The recently identified Omicron COVID-19 variant has already threatened to intensify supply shortages and inflation, with the OECD’s inflation predictions for 2022 having been amended and revised upwards, making its impending toll on the global economy indisputable. Amongst such impacts, a particular development that will be interesting is the variant’s ramifications for India’s economy.
During the 2020/21 financial year, the rates of decline in GDP for emerging markets and developing economies were 3.3% and 2.2% respectively, yet out of all emerging market countries, India’s economy was especially badly impacted, particularly during its second wave in the spring of 2021. Its sharp drop in GDP between April and June 2020 of 24.4% was the largest in the country’s history, and in the second quarter of the 2020/21 financial year (July to September 2020), the economy contracted by a further 7.4%. The total rate of contraction in India was 7.3% for the whole 2020/21 financial year, overall making it clear that the country was experiencing the worst of the pandemic’s economic repercussions for its income, unemployment, poverty, and inequality. Granted, the country’s recent recovery initially created a state of optimism for its economy, with its swift and substantial policy responses, including a broad range of fiscal, monetary and health responses, all contributing to a rapid economic rebound that marked the strongest recovery rate of the world’s major economies. This is reflected in its growth of 8.4% in the quarter ending September compared with a year earlier. In November, it experienced a surge of sales over Diwali, the Hindu festival of light, which helped sales surge to a record Rs1.25tn ($16.8bn), a 75% jump from last year and well beyond the usual 20% year-on-year growth. Additionally, the PHDCCI Economy GPS Index for October 2021 increased to 131 as compared with 113.1 in the previous month. During the April-October 2021 period, it stood at 114.8 as compared with 78.7 in the previous financial year. However, this recovery has also recently been threatened with potential inflation arising from the high commodity prices and shortages of raw materials to support consumption and private investments in the country. The IMF projected India’s economic growth to be 9.5% for the current financial year and the headline consumer price inflation at 5.6% amid elevated price pressures. This is supported by wholesale price inflation jumping 12.94% in May, a near 30-year high, driven by soaring fuel prices, while retail inflation hit a six-month peak of 6.3% as food and fuel costs rose, exceeding the central bank’s higher band and analysts’ estimates.
Considering India’s previous experience with the pandemic, and the current struggle against inflation during its economy’s rapid recovery, the country provides an uncertain economic climate vulnerable to Omicron’s recent emergence. This has already been made evident through the BJP government planning in the upcoming state elections to bring down the prices of essential commodities without having to compromise with its revenue collection from excise duty, and job losses in the export-oriented sectors, especially textiles, leather, engineering and gems & jewellery- ultimately suggesting the possibility of the Indian economy going back to the dramatic negative growth territory it was in earlier this year.
Ultimately, the economic impact of the Omicron variant on emerging market economies such as India will depend on a mix of government restrictions, public comfort with social interactions and the capacity of governments and central banks to provide additional policy support to the private sector. Continued progress in global vaccination efforts and public compliance with the use of tools such as masks and social distancing will be important factors in determining the economic impact of the new variant. Yet, considering its current inflated state, and its history of the pandemic-related economic ramifications, it is clear that India’s economy can potentially exemplify many emerging market economies in once again bearing the brunt of the ramifications of the variant, as opposed to the lesser impacted advanced economies.
By June Chung
Sector Head: Gregor MacDonald