Coronavirus Will Slow Down Growth

NEW DELHI: India’s economic growth could take a hit of up to half a percentage point in FY21 because of the disruptions caused by the Covid-19 outbreak, early estimates by the government suggest. But independent economists see a deeper cut of up to one percentage point.

“There will be a hit of 0.3-0.5% on the GDP in the next fiscal year,” said one of the officials aware of the estimate.

“Growth in the first two quarters of the next fiscal could be as low as 4-4.5%,” another official added.

The economy is forecast to grow 5% in current fiscal, the slowest in 11 years. The Economic Survey had forecast 6-6.5% rise in FY21, but Covid-19 has hurt recovery prospects.

Prime Minister Narendra Modi has asked top verticals within the government, including the Niti Aayog, the Economic Advisory Council to the PM and finance ministry to assess the economic impact of the novel coronavirus.

“India is relatively insulated from the global value chain and to that extent impact on India will be less,” Reserve Bank of India governor Shaktikanta Das said on Monday. “But India is integrated into the global economy, so there will be some impact.” Independent experts have called for fiscal and monetary stimuli.

FIRST HIT ON SERVICES

Sectors such as tourism, aviation, hospitality and trade will face the first brunt of the severe travel, assembly and activity curbs imposed by the governments across the world, followed by a wider impact on other sectors as economic activity stalls.

Moody’s has downgraded India’s growth to 5.3% in 2020 due to downside risks of Covid-19. “By first quarter in the next fiscal, we can definitely see a shaving off of at least half a per cent of GDP, which could go up to 1% depending on how much it permeates through the economy,” said Madan Sabnavis, chief economist at CARE Ratings, pencilling in 5.5% growth for FY21.

DK Srivastava, chief policy adviser at EY, said the impact would be limited to a 0.5 percentage point downward revision in the current and next quarter if the situation was contained within a month. However, if it dragged on till May, then GDP growth in FY21 could dip to 4%, he said.

The “supply side contagion effect” will impact manufacturing, agriculture and the pharmaceutical industry, said Bornali Bhandari, an economist at the National Council of Applied Economic Research.

Sectors such as consumer durables, automobiles and pharmaceuticals will feel the brunt of supply constraints.

“On top of the likely consumption slowdown, production is also going to be hit,” said DK Pant, chief economist at India Ratings and Research. In the current situation, “no one is going to pile up inventories”.

According to Sabnavis, banks will also have to be wary of a rise in non-performing assets (NPAs). If the shutdown on travel and malls continues for a month or more, a zero-revenue situation will definitely impact the ability to service loans, he said.

SOME PROTECTION

China, where the coronavirus began, is likely to see a contraction in GDP in the first quarter of 2020 — the first contraction since 1998. The US and Europe are expected to slip into recession by July, dragging down overall growth.

India may not suffer as much, given that it has a smaller exposure to the global economy — exports of services and goods are only a fifth of the total economy. Lower oil prices will provide a cushion, boosting government revenue and creating room in household budgets.

“The correction in the CPI inflation in January 2020 has anyway opened the door for a rate cut in the next policy meeting,” said Aditi Nayar, principal economist at ICRA, adding that modest transmission could weaken its impact.

Monetary and fiscal policy will both be unable to arrest the slowdown but could reduce its intensity, said Sabnavis, citing the muted impact the Federal Reserve’s rate cut had on the US and global markets.

Srivastava suggested a 25-basis-point reduction in the repo rate. “The government should relax the fiscal deficit by another 25 basis points of GDP and direct the funds towards the health sector, since it is beneficial in the long run,” he added.

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