India’s financial markets have mounted a rollicking recovery from the downturn caused by the country’s devastating second coronavirus wave, with shares near all-time highs.

But outside the cities, rural families are still piecing their lives back together even as public health officials warn that a third wave is on the horizon.

“You might see headline numbers coming back, but that doesn’t mean everything is hunky dory,” said Dharmakirti Joshi, chief economist for CRISIL, a credit-rating agency.

The shocking human cost of India’s Covid wave was exposed last month by drone footage that showed hundreds of shallow graves along the sacred Ganges river.

Despite an accelerated vaccinations push, analysts warn that the calamity weighs heavily on India’s economic prospects, too, dampening the consumer demand that policymakers hoped would revive growth.

“The population is psychologically traumatised,” said Jahangir Aziz, head of emerging market economics at JPMorgan. “All investment plans — all durable consumption plans — will get postponed.”

Until the emergence of the Delta variant, first detected by Indian scientists in rural Maharashtra in February, India’s economy was expected to register double-digit growth after a 7.3 per cent contraction last year.

Line chart of  showing India

But the second wave pushed the Reserve Bank of India’s consumer confidence index to an all-time low of 48.5, down from 84 before the pandemic. Since April 1, the virus is known to have infected around 18m people and claimed at least 232,000 lives. Analysts suspect the true toll is far higher.

The RBI recently pared its gross domestic product growth estimate for this year to 9.5 per cent, down from 10.5 per cent. JPMorgan forecasts India will grow just 9 per cent, which Aziz said would leave the economy about 10 per cent smaller than its pre-pandemic projected levels.

“Anyone hooked into the global market will do very well,” he said. “But Indian consumption, Indian investment and Indian small businesses are going to be damaged at a level at which it is hard for one to even imagine. Beyond essentials, people are going to be very, very cautious about buying.”

India’s workers were hit hard last year when 100m jobs evaporated overnight in a strict lockdown, triggering an exodus to the countryside. By late 2020, an estimated 15m erstwhile urban workers were still unemployed, while those with jobs were earning less than before, according to a study by the Azim Premji University.

Strong performance in agriculture, which grew 3.6 per cent last year thanks to bountiful monsoon rains, and heavy government spending on rural workfare schemes helped cushion the blow.

Villagers in Uttar Pradesh state

But in a country where patients pay nearly 70 per cent of health expenditure themselves, the Covid surge forced millions of families to tap savings, sell assets or borrow to treat ailing loved ones.

That shock risks depressing consumer sentiment for months, especially among middle and working class families. “Health expenditures are eating into household balance sheets, particularly poorer households,” said Joshi.

Shobhnath Patel, a 38-year-old karate instructor in rural Uttar Pradesh, said his family had struggled since the pandemic forced the cancellation of his classes, two nephews lost their automotive industry jobs and his brother’s house-painting business collapsed.

When his eldest brother was stricken with Covid in April, the family exhausted its Rs80,000 ($1,080) savings on an ambulance to the nearby city of Varanasi, doctors’ fees, an oxygen cylinder, medicines and hospital bills in an unsuccessful bid to save him.

Shobhnath Patel

Other families in Patel’s village, Paterwa, suffered similar setbacks, as the virus struck at least one member of every household and claimed about a dozen lives.

“Most people’s economic condition is at a very delicate point,” Patel told the Financial Times. “So many people spent lots of money on treatment of family members. Marriages, plans to build a house or any of those big things will have to be put on hold. Every family has suffered.”

Caught off guard by the second wave, many Indians seem resigned to the inevitability of a third wave, which will also weigh on demand. “There is a huge amount of uncertainty,” Joshi said. “Nobody can predict how severe another wave might be.”

India has so far administered 315m vaccine doses, or around 23 doses per 100 people, well below the threshold for safe economic reopening, though the pace of inoculation is speeding up. But, as JPMorgan’s Aziz pointed out, “any increase in mobility runs the risk of reigniting another wave”.

The pessimism is not universal. Saurabh Mukherjea, founder of Marcellus Investment Managers, said “business activity is recovering swiftly” as restrictions ease, while anxiety about public transport, coupled with cheap financing, is fuelling demand for cars and motorbikes. “Nobody wants to get on public transport,” he said.

But he admitted that the sustainability of any rebound in consumer demand depended on the virus’ trajectory. “If we lurch into a third wave again, we’ll be back to stagnation.”