India: Coronavirus infections weigh on economic activity

Markets summary

Before a coronavirus second wave, worsened by a new double mutation variant thought to be behind the sudden surge in cases that overwhelmed hospitals, India’s economy was seemingly on track to recovery.

In line with the said recovery, the International Monetary Fund (IMF) forecasted double-digit economic growth, set to make India the fastest-growing large economy in the world. The estimate, although back then seemed plausible, now, seems ambitious given the number of coronavirus infections and drop in mobility.

In June, leading economic figures, such as PMI readings - an indicator of economic health for manufacturing and service sectors, revolved into contractionary territory, as the intensification of the pandemic and strict containment measures negatively impacted on demand.

Manufacturing and Service PMIs

In June, India's factory activity, following a relatively positive period fell back into decline. India’s Manufacturing PMI fell to 48.1, from 50.8 a month earlier. The reading pointed to the first contraction in the manufacturing sector since July last year, as the intensification of the coronavirus pandemic and strict coronavirus-inflicted measures were employed to contain the spread, negatively impacting demand.

A reading below the 50 mark indicates a contraction.

Both output and new orders, following a stretch of growth starting in August 2020, shrank. Jobs continued to be shed midway through the year. The fall in employment, albeit marginal, took the current sequence of month-on-month contraction, now to 15 months. From a pricing standpoint, data showed that input cost inflation eased to a five-month low, while selling prices inflation slowed to a three-month low. Lastly, business confidence was dampened by uncertainty over when the pandemic can be brought under control. Businesses were at their least optimistic for almost a year.

India Services PMI declined to 41.2 in June from 46.4 reported in May, and far below market expectations of 48. The latest Services PMI reading pointed to the second straight month of contraction in the sector and the fastest pace of contraction since July 2020, amid a resurgence of coronavirus cases.

June’s data indicated that firms within the services industry endured further losses of new business as the health crisis and resultant measures employed to mitigate the spread restricted demand. Consequent to the latter loss, companies lowered payroll numbers. The decline in employment figures was for the seventh successive month, and the fastest over this period. Business sentiment weakened to the lowest since August 2020.

Coronavirus infections trickling lower

Over 240,000 people have died in the past three months, since the country has been hit by a devastating second wave that overwhelmed health systems and caused acute shortages of medical supplies. Albeit such a high figure, the trajectory is now improving.

Newly confirmed coronavirus infections are steadily declining because of regional lockdowns, to contain the spread of the virus, and an increased level of antibodies among the population, according to public health experts.

India’s seven-day moving average of new daily infections has now fallen to 43,000, down from a peak of 391,000 in early May. Meanwhile the number of daily deaths fell to below 1,000 from 4,896 – a figure noted at the pandemics peak.

While the absolute numbers have seemingly improved, the accurate number of those infected and dead are most likely higher as testing, particularly in the rural areas, remain scarce.

Vaccination programme gaining traction

Real world data on vaccine efficacy continues to be largely positive, with hospitalisations remaining largely low in those countries where the vaccine rollout has progressed far enough to protect the most vulnerable age groups. The large divide between developed and emerging economies is now evermore apparent, as many European countries plan their summer re-opening, while the tragic health crisis in India continues, and underlining the need for a rapid rollout of vaccines on a global scale.

Albeit initially marred by shortages of jabs, India’s vaccination programme, is now seemingly gaining traction.

Progress is being made, with over 350 million vaccines so far administered in India.  This progress, combined with a relatively young population, brings hope that the worst of the Indian health crisis could be over within months. The quicker a higher proportion of the world population is vaccinated, the quicker the return to normality, and thus revival of India’s economic climate.


Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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