Oxford vaccine is a shot in the arm for the economy - Capital Economics
India Economics

Oxford vaccine is a shot in the arm for the economy

India Economics Update
Written by Shilan Shah
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The distribution of an effective COVID-19 vaccine in India would significantly improve the near-term economic outlook, and we have revised up our GDP forecasts for 2021 and 2022. But the economy will still suffer repercussions from the crisis over the coming years, most notably a heavily impaired banking sector. That will prevent a rapid return to the pre-crisis GDP trend.

  • The distribution of an effective COVID-19 vaccine in India would significantly improve the near-term economic outlook, and we have revised up our GDP forecasts for 2021 and 2022. But the economy will still suffer repercussions from the crisis over the coming years, most notably a heavily impaired banking sector. That will prevent a rapid return to the pre-crisis GDP trend.
  • The Indian government has one the largest pre-orders of any country of the COVID-19 vaccine developed by Oxford/AstraZeneca, which recently announced encouraging trial results. This vaccine is already being produced in India by the Serum Institute, which has pledged to provide ample domestic supply before shipping elsewhere.
  • This is very welcome news from both a public health and economic perspective. After all, India’s COVID-19 burden is the second-highest in the world and social distancing remains a considerable drag on activity. Our in-house India Mobility Tracker is still a long way from pre-pandemic levels.
  • Of course, there are still plenty of uncertainties, a key one being how quickly a vaccine could be distributed. Health Minister Harsh Vardhan said last week that the government is aiming to vaccinate 300m people by July. That is ambitious given the logistical challenges in India, even considering that the Oxford/AstraZeneca vaccine should be easier to distribute than other vaccine candidates since it doesn’t need to be kept extremely cold.
  • But a COVID-19 vaccine would in all likelihood be fast-tracked, and it could be the case that the most vulnerable are largely vaccinated in the next 12-18 months. That would allow a rolling back of restrictions on most domestic activity in the second half of 2021 and early 2022. In light of this, we have revised up our GDP forecasts for 2021 and 2022 to 12% and 9.5% (previously 10.5% and 7%).
  • However, even widespread vaccination would not fully restore India to economic health. The severe downturn – exacerbated by the government’s disappointingly slow and weak fiscal support (see our Update, “More evidence of a woeful fiscal response” 2nd November) – will leave lasting wounds in the form of firm closures and unemployment. That will further impair the banking sector, which entered the crisis in poor health (the recent collapse of Lakshmi Vilas Bank speaks volumes in that regard).
  • Given this, we think that GDP at the end of 2022 will still be around 6% below its level had the virus not existed (our previous estimate was around 10%). (See Chart 1.) India’s relative underperformance compared to other major economies will narrow, but still, be sizeable.
  • Against this backdrop, the RBI is likely to keep policy very loose for a prolonged period. Recall that RBI Governor Shaktikanta Das said at October’s policy meeting that “the revival of the economy… assumes the highest priority in the conduct of monetary policy”. We think that markets are wrong to be pricing in modest rate hikes in 2022. (See Chart 2.) In fact, on balance, an effective vaccine could prompt the RBI to loosen policy a little further over the coming months if the scaling back of restrictions leads to an easing of supply constraints that have kept core inflation sticky.

Chart 1: GDP (2019 = 100)

Chart 2: Repo Rate (%)

Sources: CEIC, Capital Economics

Sources: CEIC, Capital Economics


Shilan Shah, Senior India Economist, shilan.shah@capitaleconomics.com