India’s announcement to extend the nationwide lockdown till May 3 in a bid to control the rapid spread of the novel coronavirus will hit the country’s economy hard, with investment bank Barclays estimating its GDP to not grow at all in 2020, while Nomura Securities expecting only -0.5 per cent growth. Economic losses are also estimated to surge to over USD 234 billion.
Barclays had initially slashed its India GDP growth forecast to 2.5 per cent from 4.5 per cent for 2020 after Prime Minister Narendra Modi had announced a 21-day lockdown till April 14. On Tuesday, after the lockdown was extended till May 3, Barclays reduced its GDP growth forecast further to zero for the year.
“While India’s COVID outbreak has not officially reached the community transmission stage, we believe the existing restrictions on movement are causing much more economic damage than anticipated,” wrote Barclays’ Rahul Bajoria and Shreya Sodhani.
The negative impact of the shutdown measures on the mining, agriculture, manufacturing and utility sectors appears higher than expected, the analysts said.
“Combined with the disruption in several service sectors, we now estimate that the economic loss will be close to USD 234.4 billion (8.1 per cent of GDP), assuming that India will remain under a partial lockdown at least until the end of May. This is much higher than the USD 120 billion we had estimated earlier for roughly the same time period previously,” said Bajoria and Sodhani.
The government had last month announced a Rs 1.7 lakh crore welfare stimulus for the poor and people living below the poverty line. Now, with the lockdown extension, a wider economic package for the affected sectors of the industry will be closely monitored.
Barclays analysts said that further major policy interventions, if taken, could bring about a faster upswing after the lockdown ends.
“So far the government has announced fiscal stimulus of 0.8 per cent of GDP primarily designed as a social security net for the most vulnerable. While the government may choose to expand some of the measures in light of the extended lockdown, the next tranche is likely to be aimed at cash flow challenges faced by small and medium-sized enterprises and other hard hit industries,” said Nomura economists Sonal Varma and Aurodeep Nandi.
A 40-day lockdown for 75 per cent of the economy will result in a direct output loss of over 8 per cent, which will be contingent on the extent to which the government is willing to relax the lockdown from April 20 onwards, they added.
Nomura expects a 3.2 per cent GDP growth in January-March, plunging to -6.1 per cent in April-June. Overall, the economy is seen growing at just -0.5 per cent in 2020.
“There will be indirect effects such as the persistence of the public fear factor (even after the lockdown ends), impact on livelihoods of the unorganised workforce and a sharp increase in corporate and banking sector stress, which are likely to further weigh on growth beyond Q2 in second half of 2020,” said Varma and Nandi.
The Nomura economists see India’s fiscal deficit shooting up to 5.1 per cent of GDP in financial year 2021, which would be well above the fiscal deficit target of 3.5 per cent. Anantha Nageswaran, dean at IFMR Graduate School of Business and part-time member of the Prime Minister’s Economic Advisory Council, had also recently called on India to relax its fiscal policy for 1-2 years to deal with the current crisis.
Meanwhile, the Reserve Bank of India, which last month reduced the repo rate by 75 basis points, is expected to ease the benchmark policy rate by an additional 75 bps, Nomura estimates.
Barclays analysts, too, have estimated a further 90 basis points cut in the repo rate this year.