How the Second Wave of COVID-19 Has Affected Economic Recovery

India continues to be in urgent need of various medical supplies such as oxygen cylinders, oxygen concentrators, makeshift hospitals, vaccines etc. to combat the second wave of COVID-19. The government is refocusing on relief measures such as vaccination drives and increased funding towards immediate health care needs like oxygen plants and temporary COVID-19 centres.

Although, we have had some improvement in the last one or two weeks in urban areas, many other rural parts of the country are experiencing dreadful medical situations.

In light of the second wave's effect and the potential risk of a third wave, state governments will be cautious in allowing public movement and will continue with lockdown restrictions for some time. Thus, forecasters are lowering their growth projections for the current financial year, and a struggling economy will increase fiscal stress of the country.

You see, the budget announced by our Finance Minister Ms Nirmala Sitharaman in February 2021 raised hopes of sharp economic revival, but the financial plan does not seem to be on right track due to the impacts of the second wave of Covid-19. Most of the growth projections that the budget was constructed around are now stalled in uncertainty, as many parts of the country are under varying degrees of lockdown.

The Union Budget FY2021-22 aimed to revive India's economy by investing in infrastructure and health care sectors, while relying on an aggressive privatisation strategy and robust tax collections to fund its spending in the fiscal year. However, the second wave of the COVID-19 pandemic took a vicious toll on public health and lockdowns were imposed and predictably, the economic toll has also been heavy, but nothing like the disaster seen in FY2020 Q1, when GDP growth crashed -23.9 per cent in response to the major lockdown.

The economic recovery is expected to slow in near-term and looking at the latest economy report Reserve Bank of India (RBI) has alerted of a demand shock and GDP projections for quarter one of the current fiscal year are likely to decline due to the loss of momentum in economy.

Notably, when the first wave of the coronavirus pandemic passed through India, the economy recovered rapidly, thanks in part to increased demand and higher discretionary spending. The demand spiked so that India registered GDP growth just after two quarters of negative growth it was an impressive achievement for India, which had been in lockdown for months, and this demand peaked during the festive season and remained high until March 2021.

With the spread of infection escalating in April 2021 and several states enforcing some form of lockdown, an economic impact is inevitable. Today, India is in a completely different scenario, it is facing one of the biggest challenges at the moment that is decreasing demand a factor that could delay economic recovery for a longer period after the second wave.

Having said that, there are several reasons behind falling demand during the second wave, ranging from lower consumer tread, weak consumer sentiments and mobility restrictions due to lockdowns in most parts of the country. In addition, consumer sentiments turned sour due to the loss crafted by the second wave that not only claimed thousands of lives but has also led to massive loss of livelihood among the informal working class, evident by the rising unemployment rate.

The smaller businesses are severely affected including micro, small and medium enterprises, which are laying off more employees as demand, and sales have plummeted due to localised lockdowns. Center for Monitoring Indian Economy (CMIE) had said that the future employment outlook remains weak due to lockdown restrictions imposed in major cities like Delhi, Mumbai, Chennai and Kolkata.

All these set conditions are causing fall in demand, the smaller workforces such as markets, malls, cinemas and theatres and shops selling non-essential goods being closed are undergoing heavy losses. Even those selling essential goods face restrictions, permitted to operate only between 7 am and 11 am on weekdays. Many large retailers have adapted, investing in digital infrastructure to facilitate online ordering and delivery. However, thousands of small entrepreneurs do not have online delivery models and these restrictions have had a lethal impact on many businesses.

The second wave may disrupt the earnings recovery of many companies that recorded over the past six months and if they are unable to survive the impact, several salaried people might be vulnerable to losing their jobs. According to CMIE, many Indian households have suffered a loss in real income. The drop in household incomes and savings is one of the key reasons for the sharp fall in consumer sentiment, which was triggered by higher unemployment and rising commodity prices.

One of the reasons for the increase in inflation is the rising cost of living as a result of the current public health crisis and rising inflation is another factor that could derail economic growth. A sharp increase in wholesale inflation was reported, and economists assume that wholesale inflation would eventually lead to higher retail prices, affecting household savings as the second wave of Covid-19 crisis.

However, one aspect that distinguishes this year's economic impact from the last year is that key businesses are being permitted to operate in several states including state and national highways to function uninterrupted transport of essential goods. The fact that the movement of goods has not stopped and industries are allowed to operate could significantly mitigate the economic loss.

While the second wave of COVID-19 posed a downside risk for economic activity in the first quarter of FY2021-22, the Ministry of Finance reported in its April 2021 monthly economic report that there are reasons to expect a muted economic effect compared to the first wave, which occurred in 2020. The scope has widened for economic activity that have learnt to operate within COVID-19 restrictions and based on international experience it provides a positive aspect of economic resilience amid the second wave.

Moreover, RBI's Monetary Policy Committee (MPC) member Ms Ashima Goyal said, "The economy will do well once the vaccination drive speeds up. India has the potential to be a centre of vaccine production and will be able to ramp it up soon. Once vaccination reaches a critical mass, the economy will do well with pent up demand, global recovery and easy financial conditions."

You see, the pandemic and its effects on economy will mostly cloud the first half of the financial year, but the second half should see economic growth led by increased vaccinations, decline in infections and the government with focus on strengthening its vaccination drives, especially in the rural towns and villages, which look highly vulnerable. A massive COVID-19 vaccination drive and betterment of public health crisis will create a rebound in consumer demand and investments, which may put the economy, back on track to recover from its deepest recorded slump.

The extent of this crisis caused by the second wave is even making investors question about the market conditions. As the second wave affected widening businesses and public mobility constraints were imposed, it influenced investor sentiments and incited them to hold on to cash this slumped the gross inflows into equity mutual funds in April 2021 compared to March 2021.

The data released by Association of Mutual Funds in India (Amfi) showed in April, gross inflows into equity mutual funds stood at Rs 22,077 crore and redemptions at Rs 18,640 crore, while in March the gross inflows were at Rs 28,023 crore and redemptions at Rs 18,908 crore. The equity-oriented categories that received significant flows are large cap, mid-cap, large and mid-cap, and sectoral/thematic funds.

However, the difference of inflows in April was due to the disruption caused by the second wave of the pandemic. The second wave of virus hitting in month of April redemptions have come down in past few months, which shows the panic scenario among investors has reduced as compared to the last year.

Despite the panic caused by the second wave, some investors would prefer to remain invested rather than redeem their funds and wait for more clarification on the effect of the second wave on the economy. Many investors missed the chance of a market correction last year due to immediate redemptions; investors may have held back their investments now in anticipation of a market correction.

As a result of these circumstances, the effects of the pandemic will result in a slower economic recovery than anticipated. This brings us to a question: Looking at the slower recovery now what should be your investment approach?

Well, considering the uncertainties, you should first measure your risk tolerance and investment horizon to survive the market volatility. Investors may consider suitable long-term investments in sub-categories of equity mutual funds, as they are well known to provide better returns over various market phases in long run.

In the current market environment, a Systematic Investment Plan (SIP) would be more valuable to investors than a lump sum investment. In both bullish and bear markets, SIP ensures that your purchases are made on a regular basis, preventing you from missing a market opportunity. Investing in SIP mode reduces the risk factor by rupee cost averaging.

Therefore, if you are seeking to generate consistent returns when the market recovers from the uncertainties, you may consider making your investments through SIP in mutual funds during prolonged low market phase that ensure accumulation of higher number of units and make market valuations attractive for investors.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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