India’s tally of total COVID cases has increased at an alarming pace in recent days, with the daily count on 4 April surpassing the first peak last September (with a most recent peak of over 200,000 cases on 15 April). Daily cases have averaged 138,000 so far in April, compared to 36,000 in March and 13,000 in February. In September 2020, when the first wave peaked, cases averaged 87,000.
On a more positive note, the mortality rate at 1.25% is lower than in the first wave, when it averaged 2.2%. The second wave also remains more concentrated. Although Maharashtra’s share has halved from late March, it continues to report the highest number of daily cases and along with four other states—Uttar Pradesh, Delhi, Chhattisgarh and Karnataka—accounts for 60% of total new cases since February 2021.
Exhibit 1: Mobility levels are yet to show a strong reaction to rising cases
The second wave is likely to swell
The narrow base of the second coronavirus wave so far (Exhibit 2) and the government’s inability to fiscally support the economy through another massive downturn have led to a quite different containment strategy from that witnessed in 2020.
For now, the onus continues to be on state governments to limit infections in their territories, and in general authorities appear reluctant to re-introduce strict lockdowns. On 7 April, Maharashtra extended its night curfew and weekend lockdown to a partial shutdown on weekdays. Rules were further tightened on 14 April with very limited movement allowed only for some essential services (as of the time of writing). Other states haven’t followed suit, although a few have imposed night curfews and weekend lockdowns. In all, social distancing measures outside of Maharashtra remain quite lax.
Exhibit 2: Maharashtra continues to account for the bulk of COVID cases
The targeted lockdown approach is being complemented by a stronger vaccination push. So far, an average of 3.1 million first doses have been administered daily in April. This is a substantial improvement from less than 1 million in February (Exhibit 3), and puts the government on track to meet its target of vaccinating 22% of the population (300 million citizens) by the middle of the second quarter.
Exhibit 3: The vaccination rate has picked up but is far below a tipping point
But international experience suggests that India’s vaccination drive is too slow and by itself will probably be insufficient to cap the second wave anytime soon. Based on developments in Israel, we estimate that between 28% to 47% of the population may need to receive a first vaccine dose for immunity levels to increase sufficiently to bring down case numbers.
For India, that would mean raising the daily vaccination rate quickly to 5 million-7.5 million. This will be a challenge considering the potential supply snags and the increasing international demands on India’s vaccine output. Consequently, the second coronavirus wave may still have some way to go, both in height and breadth.
Still, we expect the economic impact will not be as dramatic as in 2020. It’s true that countries that avoided lockdowns to control the virus last year haven’t fared especially better economically than those that did. But the health situation in these places has generally been worse than in India. Excluding Maharashtra, where 80% of ICU beds are reportedly occupied, so far, the second wave hasn’t resulted in extreme pressure on health facilities.
Assuming that the health situation doesn’t significantly deteriorate from here and the fatality rate remains low (Exhibit 4), we expect the economic impact of the second COVID wave to be much less severe compared to the first.
Exhibit 4: A low and falling mortality rate is a key positive
A 2020-like drop in mobility is unlikely
At the height of the 2020 lockdown, India’s aggregate mobility (ex-residential) dropped more than 60% below the pre-pandemic baseline. In the absence of stringent lockdowns that only allow for essential services, we do not expect such a severe impact on mobility at a national level this time around. A combination of lockdown fatigue, rising vaccinations and fewer fatalities has also made people more willing to snub voluntary social distancing.
Exhibit 5: Mobility levels have shown modest declines so far
On a weekly moving average basis, national mobility is down just 1.6 percentage points since end-February (Exhibit 5). Workplace mobility has fallen the most (4.7 percentage points), followed by transit stations. Parks, recreation and retail mobility have shown marginal dips
But the national picture masks notable variations between states. Looking at the top ten virus-hit states, Chhattisgarh, Maharashtra and Gujarat have registered the largest declines, while mobility has improved in a number of states. This includes India’s most populous state, Uttar Pradesh, which is now the second most infected state after Maharashtra.
Additionally, mobility levels remain above the last quarter of 2020 in all states (Exhibit 6).
Exhibit 6: Some states have seen sharper mobility falls but are not worse off than Q4 2020
Pressure on mobility trends will likely build as the second wave continues. Unless more states resort to shutting down private offices during weekdays—like Maharashtra—retail and recreation mobility will feel the brunt of the surge. But divergence between states and sectors is likely to persist, limiting the overall downside to mobility at a national level.
Growth momentum is slowing, not collapsing
Economic data is also yet to show a significant impact from rising coronavirus cases. While growth momentum has slowed since the last quarter of 2020, data doesn’t yet point to a notably faster deceleration in activity in response to the rapid rise in coronavirus cases since mid-March.
Exhibit 7: Economic activity is yet to show a significant impact
Both manufacturing and services PMIs fell in March. But they continued to show a healthy pace of expansion with readings at 55.4 and 54.6 respectively. Other indicators such as GST collections, retail payments, electricity usage and railway freight also continued to grow strongly last month.
However, early data for April (such as power demand) indicate a need for caution, and a more notable slowdown in activity cannot be ruled out. Maharashtra accounts for 15% of national GDP and the impact of a relatively strict lockdown there is likely to show up in national data, although recoveries in other states should help mitigate the impact somewhat.
Risks to the downside
We have been highlighting the downside risks from another coronavirus wave and maintain our forecast for growth to average 2.3% quarter-on-quarter seasonally adjusted in the first half of 2021, down from 6.3% in the fourth quarter of 2020. This partly takes into account the renewed rise in coronavirus cases in March.
However, the surge in daily cases in April has shifted the balance of risks to our first-half outlook to the downside. Depending on how long the second wave takes to peak and how much its base widens, sequential momentum in the first half of 2021 may slow further than we currently anticipate and lead to renewed sectoral divergences. This would be particularly damaging for consumer spending and services that were beginning to catch up with the rebound in manufacturing and investment, as corroborated by the fourth quarter national accounts. As such, we see four potentially inter-linked sources of downside risk to our baseline:
- The virus spreads rapidly to other parts of the country, with more states tightening social distancing measures;
- Instead of continuing to improve, the vaccination rate falters due to supply snags, slowing uptake;
- A hard lockdown is re-introduced in large states or by the central government to contain the virus; and
- The health situation worsens substantially and the death count increases, leading to significant deterioration in consumer and business sentiment.
Exhibit 8: A more stringent and broad-based lockdown is a key downside risk
The next few months will be critical, as the renewed COVID surge challenges India’s immature recovery. While the impact so far appears milder and the economy more resilient, policymakers have no room for complacency.
The low vaccination rate and the likelihood of the second wave’s swelling—both in intensity as well as breadth—do not augur well for the Indian economy, particularly if tighter restrictions are imposed widely across the country.