Goldman Sachs downgrades India’s growth forecast as Covid cases rise

NOIDA, INDIA – APRIL 11: A woman holds a pot at a food distribution by Noida Authority in Morna Village in Sector 35 on the eighteenth day of the 21 day coronavirus limit lockdown on April 11, 2020 in Noida, India. (Photo by Virendra Singh Gosain / Hindustan Times via Getty Images)

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A second wave of Covid-19 infections is likely to slow India’s economic recovery in the three months between April and June, according to Goldman Sachs.

The investment bank cut India’s growth forecast for the quarter from 33.4% yoy to 31.3% on Tuesday. Lower consumption and service activity was cited, likely due to the increasing social restrictions put in place by India’s Indian and federal governments to combat the new outbreak.

Goldman expects gross domestic product (GDP) to shrink sequentially by 12.2% on an annualized basis in the three months to June compared to the previous quarter. This is the first quarter of India’s fiscal year, which started on April 1 and ends on March 31, 2022. Last year, India fell into a technical recession after two consecutive quarters of contraction.

“Given that virus cases hit a new high of over 100,000 a day over the weekend and a number of states, including Maharashtra, are announcing stricter lockdown restrictions that are expected to widen in the coming weeks, we expect slower GDP growth second quarter than previously originally expected, “wrote Goldman analysts.

Record highs

Cases in India have risen since mid-February, with the state of Maharashtra – home of India’s financial capital Mumbai – being particularly hard hit. On Monday, India reported more than 103,000 new cases over a 24-hour period, beating September levels when the first wave of infections peaked.

On Tuesday, the South Asian nation reported 96,982 new cases, much of them in eight states, including Maharashtra, Chhattisgarh and Karnataka.

Maharashtra authorities tightened restrictions, including introducing curfews at night if only essential services remain open, as concerns grow over a possible shortage of hospital beds and doctors. Other states are also preventively increasing restrictions to slow the spread of the virus.

On the other hand, India has also stepped up its vaccination efforts. According to government data, the country has administered more than 84 million doses since Tuesday, since it launched its mass vaccination program in January.

Some analysts and investors have said the impact of the recent surge is likely to be limited in cases if India can avoid a strict national lockdown like last year.

Sharp upswing in the following quarters

Goldman expects activity to rebound strongly in the following quarters – July through September and beyond – as Indian containment policies normalize and the pace of vaccination accelerates. Still, the success of the April-June quarter is likely to affect India’s overall fiscal year growth forecast, which Goldman now expects to be 11.7%, compared to an earlier forecast of 12.3%.

However, the investment bank warned that the uncertainties surrounding its estimates remain high and the real impact could be greater or lesser depending on how strict India’s containment policy is and whether it affects sectors such as construction and manufacturing.

The impact on GDP can potentially be cushioned by more targeted, localized restrictions on trouble spots, as opposed to a broad national lockdown like the one India put in place last year, which Goldman said had a significant socio-economic impact.

“Measures were also more targeted and targeted at service sectors such as leisure, leisure and transport, with no or little or no impact on agriculture, manufacturing, construction and utilities,” the analysts said, adding that the bank’s analysis suggested they get used to more to a post-covid environment with a shift towards e-commerce and working from home. Hence, their response to states’ containment policies is likely to be less sensitive.

Goldman also expects the Reserve Bank of India to keep its policy rate at 4% and maintain its accommodative stance and an ample liquidity environment for longer than expected.

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