coronavirus

India's Economy Will Likely Contract This Quarter as Covid Cases Soar, Economists Warn

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  • Sonal Varma, India chief economist at Nomura, said GDP will shrink around 1.5% in the current quarter, and there is "downside risk" to this estimate.
  • Radhika Rao, an economist at DBS, said there will be a "very clear deceleration" compared to the previous trend.
  • India is battling against a huge surge in Covid-19 cases, and multiple states have imposed partial lockdowns or stringent restrictions.

India's economy may shrink in the current quarter as Covid-19 cases surge, but the country could recover in the next one, according to two economists.

On Tuesday, India reported another 323,144 cases, bringing the country's cumulative infections to more than 17.6 million. That comes after the country reported five straight days of record new daily cases.

Sonal Varma, India chief economist at Nomura, said the country is "clearly going to see a sequential growth hit" in its first quarter. India's fiscal year begins in April and ends in March the following year.

She predicts that gross domestic product will shrink around 1.5% in the current quarter, which ends in June. Varma added there is "downside risk" to this estimate.

While there have been fresh lockdowns or curfews in some states, cases remain high and more restrictions are expected, Varma told CNBC's "Street Signs Asia" on Tuesday.

"This is definitely going to impact activity in April and also in May," she said.

Compared with the fiscal first quarter of 2020, however, the economy could grow more than 25%, she said. That's because India's GDP contracted nearly 24% in the same period last year.

Radhika Rao, an economist at DBS, similarly expects a contraction from last quarter, but "quite buoyant" numbers compared with last year.

She said there are "significant base effects," and there will be a "natural bump up anywhere between 20% to 23%" in the quarter ending in June.

"But the sequential momentum will be very important, and that's where I think you will see a very clear deceleration compared to the previous … trend," Rao told "Squawk Box Asia."

Double-digit growth still possible

Nomura's Varma said it's important not to generalize the current quarter's contraction as India's growth outlook for the full year.

The bank has cut its growth estimates for the year by around 1 percentage point so far.

"There is a downside risk to this number given the extended lockdowns we are seeing across states, but we do still think it's going to be a double-digit growth for India," she said.

Rao of DBS echoed the sentiment.

"We might still be able to eke out a double-digit growth," she said. DBS predicts that the economy will grow 10.5% for the full fiscal year ending in March 2022.

"I might have to bring it down by half a percent or 1% in the coming weeks, depending on how restrictive the restrictions are going to be," she said.

Economic recovery

Both Rao and Varma said that economic activity could start to recover relatively quickly.

Rao said she expects "some kind of recovery" to begin in the July-to-September period.

"Last year's example also showed that once the numbers start to peak off and recede, economic activity certainly tends to come back because of pent-up savings, because of pent-up demand," she said.

Varma noted that there's a "big plan" to ramp up on vaccinations after June.

"I think it's more of a two-month, maybe three-month hit to sequential activity," she said.

She added that the Covid restrictions are more targeted and localized now, compared with during the first wave of infections.

"We have enough anecdotal evidence of factories in the state of Maharashtra which are able to operate at 100% capacity despite the lockdowns," Varma said. Maharashtra is the epicenter of India's second wave and contains financial capital Mumbai.

"It's more concentrated in the services side, and the goods side of the economy does continue to do fairly well," she said.

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