Essential service workers arrive at a station in Mumbai as the government announces plans to privatize part of its rail network. Photo: AFP

The resumption of economic activity following the recent easing of the Covid-19 lockdown may be short-lived if India fails to flatten the curve, according to a report from Nomura.

The Japanese financial services firm believes that recent improvements in activity during the initial post-lockdown phase are likely to fade after normalization. It also expressed concern over the persistent rise in daily cases, especially in states that had a lower caseload until recently.

Nomura believes this spike in coronavirus cases may make the public and local governments more averse to risk and that measures to revive the economy may take a back seat.

The number of cases in the country is now over 1.4 million, with major economic centers such as Delhi, Mumbai, Chennai, and Bangalore among the most badly hit. Five states – Maharashtra, Tamil Nadu, Delhi, Karnataka and Andhra Pradesh – now have more than 100,000 cases, nearly half of those recorded nationally.

It said that while India’s workplace mobility has rebounded from the lows recorded in April, it has been plateauing since mid-June. Similar evidence of stagnation is visible in other mobility indices around retail and recreation, essentials, transit stations and driving traffic. The plateauing trend is also visible across various states.

Nomura sees this plateauing as a precursor of a potential derailment of the ongoing nascent and narrow domestic recovery. It called for more targeted fiscal support to address this situation. A package focused on boosting the incomes of vulnerable groups and supporting contact-intensive sectors (for example, hospitality, tourism, aviation) is needed, it added.

Bad loans

Meanwhile, in its latest Financial Stability Report, the country’s central bank has projected a sharp rise in bad loans for this fiscal year.

The Reserve Bank of India has said that its stress tests indicate that the gross non-performing assets ratio of scheduled commercial banks would rise to 12.5% under a baseline scenario, but may skid further to 14.7% if the economic impact of the pandemic is “very severe.”

The report said the ratio of bad loans of state-owned banks will increase to 15.2% in March 2021 from 11.3% in March 2020 under a baseline scenario, but may increase to 16.3% under stress. In the case of privately owned banks it will increase to 7.3% from 4.2% in a baseline scenario, but could go up to 8.7% in crisis situations.

A rise in stress will also lead to a drop in banking capital adequacy ratios to 13.3% in March 2021 from 14.6% this year, and it may even go down to 11.8%.