Mizuho flash – India’s Covid tragedy: Misdiagnosis & maladies

By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

India’s COVID Tragedy: Misdiagnosis & Maladies  

In a nutshell : India’s devastating second wave is first and foremost a tragedy of lives and livelihoods, which will inevitably also extract a significant economic toll. Misdiagnosis of vaccine panacea that emboldened false choice between containment and economic recovery is now laid bare, and the necessity of concomitant containment efforts amid vaccination is immutable.

Flattening this out-of-control Covid resurgence curve is even more critical now. Not only because the severity of the pandemic is likely understated, but the acute “tipping point risks” that accompany an exhaustion of healthcare capacity will have harrowing impact on lives, resulting in disproportional economic pain; perhaps even lasting economic scars. While worrying in itself, worsening inequality amid an uneven recovery also compounds the economic setback as disproportionally large setback in the grey economy stifles growth multipliers.

Banking sector strains are also accentuated as drawn out and diminished recovery amplify balance sheet stress (both corporate and government). Cyclical growth downgrade is an arithmetic reality but the real danger stems from circularity of growth-banking-fiscal-credit ratings risks.

Misdiagnosis & Disproportional Devastation

India’s devastating second wave of Covid is a tragedy born out of overconfident mis-diagnosis that vaccine rollout can supplant containment efforts ahead of herd immunity, compounded by the pre-existing pitfall of a false choice between containment and economic relief. The perceived dilemma is understandable but self defeating; as lapses in containment that stress hospital capacity, will inadvertently inflict the malady of disproportional pain cascading from accompanying economic seizures.

To be sure, India’s daily cases spiking to nearly 315K, dwarfing the worst (sub-100K) of its Sep 2020 first wave and accounting for over 40% of all global cases (Chart 1), is first and foremost a human tragedy devastating lives and livelihoods like never before.

Vigilance Non-Negotiable

Beyond which, it is a cautionary tale against premature vaccine euphoria, and a round denunciation of complacency about containment on account of vaccine rollout. Fact is, vaccine rollout simply does not absolve the need for vigilance on containment. While India’s violent Covid resurgence is the shrillest reminder that “flattening the Covid curve” is a burdensome journey, not a destination with bragging rights, the lesson is a global one.

More Dire On-the-Ground Realities

Especially as reported numbers, in all likelihood, understate on-the-ground horrors of Covid. Inherent data shortcomings mean that real-time/complete vaccination data in contrast to cases/deaths subject to reporting lags and detection lapses (capacity constraints/asymptomatic cases).

Guarding Against Tipping Points

What’s more, metrics such as infection and death rates are not to be misunderstood as static risks. Fact is, these are conditional outcomes highly dependent on on-going containment efforts (impeding contagion) and healthcare capacity (hospital beds, health care workers, medical equipment/treatment); with adverse feedback loops between them. So, averting a sharp deterioration to the “tipping point” that results in disproportionally large human and economic devastation is the unequivocal policy priority.

Economic Setback

With pockets of lockdown necessitated, and the healthcare crisis hijacking a nascent and fragile economic recovery, the unavoidable conclusion is that India’s economic recovery will be at least delayed, if not diminished; even after accounting for less brutal lockdown compared to last year. We have accordingly downgraded CY2021 growth outlook to 6.8-7.8% (from ~10%) in a cyclical response to COVID resurgence; cognisant of wider dangers from accentuated unevenness of recovery, with inequalities inadvertently exacerbated.

“Grey” & Banking Pain Amplifiers

In which case, the far greater threat is that of “scarring” from disproportional adverse impact on the grey economy, in turn undermining growth multipliers. Reports on the plight of informal/daily-rated workers amid lost livelihoods casts a shadow (both supply- and demand-side) on the post-Covid snap back narrative. Moreover, prolonged retardation and restraint in the recovery amplifying balance sheet stress (both corporate and public sector) challenge the desire for investment pick-up to lead the way out of the pandemic. The is an unwelcome headwind to banking sector already saddled with non-performing assets and capital impairments pre-Covid.

Circular Maladies

In worse case iterations of lingering pandemic drag, the circularity of growth, banking sector impediments, fiscal constraints and credit ratings risks is the bugbear. Admittedly, the half-full take is that rating agencies remain optimistic about prospects for India’s post-Covid rebound that is “delayed, nor derailed”. But on the flip side, “stickier” growth downgrades may evoke negative credit ratings action given growth-fiscal feedback loops, and in the context of negative outlook by two of the three major ratings agencies (Fitch and Moody’s). Making for more precarious circular risks is India’s fringe (‘BBB-‘/’Baa3’) investment grade rating. Near-term some of these risks may manifest as INR wobbles, until Covid containment is established more convincingly.

Effective and lasting containment of Covid until herd immunity is attained is this a pre-condition for India to avoid a negative spiral of growth-banking-fiscal-ratings risks. The severity of the malady at hand does not afford any mis-diagnosis and/or policy mis-steps.

Source: Mizuho Bank Ltd