Indian economy showed momentum before new, severe COVID-19 wave

India’s economy expanded faster than expected last quarter before a resurgent coronavirus pandemic unleashed a new wave of challenges.

Gross domestic product rose 1.6 percent from a year earlier in the three months ended March, the Statistics Ministry said Monday. That was faster than the 1 percent median estimate in a Bloomberg survey of economists.

The number marks the second straight quarter of expansion following a rare recession, which tipped the economy into an unprecedented 7.3 percent contraction for the full fiscal year ended March. That compares with a median 7.5 percent decline estimated in a Bloomberg survey.

Stocks jumped 1 percent, the biggest advance in 10 days, before the GDP numbers were published. The yield on the benchmark 10-year government bond rose two basis points to 6.02 percent, while the rupee slipped 0.2 percent ahead of the data.

While pent-up demand for everything from mobile phones to cars revived consumption in Asia’s third-largest economy after it reopened last year from one of the strictest lockdowns that lasted more than two months, India’s status now as the global virus hotspot could hurt those prospects. It could temper what will be fastest pace of growth among major economies this year.

India’s GDP will grow 10 percent in the year that began April 1, according to the median of 12 estimates compiled by Bloomberg News. That’s after several economists downgraded their forecasts in recent weeks to factor in local curbs on activity, including in India’s political and commercial hubs, and the tardy pace of inoculation.

“Greater vaccination coverage, increased public investment and improved export demand are likely to be key factors supporting a stronger rebound, India economist Abhishek Gupta said.

Even the Paris-based Organization for Economic Cooperation and Development, which by far had the most optimistic forecast of 12.6 percent growth for India in its interim economic outlook in March, now sees a relatively modest yet world-beating 9.9 percent expansion.

The downgrades are a message to not take the economy’s recovery for granted. Economists say the relaxation of restrictions across states will determine the strength of the rebound, while the willingness of consumers to spend — as they did last year when lockdown curbs were lifted — will also be key.

“Activity will improve only when sufficient number of people are vaccinated,” said Devendra Kumar Pant, chief economist at India Ratings and Research, the local unit of Fitch Ratings. “So the risk as of now is the demand”.

While virus cases have started receding and some parts of the country look set to reopen in June, consumers are unlikely to spend freely, given the economic uncertainties and unemployment at its highest level in a year.

The government on Sunday expanded a $41 billion emergency credit program to airlines and hospitals to cushion them from the impact of the pandemic. The central bank, which will review interest rates later this week, has kept monetary policy loose and injected liquidity into the system to support growth.