Contraction in Indian economy due to Covid-19 may be short-lived: UBS

Medics arrive to take samples of the residents of Spanish Garden residential complex after a positive case was detected in the building in Guwahati. Photos: PTI
The Indian economy would be severely hit by the Covid-19 and could even enter into a contraction, depending upon the severity of the pandemic, but the recession would be the shortest on record, according to UBS.

“The potential slowdown of the economy will be determined by the duration of the lockdown, and the economic policy choices taken to ensure a safe recovery,” said Tanvee Gupta Jain, chief India economist of UBS, in a call. In a scale of one to 10, in terms of mobility restriction, India is in the red zone of 10. In comparison, China’s mobility restriction is about four in the scale.

The base case for mobility restriction in case of India would be a lockdown till mid of April, or another week of lockdown, followed by limited mobility till June.

“If the situation normalises by middle of May, the damage would be limited and the upside case for GDP growth for India would be 4 per cent for FY21,” the UBS economist said.

However, in a downside scenario, assuming the disruptions are going to last till September, which implies four-five weeks of lockdown, followed by seven-eight weeks of restricted activity, and then a very gradual normalisation, “India could be first time, since financial year 1980, witness a negative GDP.”

The contraction could be minus 0.2 per cent year on year for the fiscal year 2020-21, Jain said. In any case, the economies consumption will be hit badly because the possible job losses and reduced income levels. This will further constrain the household balance sheet, which was anyway going through some pressure as income levels were not increasing, while savings had collapsed very sharply.

Gupta said almost 30 per cent of the household consumption was related to services. Due to the lockdown and mobility restrictions, this demand for service may collapse, and consumption during the disruption phase may get completely lost.

Private sector would also shy away from any fresh investment, letting the public sector do the entire heavy lifting. According to the latest numbers, the capacity utilisation is just about 69 per cent in December, indicating that even before the spread of the pandemic, companies were sitting on idle capacity. That makes it even more challenging for them to invest when the demand has collapsed. The supply disruptions caused by migration of labour will also adversely affect even the industrial production numbers, UBS says.

The hit on the global economic growth will be sharper than 2009 credit crisis. The global economic growth would likely be a negative 1.5 per cent due to the pandemic. During the credit crisis, the global GDP contraction was -.007 per cent.

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