Reasons for caution despite drop in virus cases

New COVID-19 cases in India have dropped significantly over the past month. Encouragingly, the share of tests returning positive has also dropped, indicating that the improvement in test results reflects a genuine drop in infections. That has allowed various states to continue rolling back restrictions. But this isn’t enough to transform the economic outlook. Given the severity of the initial outbreak and the difficulty in dealing with it, policymakers are reopening with plenty of caution: in aggregate, containment measures in India are still more stringent than in most other EMs. Further ahead, the experience from other economies suggests that domestic demand will continue to struggle after restrictions are eased in earnest. And India will emerge from lockdown in worse shape than most: underwhelming financial support from the government has meant that the lockdown-induced damage to household and corporate balance sheets is more severe than elsewhere. That will leave in its wake a heavily impaired banking sector which will hold back the economic recovery.