The ferocity of the second wave of the pandemic in India has overwhelmed both the healthcare apparatus and administrative capacity, necessitating state-wise lockdowns and restrictions. These restrictions are having a detrimental impact on economic activity.

For now, we are maintaining our base case gross domestic product (GDP) forecast for the fiscal at 11%. However, risks are firmly tilted to the downside, given thecontinued rise in cases and restrictions across the country. Our base case GDP forecast assumes the surge in cases and lockdowns would peak by mid-May, and then start plateauing. The economy would return to pre-pandemic levels by the September quarter. But in case the peak is pushed further, we see two downside scenarios playing out:

• Scenario 1: Moderate downside of 9.8% GDP growth, assuming case surge and consequent lockdowns peak by May-end
• Scenario 2: Severe downside of 8.2% GDP growth, assuming the peak is pushed to June-end
  

In both scenarios, catch-up to the pre-Covid-19 GDP level is pushed beyond the September quarter. Moreover, the permanent loss to GDP over the medium term rises to ~12% from 11% in the base case. The slowing pace of vaccination keeps the likelihood of a third wave of Covid-19 cases high, injecting further uncertainty to our outlook. The government, however, is making arrangements to tackle the third wave.

We still believe this fiscal will be a story of two halves. The first half will be supported by a base effect, but clouded by the pandemic’s spread. The second halfwill be led by better-spread economic growth, owing to increased inoculations and higher adaptability to the pandemic, which would support laggard sectors. The second half should see stronger global growth, supporting India’s exports to an extent. Overall financial conditions remain comfortable during the second wave, the key factor being the Reserve Bank of India’s (RBI) policy actions. Financial conditions, however, could also face challenges from rising external headwinds.

The second wave can have a moderate to severe impact on growth depending on how long it lasts. Yet the resurgence of the pandemic is expected to leave scars. Other than the risks to our base case listed above, other key monitorables that assign risks to our forecasts arise from: (i) premature fiscal policy-support withdrawal globally; (ii) worsening of stress in the financial sector or deterioration in financial conditions; and (iii) uneven temporal and spatial distribution of the monsoon.