“In our alternate risk scenarios where disruptions could last longer, we assume the economic weaknesses in the short term could intensify and the significant secondary impacts (job losses, reduced income levels, corporate defaults, rising non-performing loans, rating downgrade, etc.) could delay a potential recovery. There is a risk India's real GDP
could contract by a much larger magnitude of 3 - 4 per cent YoY,” wrote Tanvee Gupta Jain, an economist at UBS in a co-authored report with Rohit Arora and Gautam Chhaochharia.
The Covid-19 pandemic, UBS believes, has the potential to slow India's long-term growth to around 5 per cent YoY under alternate risk scenarios, compared with 6-6.5 per cent in their base case. The structural drag to growth, they believe, could be amplified if COVID-19-related disruptions last longer. While UBS does not see an imminent sovereign rating downgrade, a downgrade in outlook (stable to negative) cannot be ruled out at this stage. That said, UBS expects more policy-oriented measures from in order to stem this economic rout, including a 75 basis point (bps) cut in interest rates in FY21.
"We expect the government COVID-19 stimulus to be scaled up to around 3 per cent of GDP
in FY21. We think the fiscal slippage could be higher than that seen during the credit crisis at close to 5 per cent of GDP," analysts at UBS said.
Given that the pandemic locked out most economies across the globe, including China that was a major supplier of goods to the world, a number of corporates across the globe are looking to diversify their manufacturing base. This, UBS feels, is a golden opportunity for India to gain market share in the global export basket as COVID-19 increases relocation intentions.