Vaccination pace too slow, India Ratings lowers GDP forecast

The Reserve Bank of India has projected a real GDP growth rate of 9.5 per cent in 2021-22. The GDP estimates for the April-June quarter will be released by the government on August 31. Because of the extremely low base of a GDP contraction of 24.4 per cent in April-June last year, most economists are projecting a double-digit growth in GDP for the same period this fiscal.

India Ratings had earlier said that if the country is able to vaccinate its entire adult (18-plus) population by December 31 this year, then GDP growth could be expected to come in at 9.6 per cent in FY22 — otherwise, it might slip to 9.1 per cent.

“Going by the pace of vaccination, it is now almost certain that India will not be able to vaccinate its entire adult population by 31 December 2021,” Principal Economist Sunil Kumar Sinha said.

Faster recovery after the second wave of Covid-19, higher exports and sufficient rainfall will provide support to economic growth. The agency estimates that 5.2 million daily doses would have to be administered August 18 onwards to fully vaccinate more than 88 per cent of the adult population, and to administer single doses to the rest by March 31 next year.

The consumption demand story does not look encouraging even from a medium-term perspective, with only exports being seen as the bright spot.

“Unlike COVID 1.0, which was largely an urban phenomenon, COVID 2.0 spread to rural areas as well. Even if the agricultural output/income remains intact in view of the progress of monsoon so far, rural households are unlikely to loosen their purse strings in view of the COVID-19 induced rise and/or a likely rise in the health expenditure as also the uncertainty/insecurity associated with the likely future waves of COVID-19,” India Ratings said.

Rural wage growth both for agricultural and non-agricultural activities has declined lately. “Wage growth even in urban areas has been muted. In fact, urban households, besides the rise in health expenditure, are facing the double whammy of income loss/stagnation coupled with high consumer inflation. All this has severely dented their disposable income,” it said.

The jobs sector has been showing indications of the impact of the pandemic being more pronounced in case of better quality jobs in urban areas, especially salaried jobs after the second wave of the pandemic.

The disproportionate impact on better quality jobs is evident in CMIE data that show salaried jobs at 76.5 million in July 2021 were actually 3.2 million fewer than they were in June, notwithstanding the broader economic uptick in July.

The July number is also 3.6 million short of the pre-second wave level of 80 million in January-March 2021.

Citing corporate tax ratio and income tax ratio to GDP, it said that while corporates have been benefiting from the reduced corporate tax announced in FY20, such benefit has remained elusive so far for urban households, despite the Covid-19 induced income shock that will limit growth of consumption expenditure.

Sinha said the recovery trend points to rising inequality after the pandemic that has pushed a large number of people back into poverty. “Whatever recovery we talk about now will be a ‘K-shaped’ recovery and not V-shaped recovery,” he said.

A ‘K-shaped’ recovery points to inequality, with the poorer sections bearing the brunt even as there is an overall recovery in the economy, benefitting mainly the better off.

The agency sees a low chance of revival in private sector investment during this fiscal. “…What we are witnessing right now is maintenance capital expenditure and not greenfield projects,” Sinha said.

The rating agency expects the nominal GDP growth to be 15.6 per cent and the average retail inflation at 5.6 per cent.

The rise in fuel prices is one of the biggest factors feeding inflation, India Ratings said, pointing out that RBI has been urging the government to reduce taxes and duties on the commodity, which lead to inflationary pressures.

“There are first round effects and there are then indirect effects of hike in fuel prices and usually the impact is greater in the indirect effects,” Sinha said, adding that transportation costs for producers have gone up significantly.

Sinha said the government is not heeding such calls because it feels the resentment among the public is not high enough for it to act. So it is continuing to keep the taxes and duties at high levels, which lead to higher revenues that can then be distributed for public schemes, he said.