India: Rising COVID cases threatens the economic recovery – UOB

Economist at UOB Group Barnabas Gan comments on the recent pick-up in coronavirus cases in India and the implications on the ongoing economic recovery.

Key Quotes

“India’s COVID-19-related risks continued to escalate in recent weeks. Recently, daily new infections clocked over 300,000 cases, surpassing the global record increase of any one economy.”

“Economic prognosis turned south fairly quickly. As recent as March 2021, India’s 3QFY2020/21 GDP expanded for the first time after clocking two straight quarters of contraction. Back then, the economic outlook appeared to be better considering the improving high-frequency data such as consumer confidence and business expectations.”

“We observed a clear shift in official rhetoric in recent weeks. Prime Minister Narendra Modi recently commented that India is facing a coronavirus “storm” amid an overwhelmed health system. This follows the Reserve Bank of India’s (RBI) view that global economic recovery may be “held back by new mutations of COVID-19” in its latest monetary policy statement in April.”

“On the assumption that India will struggle to see a quick and meaningful reprieve from the current COVID-19 wave in the immediate horizon, first-order negative impact will likely come from a sustained slowdown in private consumption (57.1% of GDP in FY2019/20). This is following the decline in consumer confidence seen to-date. Meanwhile, Gross Fixed Capital Formation (GFCF, 32.5% of GDP) may not stage a meaningful recovery as domestic and external investment demand taper on COVID-19 fears.”

“Market-watchers will be closely monitoring the upcoming RBI meeting on 2 – 4 June 2021. We think that RBI will likely drop its optimistic rhetoric previously seen in its April meeting, and potentially cut its full-year growth outlook from the current 10.5% level.”

“Given the spike in COVID-19 cases in India, we see considerable downside risk to our full-year GDP growth expectation of 10.5% in FY2021/22. Given the headwinds against India’s key growth support pillars such as private consumption, GFCF and the services sector are expected to take a hit from the current COVID19 wave.”