Indian states are starting to relax lockdown measures as the second wave of COVID-19 infections is showing signs of plateauing. As a result, national mobility has improved notably since the start of the month.
As of June 18, total mobility (ex-residential) in India stood 22% below the baseline, according to Google data, up from 50% below baseline at the peak of the 2021 lockdown. The turnaround in mobility has been led by states that have witnessed a sharp drop in infections in recent weeks, including Delhi, Maharashtra and Uttar Pradesh. Other states have also experienced improved mobility as case numbers have declined.
States are exiting lockdowns in phases and many have extended partial restrictions until the end of the quarter. We continue to expect restrictions to last into Q3. Still, reopening has commenced at a faster pace than we had anticipated, as states have focused on declining test positivity rates as the guiding factor for easing measures rather than the share of population vaccinated.
This strategy could create a challenge going forward if infections increase again, especially as we head towards the festive months, and vaccine coverage remains low in many states, including the more populous ones.
Exhibit 1: Some states have reopened substantially despite very low vaccination rates
Vaccinations lagging in important states
After slumping through most of April and May, the pace of vaccinations has picked in June (Exhibit 2). A record 8.6 million doses were administered on 22 June. However, whether this pace can be sustained remains to be seen. Moreover, the situation varies greatly across states.
Exhibit 2: The average pace of vaccinations has risen back above 3 million per day
Smaller and less populous states have made better vaccine progress compared to the larger ones (Exhibit 3). The states in the bottom half of the chart, including the most populous state of Uttar Pradesh, are particularly concerning.
We note that most of the economically important states, such as Maharashtra, Tamil Nadu, Uttar Pradesh and West Bengal, have not yet reached “safe” levels of vaccination. As we have highlighted in previous research, the international experience suggests that it is more prudent for governments to start relaxing restrictions substantially after between 28%-47% of the population have been vaccinated, which we call the “vaccine tipping point” range.
Exhibit 3: Vaccination rates are far below “safe” levels in larger states
Delhi, Karnataka, Kerala and Gujarat have edged into the tipping point range, but we still think that there are reasons to be cautious. It’s important to note that these thresholds are based on earlier variants of the coronavirus. Given that the Delta variant, which has fuelled India’s second wave, has proven to be much more transmissible than prior forms, we think that the upper half of the tipping point range is more applicable to India.
Yet several of these states have relaxed restrictions substantially. Indeed, mobility levels have almost returned to pre-pandemic levels in Uttar Pradesh and Bihar. We think this strategy could lead to states with low vaccination rates retightening measures to fight renewed coronavirus waves. The spillover effects could force other states into tighter conditions as well.
We also note that the increase in the national vaccination rate is mainly due to more first doses. As of June 22, only 3.9% of the population had been fully vaccinated (Exhibit 4). Reports vary regarding the effectiveness of one dose of Covishield/Astra Zeneca (which is the most prevalent vaccine in India) in preventing hospitalisations due to the Delta variant.
It is generally agreed that two doses are more effective against this variant, which has led the UK to increase its vaccination efforts and push out its complete reopening by four weeks. Hence, in our view, the low share of fully vaccinated in India and the slow progress are of growing concern.
Exhibit 4: Low share of the population has been fully vaccinated, presenting a key risk
Little reason to turn more optimistic on growth
The vaccine situation keeps our outlook cautious and we maintain India’s 2021 growth forecast at 9.1%. Economic data also doesn’t support an upward revision to our growth expectations at this point. While high frequency indicators for June have improved as states have relaxed restrictions (Exhibit 5), the hit to activity in May appears to be larger than in our initial assessment. This may lead us to lower our Q2 2021 growth forecast once we have greater clarity on economic progress through June.
Exhibit 5: Power demand has recovered from the slump in April and May
Meanwhile, forward-looking indicators are mixed. According to the Centre for Monitoring Indian Economy’s widely followed surveys, consumer sentiment remains depressed, even as the labour market is recovering, which could be partly attributed to lingering risks of renewed outbreaks.
Indeed, the Chinese experience shows that it could take a while for consumption recovery to reach full steam. Even with its strong track record of containing the virus, China is struggling to achieve the desired pick-up in consumer spending due to services consumption lagging the overall recovery.
We expect the second wave to cause similar divergences in India, with the consumption of contact-based services being most affected. With the less stringent 2021 lockdown unlikely to result in large pent-up demand, and vaccination rates far below levels deemed to be safe for lowering social distancing measures substantially, we do not expect reopenings to generate significantly large consumption and growth stimulus.