India's economy is on track — but new Covid variant could weigh on growth, economists say

• Economists flagged the new Covid variant omicron, which was first identified by South African scientists, as a potential source of uncertainty for India's economy going forward.
• There is a risk of a potential increase in restrictions in the first half of 2022, to contain the spread of the new omicron variant, Goldman Sachs analysts said in a note Tuesday.
• The uncertainties around the omicron strain could require India to achieve a much higher vaccination rate before there is a durable recovery in household spending, Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics, said.

India's economy expanded in line with market expectations for the quarter ending in September, but economists say risks like the new Covid variant omicron could weigh on future growth.

Gross domestic product grew 8.4% from July to September — India's fiscal second quarter — compared to a year ago, according to data released by India's statistics ministry on Tuesday. It was in line with the growth expectations of economists polled by Reuters.

During the same period last year, India's economy contracted 7.4% due to a months-long national lockdown because of the coronavirus pandemic.

While the data is likely to be a "clear positive" for the Reserve Bank of India when its monetary policy committee meets next week, the recovery was not broad-based and growth disappointed in key areas like non-financial sectors, non-public services and manufacturing, according to ANZ Research analysts.

Omicron variant

Economists flagged the new Covid variant omicron, which was first identified by South African scientists, as a potential source of uncertainty for India's economy going forward.

There is a risk of a potential increase in restrictions in the first half of 2022, to contain the spread of the new omicron variant, Goldman Sachs analysts said in a note Tuesday.

Stock picks and investing trends from CNBC Pro:

Tom Lee, among the first to call the market’s 2020 rebound, says he would buy aggressively here

There’s a ‘great battery race’ ahead says Goldman Sachs. These stocks will win

JPMorgan picks 'high-quality' Japanese stocks to buy after recent sell-off

Goldman Sachs thinks these 6 global stocks could rally by 60% or more

The omicron strain has already been detected in multiple countries from Australia and Hong Kong to the U.K. and the Netherlands. Its emergence rattled markets and has forced countries to rethink their reopening plans. Health experts are concerned about the variant's transmissibility given its unusual number of mutations and profile that differs from previous variants.

India is already reviewing its plans to reopen its borders to large swathes of international travelers. On Sunday, the South Asian country introduced mandatory Covid tests at airports and 7-day home quarantine for all travelers coming from countries deemed to be high risk, including those fully vaccinated against the disease. The omicron variant has not yet been detected in India.

The uncertainties around the omicron strain could require India to achieve a much higher vaccination rate before there is a durable recovery in household spending, Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics, said in a note.

"We continue to forecast a sequential softening in growth [in the current quarter] amid subdued consumer sentiment," she said.

"We look for a more durable recovery from [April-June quarter] onwards, by when 80% of the population is likely to be fully vaccinated. However, this is assuming that the Omicron variant doesn't dent vaccine efficacy significantly," Kishore added.

Reserve Bank of India

India's central bank is expected to keep interest rates on hold as the country faces a long road to economic recovery, Jahangir Aziz, chief emerging markets economist at JPMorgan, said Wednesday.

"There's very little chance that given the amount of slack in the economy, given the incompleteness of the recovery, the RBI will want to see much more proof that the recovery is properly grounded and rooted before it moves on policy," he said on CNBC's "Squawk Box Asia."

"It will probably fiddle around with liquidity a bit here and there, but I don't think it's going to touch rates at all," Aziz said.

Government data showed that private consumption expenditure for the September quarter improved compared to a year ago, but it is still slightly below 2019 levels for the same period.

ANZ analysts said some of the positive factors that led to a 8.4% growth will likely wane, and that would require the central bank to stay accommodative on policy to revive growth durably.

They pointed out that private consumption performed better than expected in the September quarter, likely helped by the festive demand, which is set to ease in subsequent months. India's exports may also soften in line with a moderation in external demand conditions, they added.

They also pointed out that "Government support to growth may not remain as strong in [the second half of fiscal year 2022]."

That's because India's fiscal deficit target of 6.8% of GDP may limit the room for government spending as tax revenue is expected to be lower due to tax cuts on fuel and divestment receipts might disappoint, the ANZ analysts said.

Source: Read Full Article