As images of overwhelmed hospitals and lines outside crematoriums headlined globally, India has been and continues to be in the grip of a COVID-19 surge that has hit with more intensity and ferocity than any seen before. The harrowing scenes on the ground in recent weeks have painted a picture of a nation overwhelmed by the crisis with over 21m cases reported and a staggering 234k deaths. The sheer numbers, which are likely undercounted, combined with the emergence of another COVID-19 variant, dubbed the “double variant” is a stark reminder that the dark clouds of COVID-19 remain, and the battle is far from over. As the third-largest economy in the world by purchasing power parity, and Australia’s fifth-largest export market, India’s struggles can have ripple effects on both the Australian and global economy.
An Impending Disaster
The situation in India was starkly different three months ago.
After a successful containment of the first wave in the backend of 2020, healthcare and epidemiologists in India were delighted with their good fortune. By February 2020, the curve has been flattened, and experts predicted that the country would be spared a major second wave.
Prime Minister Narendra Modi said in a World Economic Forum speech in January, “Today India is among those countries that have succeeded in saving the lives of its citizens.” His Bharatiya Janata Party even went as far as to say in a resolution that India had “defeated COVID”, applauding Modi for his “able, sensitive, committed and visionary leadership.”
Masks slipped. Social distancing restrictions eased. The season of state-level elections initiated street parades and large-scale political rallies, sending a message that there was no reason to worry about COVID-19.
Cases started climbing in mid-March before accelerating exponentially in April. However, the government remained complacent, even when it became clear the second wave was imminent. Modi continued to hold rallies throughout April, even congratulating these mass gatherings as a show of strength to his political opponents.
Setting New Records in the Wrong Way
By April, hospitals buckled under the massive wave of infections, and images of people begging for oxygen cylinders and hospitals turning away ambulances headlined globally. By the end of April, India was setting new records at 412k new cases and 3,980 deaths per day.
Worryingly, the country’s coronavirus surge shows no sign of abating. Experts are warning that the coronavirus crisis has the potential to worsen in the coming weeks, with research models from the University of Washington projecting that the death toll could more than double from current levels by the end of July.
“The next four to six weeks are going to be very difficult for India”, said Ashish Jha, the Dean of Brown University School of Public Health. “The challenge is going to be to do things now that will make sure it is four weeks, not six or eight, and that we minimize how bad things will get. But in no way is India anywhere near out of the woods.”
The Rice and Chessboard Problem
The explosion in cases can be explained by the famous rice and chessboard problem. If we were given a chessboard (which has 64 squares on it) and were asked to put one grain of rice on the first square, two grains on the second square, four grains on the third, and so on, how many grains would end up on the 64th square?
In the context of India’s second wave, fortunately, the reproduction number R for COVID-19, which is currently 1.32 is much lower than the chessboard formula. However, the mathematical problem teaches us that when something small begins multiplying at a constant rate, it can become unfathomably large in a relatively short period – showing how multiple policy mismanagements can quickly snowball.
How did the Outbreak Get So Bad?
1. A highly contagious variant
The Indian CDC has linked the COVID resurgence which has been sweeping through India to the new “double mutant”, B.1.617. It has been nicknamed the “double mutant” because the strain acquired two key mutations in the outer spike protein. The spike protein is used by the virus particle to invade a human cell, meaning the double mutation may increase risks and allow the virus to escape the immune system. The new variant has been dubbed “the most infectious variant on the planet” and initial research by top WHO scientists suggest some of the mutations may make it potentially resistant to antibodies that are generated by vaccination.
2. Government Complacency
Despite an acceleration in cases, Modi has assuaged such concerns, urging states to ensure that lockdowns are only chosen as the last resort. The laissez-faire approach by the federal government, which has seen states run by his party ignore the advice of health officials, has been criticised by both domestic and international commentators. Since then, the prime minister has been admonished for his passive dismissive stance by putting politics and campaigning above public safety. Indeed, such political rallies have been super spreading events.
3. Testing Fiasco
Public health researchers have heaped blame on the government’s dearth of coronavirus testing, which many scientists believe is causing a sharp undercounting of cases. Accordingly, the main metric that officials are watching is the test positivity rate, which is have been topping 40%, in some parts of the country, a shockingly high number that indicates as many as three-fourths of infections are being missed.
4. Refraining from a lockdown
When cases started to skyrocket in early April, the Indian government was stuck between a rock and a hard place due to the balancing act of protecting Indians from COVID-19 with the costs of protections to the economy. While this argument holds some weight in the short term, the lassiez-faire approach means impacts of the COVID continue to be felt in great intensity which will become a drag on the economy in the longer term.
What has been done?
After initial policy failures, the Modi government cancelled all rallies and admitted that in hindsight more could have been done. The government has avoided the strict lockdown that punished India’s economy last year, instead opting for specific state lockdowns despite calls from the Supreme Court of India to impose a lockdown. Several state governments including Maharashtra, Kerala and Uttar Pradesh have imposed night curfews and weekend lockdowns since.
India’s Vaccine Plan
Last December, India’s health authorities announced a rollout plan in line with other major economies, with a goal to vaccinate 300m Indians between January and early August. On paper, the plan sounds like one which would be able to be realised given the country is home to the world’s largest vaccine manufacturer. However, disruption in the form of supply bottlenecks was bound to occur from a lack of planning and shoddy regulatory oversight. To compound the issue, a war of words between the ruling party and the opposition has ensued, criticising the incumbent government for allowing millions of doses to be exported worldwide earlier this year.
To date, India has administered approximately 160 million doses of the Covid vaccine. The predominant shots being used are the AstraZeneca shots, produced locally by Covishield, as well as an indigenous vaccine called Covaxin developed by Bharat Biotech. The country also approved Russia’s Sputnik V vaccine in April for first use and the first batch of doses arrived in early May.
After successfully controlling the first wave, India disappointed economists by announcing a $9.94 billion fiscal stimulus package last October. Valued at approximately 2% of GDP, the government’s underwhelming response was held in rebuke by economists, highlighting how the schemes will result in only a temporary boost to consumer sentiment and economic activity. The finance minister defended this position, explaining that the government’s reluctance was guided by the worry that restrictions would blunt the effectiveness of those measures in generating more economic output. Furthermore, given how the country prioritised growth during the GFC which saw the fiscal deficit widen, inflation reach double dights and credit growth surge, policymakers have kept the purses tight to maintain financial stability. The country also entered COVID with a worsening debt to GDP profile which is estimated to surge over 90% over the course of 2021 and widening current account deficit – further justification for the muted government response.
Within the fiscal policy measures was a focus on social protection and healthcare. These included cash transfers to lower-income households (1.2% of GDP), wage support and employment provision to low-wage workers (0.5% of GDP), insurance coverage for workers in the healthcare sector and healthcare infrastructure (0.1% of GDP). In October and November 2020, further policy measures were announced: additional capital expenditure by the central government and interest-free loans to states (0.2% of GDP) and support for urban construction (0.1% of GDP), agriculture and SMEs.
In response to the second wave, the central government announced free food rations and interest free loans to states and waived custom duties and other taxes on vaccines and oxygen related equipment. However, no substantial fiscal stimulus is on the horizon despite the country’s grim outlook.
In tandem with an expansionary fiscal agenda, the Reserve Bank of India (RBI) has reduced the repo rate by 115 basis points to 4% and extended open market operations by purchasing government securities. The accommodating monetary policy has indeed been able to offset some of the economic downside COVID has posed.
However, although policymakers have indicated they have been ready to take steps to support growth, the failure to flatten the curve could dampen the effectiveness of monetary policy. This comes at a time when much of the conventional space available has already been used.
What Effect Could This Have on Markets?
The surge in Covid cases has taken a toll on India’s energy, metals, and agriculture exports, in turn casting a shadow on the international price outlook on some commodities. India’s largest export, petroleum has been impacted by lockdowns which have resulted in supply chain disruptions across the country.
2. Bond Repurchases
Shortly after the RBI announced a 1 trillion-rupee secondary market government securities acquisition program last month, investors’ fears were assuaged after fretting how the market will absorb the 12 trillion rupees of extra liquidity. Shortly after, the blue-chip Nifty 50 index and the benchmark S&P BSE Senex both rallied 1.1%.
3. Capital Flight
The Indian rupee has declined about 1% this quarter in Asia’s worst performance as investors turn cautious ahead of a speech by India’s central bank governor and spiralling COVID infections. The benchmark S&P BSE Senex Index is down about 2% as foreign funds sold about $1.7 billion of equities.
4. Interest Rate Differentials
The reflationary thematic has led to a rise in global yields. However, stabilising US yields and widening interest rate differentials between emerging markets and advanced economies have made emerging market debt more attractive. For India, the contagion remains a key concern for investors concerned with the prospects of its economic recovery. As such, many have chosen to increase their capital exposures to competing emerging markets such as Brazil and China.
Short Term Outlook:
The economic impact of Covid-19 has been broad-based. In 2020, India’s GDP contracted by 8% due to the unprecedented lockdowns to control the spread of Covid-19. Looking ahead, the prolonged crisis has the potential to slow or reverse India’s budding economic recovery. Indeed, Bloomberg Economics lowered its growth projection for the year ending March 2022 to 10.7% from 12.6%, and even these numbers are flattered by a low base as activity ground to a halt due to a strict lockdown last year.
The devastating spread in India shows, in part, the dangers of the world’s uneven vaccination campaign. Worryingly, India’s coronavirus surge shows no sign of abating. The country continues to set new records in the number of confirmed infections. As such, questions continue to arise over the complex interplay between managing difficulties associated with COVID-19, the economic recovery and shifting political priorities.