The Centre has expressed cautious optimism on the impact of the Covid-19 second wave on the economy with Chief Economic Advisor KV Subramanian believing that it will be muted. But this optimism is not shared by many economists, who think the growth projection for 2021-22 (FY22) may need to be moderated.

The National Statistical Office (NSO) on Monday said that economy grew 1.6 per cent in the January-March, fourth, quarter of 2020-21, and this will limit the contraction for the full fiscal year to 7.3 per cent as against -8 per cent estimated earlier. The economy’s Gross Value Added shrank 6.2% in 2020-21 compared to a 4.1% rise the previous year.

“We do not anticipate a significant impact on GDP (during FY22),” Subramanian said in a virtual media briefing. However, this optimism came with a caveat on the uncertainty over the pandemic. Many doctors and virologists are talking about third wave, without giving any timeline for it.

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Internal assessment

Giving a detailed presentation on the macro economy, Subramanian said that an internal assessment of the economic impact of the second wave was undertaken. Based on that, two scenarios were visualised. First, the ‘Worst case Scenario’ that assumes Covid peaking by mid-June, which means stringency in April, May and June and normalcy in subsequent months. Second, the ‘Expected Scenario’ wherein the peak happens in mid-May, with stringency in April and May and then a return to normalcy.

“As per the pathway of the second wave, India peaked on May 8. ‘Expected Scenario’ seems most probable,” he added with a caveat that these estimates are subject to uncertainties in the trajectory of the pandemic during the year (intensity of the second wave could not be predicted by epidemiologists). The CEA also called for enhanced pace of vaccination.

 

Numbers must be balanced

As expected, not many economists shared the optimism of the CEA. Though many did feel that FY21 numbers are better, they did not think this would change the big picture. Alok Sheel, RBI Chair Professor in Macroeconomics at ICRIER, said these numbers would need to be counter-balanced by likely downgrades of current GDP growth estimates for FY22. The consensus number for this is now down to below 10 per cent on account of the severity of the second wave of Covid-19.

“It may be recalled that the IMF projection was 12.5 per cent in its WEO of April. Thus, the overall rebound of the economy through to FY22 is likely to be lower, and the output loss greater, than what can be estimated from the WEO April 2021 numbers,” he said.

DK Srivastava, Chief Policy Advisor, EY India, said that with a lower contraction in GDP and GVA in 2020-21, the sharp recovery projected for 2021-22 by a number of agencies such as the IMF at 12.5 per cent and the RBI at 10.5 per cent may have to be moderated. These projections were done prior to the impact of the second Covid wave. “The combination of Covid’s second wave and the revised base effect may imply a lower GDP growth for the Indian economy for 2021-22, which may be in the range of 9-9.5 per cent,” he said.

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