India is in the midst of a brutal second wave of COVID-19, with the situation continuing to deteriorate by the day. While the human toll is massive, the economic impact is also not insignificant. At the start of 2021, India was expected to be one of the fastest-growing major economies in the world. Now, it is expected to succumb to a massive economic shock.
Let’s examine what this surge means for the global recovery, including the potential risks for investors.
A Humanitarian Crisis in the Making
India’s explosive second wave has caught the country and the world by surprise. Even as many of us are beginning to see light at the end of the COVID tunnel, the world’s second-most populated country is gasping for oxygen. Personally, I dread calling family back in India, as every call means more news of a friend or family member who is infected, is in critical condition, or has succumbed to the virus.
In fact, India has recorded more than 6 million cases in April alone, accounting for more than one-third of the total recorded cases in the country since the start of the pandemic. The official death toll surpassed 200,000, although it is suspected that the actual number could be much higher. India now accounts for around 40 percent of the world’s new recorded infections.
Economic Cost of the Second Wave
India staged a classic V-shaped recovery from the massive collapse in economic activity last year. Output rebounded to pre-pandemic levels as early as Q4 2020, and purchasing managers’ indices pointed to a continued recovery in Q1. But the explosive second COVID outbreak is threatening a relapse for the economy. While it is too early to assess the actual impact of the second wave, initial indicators are pointing to a significant decline. Mobility indicators have tumbled as states have enforced stricter lockdowns. Labor force participation has fallen, and unemployment has climbed. Migrant workers have had to leave cities and head home for the second time in a year. The surge in cases has triggered massive capital outflows.
Compared with last year, the shock from the second wave is expected to be more heterogeneous, more asynchronous, and hopefully less enduring. Targeted lockdowns mean that the entire nation may not go into an economic coma—the hospitality and leisure sectors will bear the brunt of the new measures. But with manufacturing and construction sites set to stay open, plus a rise in online shopping likely to offset at least some of the drop in sales from physical shops, economic activity will hold up much better than it did during the first lockdowns.
Global economic recovery will be supportive of India’s export-oriented IT services industry. The banking sector, which entered the crisis last year in poor health, will need to be monitored closely. India’s nonperforming loan ratio was already one of the highest of any emerging market, and it is likely to rise further as industries grapple with the deadlier second wave with very little fiscal and monetary support.
Impact on Global Recovery
India’s share of global trade is quite small: 1.67 percent for global merchandise exports and 3.54 percent for services exports, according to the Confederation of Indian Industries. Hence, the direct impact of India’s second wave on the rest of the world is likely to be limited. Still, the situation in India has drawn international attention that the fight against the microscopic virus is increasingly a struggle of the haves and have-nots. Places like the U.S., U.K., China, and parts of Europe have been able to vaccinate their populations quickly and provide them with much-needed monetary support, while the likes of India, Brazil, and Russia have not been as successful.
In other words, the economic recovery from COVID is a two-track recovery. Countries that have been able to inoculate larger populations have been able to reopen their economies quicker and are already well on the path to recovery. On the other hand, for countries that are falling behind and must continue resorting to lockdowns, the crisis is far from over and the ride will be quite bumpy. In the meantime, the risk remains that the longer the virus rages in parts of the world, the more time it has to mutate, with some mutations likely to be more resistant to existing vaccines than others.
Vaccination the Key to Normalization
India is the world’s largest vaccine manufacturer. Early in the year, when the pandemic looked like it would soon be a thing of the past in India, India was exporting and donating millions of shots to the rest of the world. Now, it can’t fulfill its global commitments or provide for its own citizens. Several countries have offered aid to India in the form of medical equipment, oxygen concentrators, and so forth. Near-term relief apart, stepping up vaccination remains the best route to economic normalization.
The U.S. has lifted the ban on exports of raw materials required for manufacturing the vaccines in India. This should help in significantly augmenting supply, but the time required for mobilizing support could slow down vaccine rollout and cause more economic damage in the near term. Equitable distribution of vaccines is also going to be a challenge.
The Investment Case
The explosive COVID outbreak in India is potentially devastating for the country’s near-term outlook. This is reflected in India’s stock market and currency performance. In the first 20 days of April, Indian equities underperformed the broader MSCI Emerging Markets Index benchmark by about 5 percent, and the Indian rupee depreciated about 3 percent versus the U.S. dollar. While Indian equities have historically traded at a premium to the rest of the emerging world, this premium has normalized over the past month. Fresh lockdowns and higher commodity prices mean that the risk remains to the downside.
But the rebound in the currency and equity performance in the last week suggests that investors are already looking past the near-term weakness to a tad bit less strong economic recovery in the quarters ahead. For those in this for the long haul, the market volatility might present opportunities, as the longer-term macro story of favorable demographics, a rising middle class, and structural reforms is only slightly dented.
The global risk of contagion is limited, but it does foreshadow risks for other countries that are still struggling with vaccinations. As India plays a leading role in making vaccines for other nations, failing to stop the spread there could endanger the vaccine rollout worldwide. One upside to the unevenness of the recovery is that it could ease market concerns about an overheated global economy forcing central banks to start taking the punchbowls away.
A Warning Sign for the Rest of the World
The spike in COVID infections in India, and in several other developing countries, is fueling concerns that the end of the pandemic may be more distant than hoped. It is also a warning sign for the rest of the world to remain vigilant of variant and possibly more contagious and dangerous mutations. For markets, rising vaccinations, especially in the developed world, give confidence that the global economic recovery will keep marching, even as the outbreaks highlight the unevenness of the timing of recovery around the world. As investors, market volatility from deteriorating headlines could present opportunities.
But let’s not forget to spare a moment to pray for the well-being of the millions of people who are currently in a dire situation in India and elsewhere.