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Covid-19 economic impact to be much greater than assessed earlier

The latest macro data suggests a much deeper impact of Covid-19 on the economy than was previously expected.

Merchandise exports contracted by 34.5 per cent in March, the steepest monthly fall in at least 25 years, as overseas demand remained lacklustre. Exports stood at just $21.4 billion in March, as a massive broad-based decline plagued all major foreign exchange-earning sectors.

With trade demand remaining soft during earlier months, the country's annual exports stood at a dismal $314 billion in 2019-20, or five per cent lower than the $331 billion worth of shipments in the previous year. This is the first time in four years that annual exports have fallen.

Then, the output of eight-core industries contracted by a record 6.5 per cent in March, the steepest in the new series. This followed February's high 7.1 per cent growth. The latest broad-based decline meant that core sector output in 2019-20 dropped to just 0.6 per cent, from 4.4 per cent growth seen in the previous year.

Then came purchasing managers' index (PMI) data, giving some broad indicators for April. Manufacturing PMI declined to just 27.4 in the month, showing the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago. In PMI parlance, a figure above 50 means expansion, while a score below that denotes contraction.

On Wednesday, came the real shocker. PMI for services declined to just 5.4 points, the lowest since data collection began over 14 years ago in April. March PMI for services was also in the contraction zone, at 49.3 points.

Some experts take PMI as a broad indicator and not a real assessment of the economy. But even the real indicators showed worsening conditions in April.

For example, in March, only the coal sector grew among the eight core sectors. Output rose by 4 per cent, as compared to the previous month's 10.3 per cent growth. However, in April even Coal India output contracted by 11 per cent. Also, electricity generation fell by 24 per cent in the month, after having contracted by 7.2 per cent in March, according to core sector data.

All this suggests that the dampening impact of Covid-19 on the economy was much severe than thought earlier. 

In fact, former chief economic advisor Arvind Subramanian had warned that growth forecasts given by various agencies look much more optimistic than the ground reality.

“The numbers given by agencies like the International Monetary Fund and others are way too optimistic. Even one month’s loss in output can lead to a 3 per cent fall in GDP. We will experience a sharp collapse in the output,” Subramanian said.

The IMF has cut its 2020-21 forecast for India to 1.9 per cent from 5.8 per cent, while the World Bank has reduced it to 1.5-2.8 per cent from 6.10 per cent. Other agencies like the Asian Development Bank, Nomura, Fitch, Goldman Sachs, Moody’s, India Ratings and Icra have also slashed their forecasts for India.

Then, the lockdown due to Covid-19 was further extended till May 17, though some economic activity was allowed, depending on the severity of infection in various parts of the country.

Rating agency Icra further cut its projections for India's economic growth rate to minus 16-20 per cent in the first quarter of the current financial year from its earlier estimates of minus 10-15 per cent.

This would mean a contraction of one or two per cent for the whole of FY21 against its earlier projections of economic growth rate at minus to plus one  per cent, Icra principal economist Aditi Nayar said.

"While the graded relaxations announced by the government will permit the resumption of economic activity, the relatively stringent norms in major urban centres will limit the pace," she said.

Given the likelihood of mismatches in labour availability, she now expects the drag from sectors such as manufacturing, construction, trade, hotels and transport to linger for a large part of May, with a further delay in the return to normalcy for a large cross-segment of these sectors.

Devendra Pant, chief economist at India Ratings, said he gave a range of economic growth between minus 2.1 per cent to plus 1.9 per cent due to uncertain environment.

If the partial lockdown continues till mid-May, the rating agency believes economic growth may come down to 1.9 per cent — the lowest in the last 29 years after 1991-92, when the economy grew 1.1 per cent because of the balance of payments crisis. In such a situation, Ind-Ra's estimate suggests that gross domestic product (GDP) may come back to the March quarter level only by the December quarter.

It anticipated resumption of normal economic activity during the September quarter of this fiscal year. Late last month, Ind-Ra had pegged GDP growth rate at 3.6 per cent.

However, if the lockdown continues beyond mid-May and a gradual recovery takes root only from June-end, GDP may contract by 2.1 per cent—the lowest in the last 41 years and only the sixth instance of contraction since 1951-52. 

GDP shrunk by 0.4 per cent in 1957-58, 2.6 per cent in 1965-66, 0.1 per cent in 1966-67, 0.6 per cent in 1972-73 and 5.2 per cent in 1979-80.

While gauging the impact of Covid-19 on economic growth through the data cited above, one must exercise caution that most of them are volume indicators, where GDP is a value addition nowadays. 

GDP growth rate cuts by various agencies for India
Rating agency/organisation Year of estimate GDP growth rate
India Ratings
2020-21 -2.1 to 1%
Icra  2020-21 -2 to -1%
2020-21 -0.9 to 1% 
Nomura  2020* -0.5%
Fitch Ratings
2020-21 0.8%
Goldman Sachs  2020-21 1.6%
Moody's Investors  Service 2020* 0.2%
World Bank
2020-21 1.5 to 2.8%
IMF  2020-21 1.9%
Asian Development Bank 2020-21 4%
* Calendar year;  Source: Respective agencies

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