Omicron restrictions may shave off up to 150 bps from FY22 GDP growth

Omicron-induced lockdowns, among other factors such as an increase in raw material prices, may pull down growth in gross domestic product (GDP) by up to 150 basis points (bps) for this fiscal year, according to economists.
 
Meanwhile, the government will release the first advance estimates of GDP for FY22 on Friday. It is to be seen whether it takes the Omicron effect into consideration.
 
Advance estimates are released to provide the numbers to the finance ministry to work on the Budget for the next year.
 
The curbs will affect economic activities mainly during the fourth quarter of the year.
 
Govinda Rao, former director at the National Institute of Public Finance and Policy (NIPFP) and now chief economic advisor at Brickwork Ratings, said an apparent third wave, rising international crude oil prices, steadily increasing costs of raw materials and freight rates, disruption in semiconductor supplies, and coal and power supply issues were likely to slow the growth momentum.

 
“We revise our GDP estimates for the current fiscal year to 8.5-9 per cent as against our earlier estimate of 10 per cent,” Rao said.
 
Others have revised down GDP growth by  lesser percentage points.
 
India Ratings said concerns relating to Covid-19 and its impact on the ongoing economic recovery had resurfaced in view of the spread of Omicron.
 
It added curbs in various forms such as reducing the capacity of market/market complexes and night/weekend curfews to check human mobility/contact had started in several states, affecting economic activities.
 
“This will have an adverse impact on Q4 of FY22 GDP,” India Ratings Chief Economist Devendra Pant said.
 
He said the India Ratings estimate showed GDP growth in Q4 FY22 would come in at 5.7 per cent year-on-year, which is 40 bps lower than “our earlier estimate of 6.1 per cent”.
 
“For FY22, GDP is expected to clock a growth rate of 9.3 per cent, 10 bps lower than our earlier estimate of 9.4 per cent,” Pant said.
 
He added once Covid 3.0 subsided, the economy was expected to bound back quickly as was the case after 2.0.
 
The Reserve Bank of India (RBI) would continue to pursue its accommodative policy stance with no change in the policy rate in the foreseeable future and the Union government would not be in a hurry to get back to the fiscal consolidation path, he said.
 
Yuvika Singhal, economist at OuantEco Research, said her organisation haddownscaled full-year GDP growth to 9.6 per cent from 10 per cent earlier with mild downside risks.
 
Bank of Baroda Chief Economist Madan Sabnavis said GDP in the fourth quarter might be pulled down by 10-20 basis points if restrictions persisted during the period. Mainly services will be affected, he said.
 
HDFC Bank Chief Economist Abheek Barua said there was a downside risk to his growth forecast to the tune of 20-30 basis points in the fourth quarter.
 
HDFC Bank has estimated economic growth at 6.1 per cent in the quarter.
 
In a note, HDFC Bank said the downside risks emanated from additional states imposing restrictions, curbs extending beyond January 22, and a slowdown in global recovery, which will weigh on exports.
 
CRISIL Chief Economist D K Joshi said he was retaining the growth outlook at 9.5 per cent for the fiscal year with a mild downward bias.
 
Joshi pointed out since successive waves had been found to be less damaging to the economy due to “living with a virus attitude”, the economic impact would not be severe.  “Contact-based services will suffer the most,” he said.
 
ICRA Chief Economist Aditi Nayar said her early analysis suggested that the impact of an Omicron wave might be limited to one quarter from a medical duration point of view. “There continues to be uncertainty around this. The impact on GDP will depend on how much restrictions proliferate in the coming weeks. As of now we see a modest downside to our forecast of FY22 GDP expansion of 9 per cent,” she said.
 
Dun & Bradstreet Chief Economist Arun Singh said Omicron had clouded the economic outlook for 2022.
 
He said India would not remain decoupled if global growth weakened as countries were forced to close their borders or implement domestic restrictions.
 
He expected the pace of growth to slow in the first half of 2022 and then to pick up momentum.
 
Soumya Kanti Ghosh, chief economic advisor at the SBI group, however, said initial reports suggested the virus was mild. “Hence its impact on GDP will be limited.”
 
YES Bank Chief Economist Indranil Pan said he did not have any percentage point assessment of how much damage Omicron would do to the economy.
 
He said there was damage, which in the short term would be on consumption demand. “Investment demand will have a significant lag to pick up though the policy atmosphere from the government is relatively good and interest rates remain docile,” Pan said.
 
Risks are towards the downside, but there is no way to capture their quantification, he said.