The fierce second Covid-19 wave took the healthcare ecosystem to the brink, but it does not seem to have hit economic activity as hard as the first wave did. However, the lockdowns are likely to be more prolonged, including to preclude a third wave. The pace of recovery hereon will be influenced by how the third wave pans out and, more importantly, the pace of vaccination.

In view of these developments, CRISIL has lowered India’s gross domestic product (GDP) growth forecast to 9.5% for this fiscal, from 11% expected earlier. The base case assumes 70% of India’s adult population would be vaccinated by December-end. The pessimistic case, wherein vaccination slackens and the third wave turns out to be intense, sees GDP growth for this fiscal dropping to 8%.

Provisional estimates show that despite upward revisions last fiscal, GDP fell below fiscal 2019 levels, with deep scarring in contact-based services such as trade, hotels and transport, where it sank further to fiscal 2017 levels. The primary engines of demand – private consumption and investment – took a severe beating. Private consumption contracted 9.1%, and was only 3.1% above fiscal 2018 levels.

India’s GDP had bounced back to the pre-pandemic level in the fourth quarter of fiscal 2020, despite the sharp contraction witnessed in April-June. However, the second wave has likely erased those gains in the first quarter of this fiscal. We believe it would take more than a quarter to regain the pre-pandemic levels of growth. In our base case of 9.5% growth, that could happen after the second quarter. While in the pessimisticscenario, quarterly GDP would surpass the pre-pandemic levels only in the third quarter.

The government plans to vaccinate India’s entire adult population (68% of total) by December. Provided we stay on track to achieve this target, recovery could start in the third quarter of fiscal 2022. And as vaccination progresses and more clarity emerges, recovery could strengthen in the fourth quarter, and stay steady in the first quarter of fiscal 2023. In fiscal 2023, we expect growth to remain strong and become more broadbased,as a sufficient proportion of population would get vaccinated by then.

Getting sufficient people vaccinated will particularly strengthen growth in contact-based services, which have been hit the hardest of all. Growth in other sectors is expected to be moderate. But all this will not make up for the permanent damage the pandemic has wrought on GDP. In our base case, between fiscals 2021 and 2025, we expect real GDP to be ~Rs 97 lakh crore, which is 10.9% below the level we would have reached had there been no pandemic. We expect this loss to GDP to be permanent.