Can India’s economy withstand a third Covid-19 wave?

The rapid spread of the Omicron coronavirus variant among India's population of more than 1.3 billion people is not a good omen for the country's economic recovery, with businesses facing growing uncertainty as the new year begins.

The possibility of a significant rise in infections and a tightening of pandemic-related restrictions threatens to derail the economy at a time when businesses in Asia's third-largest economy have started to recover from a historic recession.

“The advent of Omicron has clouded the economic outlook for 2022,” says Arun Singh, global chief economist at analytics and insights company Dun and Bradstreet.

“We expect the pace of growth to slow down” in India in the first half of the year as the infection rate continues to climb.

New Covid-19 curbs “will intensify supply bottlenecks, further aggravating inflationary pressures and weigh upon the optimism and consumer demand”, says Mr Singh.

Similar to other countries that are already suffering from the economic fallout caused by the new variant, India is also expected to experience the knock-on effects of what happens to the global economy, including on its import and export trends.

India fell into a recession in 2020 after New Delhi imposed one of the world's strictest lockdowns, disrupting business across the country.

However, activity picked up in 2021 and the economy managed to reverse the trend despite the country battling a deadly second wave of infections, which peaked in May and prompted authorities to reintroduce many Covid-19 restrictions.

The resurgence of the virus was a setback last year but the economic impact was not as severe as many businesses adjusted to the new normal.

The latest official data, for the quarter to the end of September, showed that India's gross domestic product grew by 8.4 per cent. Although this was compared to a low base from the previous year, it meant that the country was the fastest growing major economy in the world.

In a report published last week, the Centre for Economics and Business Research predicted that India will regain its position from France as the world's sixth-largest economy this year and become the third largest by 2031.

It is still too early to ascertain the extent to which Omicron will affect India. Many business leaders view it as a significant risk as the latest variant continues to spread at a rapid rate.

“It is possible that even a limited scare could somewhat upset the recovery", as another round of restrictions looms, says Suyash Gupta, director general of industry body the Indian Auto LPG Coalition.

India’s reported number of new daily infections increased to 22,775, according to data released by the country’s Ministry of Health on Saturday. At the same time, only two thirds of India's adult population had been fully vaccinated against Covid-19 as of Saturday.

“The new variant Omicron stands as a definite hurdle to the economic recovery,” says Ambrish Kumar, founder of digital logistics platforms Zipaworld and group chief executive of solutions company AAA 2 Innovate.

“Further lockdowns and other restrictions would lead to supply chain and logistic challenges that would affect exports and further increase the trade deficit.”

Several states in India have already introduced new Covid-19 restrictions while travel rules have been tightened due to the Omicron variant.

“Business activities could face headwinds,” says Srividya Kannan, founder and director of Bengaluru-based digital solutions consultancy Avaali Solutions. “Hopefully, we should be better prepared via lessons [learnt] from the past.”

The slowing momentum comes after her company enjoyed strong growth in 2021 as businesses pivoted to technology and digitisation to counter the effects of the pandemic.

While some sectors remain optimistic that they can weather the storm, Omicron remains a significant threat − considering the recovery so far has been "uneven across sectors and across regions”, Mr Singh says.

“Rising inflationary pressures and faltering of growth momentum could widen this uneven growth” divide if Omicron continued to spread, he says.

Many “employment-intensive sectors”, including hospitality and transport, are still below their pre-pandemic levels, and with the new variant on the rise, the travel and tourism sector is also expected to come under renewed pressure in 2022, he says.

There are also concerns about the impact a resurgence in infections and new restrictions could have on consumer spending. India is a consumption-driven economy and although demand has been recovering, economists say it has yet to return to pre-pandemic levels.

Ritesh Goenka, group managing director of Indian consumer electronics brand Just Corseca, says Omicron is “the biggest point of concern”.

After taking a massive hit in 2020 due to the pandemic, 2021 was "our best year in terms of business, tech and innovation”, says Mr Goenka.

But “as the cases of Covid are, again, shooting up, it looks like the consumers’ needs and daily lifestyle will go through a sea change”.

He is particularly worried about the effect that this could have on inflation, which would weaken consumers' spending power.

The potential fallout of Omicron forced the Reserve Bank of India to keep interest rates on hold in December, rather than increase them to tame inflation, as countering the risk to the economy became the bigger priority for the central bank.

Borrowing costs are still low in the country and there are widespread concerns that this could allow inflation to further rise in the coming weeks and months.

Higher crude oil and other commodity prices have already fuelled inflation and weighed heavy on companies in 2021. Business will certainly be keeping a close eye on them in the new year.

“The turbulent oil and energy market is one of the major factors that will affect both businesses and economies in 2022,” says Mr Kumar.

If Omicron does not wreak havoc, as many expect it would, economists say the RBI will consider raising interest rates in 2022 to counter rising consumer prices.

Aside from the virus and energy-driven inflation, businesses in India are feeling the pressure from the US Federal Reserve's plans to decrease its policy support and raise interest rates this year.

This will have indirect implications for companies in India as it would raise the cost of borrowing for businesses in the international market. It could also slow foreign capital flows to the Indian stock market, which already has higher valuations than its peers in Asia.

After “a super show in 2021, valuation levels in Indian equities could make most people cautious on India within emerging markets and Asia”, says Deepak Jasani, head of retail research at HDFC Securities.

India's benchmark BSE Sensex index surged to record highs in 2021 as investors bagged the best gains in four years, helped by investment from overseas. The benchmark S&P BSE Sensex stock index rose 0.8 per cent on Friday to end the year at 58,253.82.

This represented a 22 per cent surge for the year. However, the benchmark is down by about 7 per cent from its October highs.

“Indian equities are running into many challenges, including the US rate cycle, rising oil prices, elections in key states, potential Covid wave [number] three and an upward inflection in domestic interest rates,” says Mr Jasani.

In the first half of 2022, “the market could cool off as it absorbs the gains of the preceding 18 months … [but] it still has potential to positively surprise”, he says.

Amid expectations of the Fed unwinding its stimulus programme, the Indian rupee is also coming under pressure.

The currency traded at 74 against the US dollar on Friday, off its near record lows in December when it breached 76. Fitch Solutions forecasts the rupee will average about 76 against the dollar in 2022.

However, a significant amount of uncertainty remains on how the situation will unfold for investors and for businesses.

“Right now, we do not really know the extent of the damage that Omicron is capable of in the coming weeks and months in terms of health implications, as well as for the economy,” says Mr Gupta.

But he and many others are trying to remain hopeful that the variant will not prove to be deadly, which would enable the economy to “continue to forge ahead, remaining on its path of recovery and revival”.

Source: https://www.thenationalnews.com

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