Surge in virus cases a growing threat to recovery - Capital Economics
India Economics

Surge in virus cases a growing threat to recovery

India Economics Update
Written by Shilan Shah

The rise in new COVID-19 infections to a six-month high yesterday has predominantly been limited to one state. But there are signs that the virus is spreading rapidly to other parts of the country and, with the vaccine rollout proving slow-going, the reintroduction of wide-ranging restrictions on activity could come onto the agenda before long. That would severely dent the economic recovery.

  • The rise in new COVID-19 infections to a six-month high yesterday has predominantly been limited to one state. But there are signs that the virus is spreading rapidly to other parts of the country and, with the vaccine rollout proving slow-going, the reintroduction of wide-ranging restrictions on activity could come onto the agenda before long. That would severely dent the economic recovery.
  • New COVID-19 cases in India hit a six-month high of over 70,000 on Wednesday. The bulk of the infections are still in Maharashtra. (See Chart 1.) Though the state assembly has so far refrained from implementing a full lockdown, it might now only be a matter of time as local healthcare comes under increasing pressure. Maharashtra’s Health Minister Rajesh Tope commented this week that “if this situation continues unchecked, then a lockdown will have to be deployed as a last option”.
  • A full lockdown in Maharashtra would be a headwind to the recovery in the near term. It is the most economically-important state in India, accounting for around 14% of output. (See Chart 2.) Domestic supply chains would also be interrupted. But the experience from the past year shows that, if restrictions do work in quashing a new outbreak, they would pay dividends over the rest of the year as lost economic output could quickly be made up.
  • The bigger worry is that it is already too late to stop the outbreak spreading beyond Maharashtra. Virus cases have also been rising in several other large states including Gujarat and Tamil Nadu.
  • The obvious rejoinder to this is the vaccine rollout. But while it has gathered pace, the number of vaccines administered is very low in per capita terms. (See Chart 3.) At the current pace, around 220m will have been vaccinated by August, some way short of the government’s target of inoculating 300m people (healthcare and frontline workers, over 50s and those with underlying health issues) by then.
  • The upshot is that if infections continue to rise unchecked over the coming days, more widespread containment measures are likely and the greater prevalence of the virus may lead to renewed social distancing by the public. That would pose a more serious threat to the economic recovery – and is one reason to think that the RBI will keep policy very accommodative for a long while yet. (See Chart 4.)

Chart 1: New COVID-19 Cases (7d. Avg.)

Chart 2: State GDP (% of Total, 2020)

Chart 3: COVID-19 Vaccines Administered
(% of Total Population, Latest)

Chart 4: Repo Rate (%)

Sources: CEIC, OurWorldInData, Capital Economics


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