A bumpy sequential path until a widely distributed vaccine becomes available, followed by faster rebound
By Sonal Varma & Aurodeep Nandi
The economy continues to normalise from the recent stringent lockdowns. The Nomura India Business Resumption Index has risen to post-lockdown highs in successive weeks, jumping to 89.1 for the week ending 6 December from 81.5 at end-September. On balance we expect GDP growth to improve to -0.8% y-o-y in Q4 vs -7.5% in Q3, with 2020 at -7.1% y-o-y. Yet, the process of normalisation remains uneven and incomplete, as shown by the Nomura India Normalization Index (NINI) which is our proxy for measuring the extent of normalisation across sectors. While the consumption sector has largely normalised owing to a festive boost in auto sales in recent months, the momentum is flattening for the industry, investment and external sectors, with levels ~10pp below the pre-pandemic normal. Services continues to lag considerably behind, owing to its contact intensive nature (40pp below pre-pandemic levels). For 2021, we expect a slower sequential pace in H1, followed by a faster recovery in H2 (although y-o-y growth will likely fluctuate due to base effects). We project GDP growth to remain in negative territory in Q1 2021 (-1.2%), pick up to 32.4% in Q2 on base effects, before easing to 10.2% in Q3 and 4.6% in Q4. Overall, we expect GDP growth to average 9.9% in 2021 vs -7.1% in 2020, and 11.9% in FY22 (year ending March 2022) vs -8.2% in FY21.
In H1, there is a risk of a slowdown in sequential momentum owing to: 1) a rise in infection cases due to crowding during recent festivals (e.g., already some states have reimposed restrictions, which could weaken consumer demand); 2) fading of pent-up demand after the initial reflex; 3) fiscal drag from expenditure compression in Q1, as the government struggles to keep the deficit under control; and 4) weaker growth in Europe and the US due to the pandemic. However, despite the growth hiccups, we believe India is at the cusp of a cyclical recovery. We expect the cycle to gain further traction through the year supported by: 1) lagged effects of easy financial conditions; 2) a synchronised global recovery; and 3) a “vaccine pivot”.
Lagged effects of easier financial conditions
RBI has already delivered 250 bps of policy easing (135 bps pre-pandemic and 115 bps from February 2020 onwards), in response to which the weighted average lending rates of banks have fallen by ~50 bps, while the more sensitive Marginal Cost of Fund based Lending Rate (MCLR) has fallen by ~130 bps from 2019 levels. Moreover, interest rates have fallen more sharply in the money market due to the liquidity glut. We estimate that real lending rate has fallen by the sharpest in nearly a decade, after remaining largely range-bound for five years, which should boost credit growth with a lag. Given risk aversion among banks in wholesale lending, we expect a greater push to retail lending which, along with the government’s push towards housing, should support discretionary consumption.
Supportive global growth
Relative to last year, 2021 offers a brighter outlook for the global economy. We expect Q2 to mark a vaccine pivot point for developed economies, which should unlock a large quantum of ‘trapped’ consumer and business sentiment as social distancing requirements become gradually relaxed. We estimate global growth will pick up from -3.7% in 2020 to 5.6% in 2021, with growth in H1 2021 averaging ~7.8% y-o-y (owing to base effect), and recording 3.8% in H2 (average for G3 and China). This bodes well for India, especially given the US and EU are key export destinations. Strong recovery in export growth is positive for India’s manufacturing sector, and in turn for the capex cycle (manufacturing accounts for ~16% of fixed investment).
Domestic “vaccine pivot” to boost laggards and trigger pent-up activity
The Indian government is optimistic that it will be able to give emergency approval for Covid-19 vaccines in the near term, possibly by Q1 2021. The Serum Institute, which has exclusive rights to distribute AstraZeneca’s vaccine in India, projects ~400mn doses by July 2021 and plans to manufacture ~100mn doses/month thereafter. We expect Q3 to mark the vaccine pivot point for India and ~30% of the population to be inoculated by end 2021. Other domestic vaccines that could also receive potential approval in H1 2021 include Bharat Biotech, Zydus Cadila, and the Russian vaccine Sputnik V. All of these vaccines can be stored at a more manageable 2-8 degrees Celsius.
Vaccine distribution challenges remain, but as vaccines become more readily available, the economy is likely to witness a spurt in activity in contact-sensitive services (e.g., travel, tourism and hospitality). As vaccine uncertainty ebbs and consumer confidence builds, households are likely to tap into their large savings buffer. The wide gap between consumer expectations regarding their current situation and their future, which was triggered due to the pandemic, suggests significant scope for consumption to bounce back. Higher business confidence and lower uncertainty should also trigger pent up investment activity after nearly two years of lull.
Excerpted from Asia 2021 Outlook, Global Markets Research, Nomura, dated December 8
Varma is chief economist, India and Asia ex-Japan, and Nandi is India economist, Nomura
Views are personal