Second Covid-19 wave poses a downside risk to economic growth: Finmin

Global cooperation is critical to ensure availability of vaccines and addressing inter-country disparities in vaccination rates


India economy | Coronavirus | Finance Ministry

The finance ministry on Friday said that the second wave of coronavirus (Covid-19) has posed a downside risk to economic activity in the April-June quarter of financial year 2022. However, it expects a muted economic impact as compared to the first wave.

The finance ministry’s Department of Economic Affairs (DEA) in its Monthly Economic Review for April said “the second wave in India is witnessing a much higher caseload with new peaks of daily cases, daily deaths and positivity rates and presents a challenge to ongoing economic recovery.

With infections forcing localised or state-wide restrictions, there is a downside risk to growth in the first quarter of FY22. However, there are reasons to expect a muted economic impact as compared to the first wave. The experience from other countries suggests a lower correlation between falling mobility and growth as economic activity has learnt to operate ‘with Covid-19,” the report said.

In April, due to the second Covid-19 wave in India, the momentum in economic recovery since the first wave has moderated. However, agriculture continues to be the silver lining with record foodgrain production estimated in the ensuing crop year on the back of predicted normal monsoons.

Rural demand indicators like tractor sales recorded a growth of 172 per cent and 36 per cent compared to a low base in March 2020 and even the pre-Covid month of March 2019 respectively.

While industrial production showed mixed trends. The index of Industrial Production (IIP) in February 2021 registered a broad-based decline of 3.6 per cent (YoY) and 3.9 per cent compared to January 2021, the eight-core sector index posted a growth of of 6.8 per cent (YoY) in March 2021 and 11.1 per cent compared to February 2021.

Other high frequency indictors like e-way bills generated reached Rs 17.36 trillion in April compared to Rs 3.9 trillion in April 2020 and Rs 14.8 trillion in April 2019 – the growth since April 2019 is an indicator of the increased formalisation of the economy, report highlighted.

Besides, latest data on corporate earnings signals a manufacturing turnaround in Q4FY21, with 12.5 per cent growth in net sales and a 9.5 per cent rise in income for a sample of 213 companies.

However, WPI inflation increased to an 8-year high of 7.39 per cent, led by oil and metal prices as well as base-effect, exceeding its CPI counterpart after nearly 2 years. Softening food and fuel prices, with normal monsoon and expected supply easing of food products, may provide succour to a potent risk of rise in input prices surfacing as retail inflation, report said.

The pandemic also hit the market sentiment as Nifty 50 and the S&P BSE Sensex recorded losses of 0.4 per cent and 1.5 per cent, respectively, in April, and rupee depreciated by 2.3 per cent to reach Rs 74.51 to a $ in April. This was mirrored by net FPI outflows of $ 1.18 billion in April.

Domestic financial conditions, nevertheless, continue to remain comfortable with RBI’s support to liquidity, with open market operations worth Rs 3.17 trillion carried out in FY21.

On the external front, India’s trade deficit hit its lowest in FY21 since FY 2007-08, with a stronger contraction in imports compared to that of exports. While drugs and pharma were the frontrunners in exports, safe-haven gold led the imports trajectory.

Commenting on the mutated contagious strains, which have hit again in 2021 – with a rapid resurgence in global cases, notably in India, the ministry said that rapid vaccination lends a ray of hope.

“April 2021 saw a doubling of global vaccination rates and a concomitant lowering of average transmission rates in countries with high vaccination rates. With vaccines doubly effective in battling the spread and shielding the economy, global co-operation is critical to ensuring availability of vaccines in all countries and addressing inter-country disparities in vaccination rates at the earliest,” report said.

Talking on the fiscal position, the report said that central government has witnessed improvement in the recent months with a revival in the economic activities during the second half of FY21. As per provisional figures, net direct tax collections for FY 21 are 4.5 per cent higher than Revised Estimates (RE) and 5 percent higher than collections in FY 20. While net indirect tax collections for FY 21 were 8.2 per cent higher than the RE and 12.3 per cent over collections in FY 20.

It said that India is emphasising on a five-fold strategy to curb the tide of new Covid-19 cases –Test, Track, Treat, Covid appropriate behaviour, Vaccination. A dynamic and concerted policy response to the second surge has been initiated with ramping up health infrastructure, oxygen supplies and deregulating the vaccine availability for all Indians above the age of 18 from May 1.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor