double-digit growth as well as a 15% growth in nominal terms in our current projection.

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The key upsides to our forecast are the faster-than-expected rollout of government spending, especially on the capital expenditure side but at the same time, thThe uptick in consumption will be rather uneven next year while some sections will be looking at sharply ramping up discretionary spending, especially on services, after the vaccine rollout. There could be large segments of society that really need to rebuild the savings that they drained during the lockdown. These would be people who work in the informal sectors, in the lower-end jobs in the contact intensive industries and people who are self-employed. So we do not expect to see a very broad-based surge in consumption in FY22.

The key downsides to our forecast are that firstly the surge in cases that we have seen recently is something that continues over an extended period of time resulting in a continuation of restrictions and an acceleration of restrictions in localised areas. Secondly, the vaccines which are available right now are not being effective enough against new mutations, new variants of the disease and really slower-than-expected rollout and availability of vaccines for a larger part of the population. With the latest phase that is about to start, still, a large part of the working-age population will not have access to the vaccine and these are people who are part of the workforce or the young adults up to 45 years of age and also people who drive a lot of aggregate demand. So the uncertainty will persist as far as the near-term outlook is concerned until a much larger part of the adult population is vaccinated.

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