Will Covid-19 vaccines provide a shot in the arm for India's economy?

After a torrid 2020, India looks set to benefit from a consumer-led revival during its next financial year

A health worker checks a syringe before performing a trial run of COVID-19 vaccine delivery system in Gauhati, India, Friday, Jan. 8, 2021. India is testing its COVID-19 vaccine delivery system as it prepares to roll-out an inoculation program to stem the coronavirus pandemic. The exercise included necessary data entry into an online platform for monitoring vaccine delivery, along with testing of cold storage and transportation arrangements for the vaccine, according to the health ministry. (AP Photo/Anupam Nath)

With the rollout of a Covid-19 vaccine around the corner in India, hopes are rising among business leaders of a swift recovery in 2021 after the economy was plunged into a recession last year because of the impact of the pandemic and lockdown restrictions.

India has given emergency approvals for two vaccines – the Oxford-AstraZeneca jab and a homegrown candidate – and it is currently preparing to begin its immunisation drive, which starts on January 16. This will start with 30 million essential workers, and India has the ambitious target of vaccinating some 300 million citizens by the middle of the year. India is the second-worst affected country after the US with more than 10 million confirmed Covid-19 infections.

“Things are looking much brighter,” says Harkirat Singh, the managing director of Aero Club, which owns the Indian footwear brand Woodland. “2020 was really not a good year for retail because our stores were closed for almost five to six months [because of lockdown curbs]. We were badly hit.”

As the vaccine rollout nears, this comes as a huge relief to many businesses that have been battered amid the pandemic, with India last year entering one of the world's strictest nationwide lockdowns.

“On balance, we continue to assume that India’s most vulnerable will be largely vaccinated by the second quarter of 2022,” says Darren Aw, the Asia economist at Capital Economics. “That would probably allow a rolling back of restrictions on most domestic activity during the second half of this year.”

The country's gross domestic product plummeted by a record 23.9 per cent year-on-year in the quarter between April to June at the height of India's strict nationwide lockdown, while unemployment soared.

As restrictions were gradually eased, official figures showed that GDP picked up to a decline of 7.5 per cent in the following three months, plunging the country into recession. Even before the pandemic, growth was slowing amid liquidity challenges stemming from a crisis in the non-banking financial sector.

“With an unprecedented pandemic-induced recession, 2020 has severely challenged micro, medium and small businesses,” says Akshay Hegde, the co-founder and managing director of ShakeDeal, an e-commerce and supply chain start-up based in Bangalore. However, he says the outlook for this year is being “buoyed by rebounding [consumer] demand and hopes of an early vaccine rollout”.

An estimate released on Thursday by India's Central Statistics Office showed that India's economy is expected to contract 7.7 per cent in the current financial year to the end of March, which would be its worst performance in four decades.

The World Bank forecasts a larger contraction of 9.6 per cent and then a rebound of 5.4 per cent in the next financial year. But it warns that the recovery is likely to be muted because of the impact of the Covid-19 crisis on private investment.

“The pandemic will likely lower potential growth, including through eroding human capital and investment growth,” according to the World Bank's Global Economic Prospects report, released last week. “In the financial sector, non-performing loans were already at high levels before the pandemic and the economic downturn may lead to further insolvencies among financial and non-financial corporations.”

But analysts say that there are elements working in India's favour, too, with consumer demand expected to be boosted by the vaccine.

“Consumption, the prime mover of the Indian economy, has started experiencing a turnaround,” says Partha Ray, a professor of economics at the IIM Calcutta business school. “Also, perhaps reflecting the global recession and low oil price, India’s current account balance is expected to turn into a small surplus after a long time.”

Looking at sectors that are major contributors to the economy, he points out that agriculture has managed to grow even during the pandemic.

“Manufacturing and financial and IT-related services may already be on a path of recovery, but it remains to be seen how fast construction and real estate come back,” says Mr Ray. “Sectors like travel, tourism and hospitality may take some time to recover in tune with the global trends.”

And he warns that challenges remain in India's journey towards an economic revival.

“While the pandemic-related infections and deaths have already started showing distinct downward trends in India and the announcement of two vaccines has been greeted with cheers by one and all, the possibility of any second wave of the pandemic, as reported in some advanced countries, could derail the recovery.”

There are also potential hurdles that could hinder the vaccination drive.

“Concerns over the approval process and pricing disagreements underscore some of the challenges that remain to widespread vaccination,” says Mr Aw.

A health worker performs a trial run of COVID-19 vaccine delivery system in Gauhati, India, Friday, Jan. 8, 2021. India is testing its COVID-19 vaccine delivery system as it prepares to roll-out an inoculation program to stem the coronavirus pandemic. The exercise included necessary data entry into an online platform for monitoring vaccine delivery, along with testing of cold storage and transportation arrangements for the vaccine, according to the health ministry. (AP Photo/Anupam Nath)

Despite the challenges, there have also been some lasting positive effects from 2020, as the pandemic forced companies to accelerate their digital strategies.

“The air is fresh and expectations from the April 2021 to March 2022 financial year are sky high,” says Sandeep Wirkhare, the managing director and chief executive of Indian School Finance Company, a lender to the education sector. “The challenging period gave us opportunity to relook at [our] complete business model and work on digitisation, product innovations, methods of product delivery.”

Samarth Agrawal, the chief executive and co-founder of MaxWholesale.com says that “for the e-commerce industry, 2021 was a year of fast-tracked growth, and the way companies and individuals function has been completely transformed”. As a result, “there were also major technological advancements that have further increased the scope for the growth of Indian e-commerce in the coming years”.

While India saw mass lay-offs last year, experts say that new jobs could be created this year in the digital space as the economy begins to rebound.

“Hiring trends that we are witnessing in 2021 include increased hiring for technology talent with digitisation becoming a key mantra for businesses in nearly every industry,” says Neha Bagaria, the founder and chief executive of JobsForHer, a portal that encourages women to start, restart and progress in their careers.

The lockdown's effect on daily wage labourers, many of whom returned to their villages from cities when they were left without work, could also have an effect on the employment landscape in 2021.

"Contraction in the nation’s GDP owing to the pandemic disruption will have its magnified impact on the informal sector that comprises 80 per cent to 90 per cent of India’s workforce,” says Gayathri Vasudevan, the chairperson and co-founder of LabourNet Services India.

“With increased appetite for remote work, the gig economy will also open up a range of outcome-focused online work. 2021 could be a year of reorganising the informal sector in India.”

Also shaping the economy this year, India is expected to continue its drive to expand its manufacturing sector, as the pandemic strengthened the government's ambitions for the country's economy to become what Indian prime minister Narendra Modi describes as more “self-reliant”.

“India may be in a favourable spot as the post Covid-19 world is looking for economic distancing from China,” says Amit Jain, chief strategist at Ashika Group, a financial services company. “In my personal view, it is a big opportunity for India to portray itself as a replacement for China as the 'world's factory'.”

Following the rollout of the vaccine, the next major event that is being closely watched in terms of India's economy, is the union budget, set to be unveiled on February 1.

Despite India's widening fiscal deficit, there are hopes that the budget could be another shot in the arm, with expectations of New Delhi boosting its spend on infrastructure and launching new incentives for manufacturers in a effort to propel India's economy.

“There is significant posturing around the budget,” says Nikhil Kamath, the co-founder and chief investment officer at asset management company True Beacon and brokerage firm Zerodha. “It will be interesting to see if the government delivers the big bang budget they are hinting at.”

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