The pace of vaccination holds the key to the momentum and sustainability of the economic recovery.
The government does not expect the economic impact of the second wave of the COVID-19 pandemic to be as severe as the first, TV Finance Secretary Somanathan said in a media interaction. This is roughly the view of the consensus between economists, multilateral institutions like the International Monetary Fund and the World Bank, and the Reserve Bank of India
Although the central bank has toned down its optimism about economic growth since the beginning of the year, it still expects India's gross domestic product (GDP) to grow 9.5% in Financial Year 2022. In his assessment of the economy released in mid-May, although he warned of a potential demand shock, he also said his assessment was that "the loss of momentum is not as severe as it is right now a year ago."
To be sure, it's not like there's no impact from the second wave. Previously, the RBI had forecast growth of 10.5 percent. Private-sector economists have also reduced the projections to 9-10 percent now from 11-14 percent before. The spread of infections in the hinterland and the potential reluctance of families to spend even after the second wave could further slow the recovery.
At this stage, however, things are better than in the first wave. In FY21, when India imposed the world's toughest lockdown, gross domestic product (GDP) shrank by 7.3%, the first contraction in about 40 years. The second wave of the pandemic was more devastating than the first in terms of the number of infections and victims. After peaking at nearly 400,000 cases per day, the number of new infections has dropped to fewer than 100,000 in the past three days. This has raised hopes that the restrictions will be lifted by states that have imposed before.
In any case, the absence of a national lockdown has allowed the economic activity to continue at moderate rates, high-frequency data show. The recovery tracker showed that activity is recovering from the lows it hit in May as the blocks eased. Energy consumption is on the rise, vehicle registrations are on the rise while exports and rail freight have increased. Goods and services tax collections of over Rs one lakh crore in May also boosted sentiment. The Manufacturing Purchasing Manager Index showed booming activity in May even though it was a multi-month low.
“The restrictions this time were much less stringent than the national lockdown and the movement of people within the country was not stopped. That helped, "said Gaurav Kapur, IndusInd Bank's chief economist. India has so far vaccinated about 5 percent of its adult population. About one in five adults have got at least one jab. Economists also say it is important that one-third of the adult population be vaccinated by the festival season.