By Shan Li and Vibhuti Agarwal 

India's economy was bouncing back after a nationwide lockdown last year stifled consumer spending and pushed the country into a deep recession, but the recovery has now run headlong into a devastating surge of Covid-19.

As the South Asian nation battles the world's worst current outbreak, states and cities across the country have gone back into lockdown. Many nonessential businesses have closed, and people are once again hunkering down at home. Private consumption, which makes up more than half of India's gross domestic product, is expected to plunge, economists said.

"The immediate impact of the second wave is that recovery is going to take a big setback," said Mahesh Vyas, chief executive at the Centre for Monitoring Indian Economy, an independent think tank in Mumbai. The economy is in a "very shaky position," he added, as the virus spreads beyond major cities into most corners of the country.

Payal Das, 33 years old, lost her work as a domestic cook and cleaner after the nation's capital, New Delhi, imposed a lockdown in late April. Her employers were scared of the rising infections and fled the city, she said. No other families in the area want to hire new help. "They think we are infection-carriers," she said.

Ms. Das said she is worried about how to feed her 7-year-old daughter and pay for school fees. Her husband's work as a drummer at weddings has also dried up. The couple has been so consumed by fights about money that they recently decided to divorce, she said.

"This disease has pushed us into helplessness," Ms. Das said. "The government wants to save us from the virus. The real virus is unemployment."

Many Indians, lacking confidence that they can get a hospital bed, are fighting the pandemic the only way they can--by staying away from public spaces.

The latest Google mobility data shows activity around retail and recreational locations in India was down 64% from pre-pandemic levels. Activity at supermarkets and pharmacies has fallen 26%. Even public gardens and parks, which have mostly remained open during the recent surge, saw visitors drop by 47%.

Many Indians have no savings to fall back on. During last year's lockdown, millions of migrant workers returned to their villages in rural India as their jobs in cities evaporated. This time around, the middle class is reeling too, Mr. Vyas said. Many relatively well-off families are falling sick, but have been unable to get medical care from hospitals struggling with an onslaught of patients.

Spending--except on healthcare--is the last thing on people's minds. "That's going to have an impact on consumption expenditure going forward, " Mr. Vyas said.

Consumer spending is the main engine of growth in the world's sixth-largest economy. Until the latest surge, pent-up demand was bolstering India's economic recovery after its GDP shrank for two consecutive quarters last year.

But the second wave is pummeling small and medium-size businesses, which were already wounded after last year's shutdown, economists said. Any further curbs on spending could permanently wipe many of them out, said Vishrut Rana, an economist at S&P Global Ratings.

"There could be a number of closures," he said.

Delhi salon owner Nima, who goes by one name, said she decided to shut down her business for good after the city went into lockdown in late April. The salon barely managed to survive last year, she said, but life was slowly getting back to normal. Now, Ms. Nima said she can no longer afford to keep paying her staff.

"How long can we keep investing with no returns?" she said.

The biggest unknown is how long the current surge will last. The long-term economic impact will depend on when it ends--and whether another wave of infections can be kept at bay.

Some epidemiological models, including one prepared by advisers to Prime Minister Narendra Modi, have predicted the surge will peak around mid-May. In that case, the pain could be limited to the April-to-June-quarter, economists said, with the economy rebounding soon after.

GDP growth for the fiscal year ending March 2022 would take a modest hit, down to 9.8% from an original estimate of 11%, Mr. Rana said. But if the peak comes a month later, in June, the outlook is more grim. In that scenario, GDP growth would fall to 8.2%, he said.

"That's a longer period of time where people are indoors and not spending," he said.

India has avoided imposing the kind of sweeping national lockdown that brought the country to a virtual standstill for months last year. That has blunted some of the pain by allowing heavy industries such as agriculture and manufacturing to keep operating.

Data firm IHS Markit's purchasing managers index for manufacturing in India--a measure of activity in the private sector--rose to 55.5 in April, up slightly from 55.4 in March. A reading above 50 indicates that activity is increasing, while a reading below points to a decline in activity.

"Power consumption, railway, freight--all these things have held up fairly well," Mr. Rana said. "It's a positive sign for at least the heavy side of the economy."

Even after the current crisis ends, a slow vaccination campaign will continue to hamper India's ability to safely open up, said Kunal Kundu, an India economist at Société Générale Corporate and Investment Banking. Only 2.8% of the country's more than 1.3 billion people are fully vaccinated, according to the health ministry.

India is unlikely to achieve herd immunity from vaccinations before the first half of 2022, Mr. Kundu wrote in a research note. Opening up the economy too quickly, he said, could bring about another surge, which would hamper the economy in the long term.

"There is now an increased possibility that localized lockdown will continue until June or maybe even beyond," he said. "India still needs to maintain all of its Covid protocols to prevent a further deterioration until mass vaccination can be achieved."

Mr. Kundu revised the forecast for GDP growth down to 8.5% from 9.5% for the fiscal year ending March 2022. There is a likelihood for further downward revision, he wrote.

Write to Shan Li at shan.li@wsj.com and Vibhuti Agarwal at vibhuti.agarwal@wsj.com

(END) Dow Jones Newswires

May 12, 2021 07:14 ET (11:14 GMT)

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