On March 24, 2020, Prime Minister Narendra Modi announced the imposition of a nationwide lockdown in India to prevent a surge in Covid-19 infections. May 24 marks 14 months since the imposition of this lockdown.
For 68 days from March 25, 2020, India was in an almost complete lockdown. While restrictions were relaxed significantly in the second half of 2020, 2021 saw a reimposition of lockdowns. Data from the Google Mobility Index shows that workplace mobility on May 20 of this year was significantly lower than it was on May 20, 2020.
The 2020 lockdown led to a 24% contraction in GDP in the quarter ending June 30, 2020. GDP figures for the quarter ending June 30 of this year will not be released until August. Most economists don’t expect this quarter’s GDP numbers to be as bad as last year’s. That said, there are at least three reasons the economic situation has turned grim.
1. The favorable economic winds of cheap crude oil are over
When the pandemic broke out in 2020, mobility and economic activity fell sharply across the world. This had a concomitant effect on oil consumption and, consequently, on prices, which fell sharply. India’s average basket price of crude oil (COB) fell to $ 44.82 per barrel in 2020-2021, the lowest since 2004-05. Over 80% of India’s oil needs come from imports. Thus, cheaper oil has multiple potential benefits for India. These include higher GDP through a favorable trade balance, lower inflation, and higher government revenues if the benefits of lower crude oil prices are not fully passed on to consumers.
The exceptional gain in revenue from petroleum products played an important role in supporting the budget in 2020-2021, a year when normal sources of revenue mobilization collapsed. Oil prices have recovered in recent months. Data from the US Energy Information System suggests that it is not expected to decline in the near future. This means a dissipation of the favorable winds that were there to support the economy in 2020. To put it another way, the government will either have to keep fuel prices at their current record highs or sacrifice a large chunk of its revenue. With a GDP in 2021-2022 likely to be lower than expected, this is not an easy choice to make.
2. More exceptional gains in the financial markets in 2021
India’s benchmark stock index, BSE Sensex, collapsed to 25,981.24 points on March 23, 2020. This was the lowest value since December 26, 2016. The index has closed at 50,651.90 on May 24, 2021. This means that on average, a rupee invested in the stock market on March 23, 2020, has almost doubled in about 14 months in India. This probably generated massive capital gains for those who made such investments.
Unlike when the pandemic first broke out, stock markets were remarkably resilient in India during Wave 2. True, the PE multiple – which tells us the relationship between stock price and earnings per share – for the BSE Sensex has declined slightly from its peak levels in 2020. The profit-driven recovery has played an important role. in this regard. However, the PE multiple of BSE continues to be relatively higher than that of major stock markets around the world. Then there is the medium-term risk of a correction in the equity markets as interest rates rise in advanced economies.
All this means that there is not much chance of large scale capital gains in the financial markets; in fact, there is a risk of a significant negative wealth effect in the event of a significant and prolonged correction.
3. Will India switch from a high risk strategy to a risk aversion strategy by opening up its economy?
One of the main reasons for the large-scale panic of the first wave of Covid-19 was that there was very little knowledge about the disease. No one knew if and when vaccines would be available. Was there little clarity on how long the lockdowns last and whether there would be more than one wave of a pandemic? There is now more clarity on this. Vaccines are available but not in required quantities in India. Making sure of the latter could take some time. India’s exuberance – both the state and the private sector are to blame for this, but the former has greater guilt – to believe that it will not face a second wave of infections s ‘turned out to be totally misplaced.
The Nomura India Resumption to Activity Index (NIBRI), a measure of business activity against a pre-pandemic basis, fell to 60 in the week ending May 23, just three percentage points from more than it was during the week ending May 24, 2020. It hit 99.3 at the end of February. This experience is likely to play a crucial role in shaping expectations about the likelihood of a third wave of infections and the restrictions associated with economic activity. Sajjid Chinoy, chief economist for India at JP Morgan, pointed out this fact in an essay published in the Business Standard, arguing that “the suddenness and sheer nastiness of the second wave could inflict behavioral scars for months to come. until a critical mass of vaccinations has reached. ”These scars, according to Chinoy, could manifest as policymakers become more conservative about restrictions, uncertainty in incomes, and rising income. precautionary savings for households and private investment taking time to recover, despite the significant easing of monetary conditions.