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Economic recovery threatened by the second pandemic wave

6/10/2021

The second pandemic wave could delay the economic recovery. The government’s fiscal tool is very tiny to sustain economic growth as rating agencies have a negative outlook on the sovereign rating.

TRANSCRIPT // Economic recovery threatened by the second pandemic wave : June 2021

3 QUESTIONS

FRANÇOIS DOUX

In India, the second wave of the Covid-19 pandemic has been deadlier than the first. The total death toll is now more than 300,000. To look at economic prospects after the pandemic, we are joined by Johanna Melka.

FRANÇOIS DOUX

Hello Johanna.

JOHANNA MELKA

Hello François.

FRANÇOIS DOUX

First question: what impact has the second wave of the pandemic had on India’s economic growth?

JOHANNA MELKA

Last year, in 2020, India was particularly hard hit by the Covid-19 crisis. Its economy contracted sharply. Then, just as it had returned to strong positive growth in the early months of 2021 the economy was hit, head on, by the second wave. In mobility indicators we can already see that activity has slowed noticeably in services, due to lower mobility. But one positive in this latest phase of the crisis has been that factories have not been closed.

JOHANNA MELKA

We estimate that across the whole 2021-22 fiscal year, that will end on 31 March 2022, the second wave could cut two percentage points off economic growth.

FRANÇOIS DOUX

Second question: what are the longer-term prospects?

JOHANNA MELKA

Over the longer term, the outlook remains positive, but we are unlikely to return to growth rates of around 7%. Unfortunately, a return to something around 6% looks more likely. As we can see on the chart, the reality is that economic growth in India had begun to decelerate well before the Covid-19 crisis, for mainly structural reasons. What’s more, the quality of growth had deteriorated. The labour participation rate had started to slow some time before the onset of the Covid-19 crisis.

JOHANNA MELKA

The government will have very little scope to support economic activity given the considerable constraints on the already weak public finances, which have deteriorated further with the COVID 19 crisis. Meanwhile, banks and companies will have to consolidate their financial position. In this context, the Modi’s government has therefore decided to adopt major structural reforms in order to support and attempt to restart economic activity over the medium term. These were adopted in the autumn of 2020. Today the challenge lies in implementing them.

JOHANNA MELKA

It is always difficult to implement reforms in India. Moreover, the recent elections in April and May have shown that Narendra Modi’s ruling BJP party seems to have lost a bit of its aura, with results that were somewhat more mixed than we are used to.

FRANÇOIS DOUX

Third and final question. What are the major risks for the Indian economy?

JOHANNA MELKA

Unfortunately, as a result of slower growth and a worsening of the public finances, the ratings agencies have put a negative outlook on India’s sovereign rating. For the time being, refinancing risks are seen as being under control. Why? The structure of debt is extremely sound. Debt is denominated in rupees, is held by residents and has long maturity. The problem is that if growth slows too abruptly, or if the government is unable to consolidate its finances, we could see the agencies downgrade India’s sovereign rating. And with the second wave of Covid-19, all the ingredients are in place for a marked slowing of growth, or a deterioration of the public finances, and thus the risk of a downgrading of the country’s credit rating.

FRANÇOIS DOUX

Thank you Johanna Melka for this update on the Indian economy, something we will have to watch over the next few months. I’ll be back in a month’s time for our next edition of ECOTV.

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