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With 75% economy under lockdown, analysts see sharp fall in GDP

Even when the lockdown period ends, it will take time for the economy to be fully up and running.
The 21-day shutdown announced by the Narendra Modi – led government due to coronavirus (Covid-19) pandemic has put nearly 75 per cent of the Indian economy under lock and key, which is likely to strain the government’s finances and see the fiscal deficit for financial year 2020-21 (FY21) rise by one per cent from the 3.5 per cent target set in the Union Budget presented in February, says the latest report from Nomura. 

“Our initial estimates suggest that around 75 per cent of the economy will be shutdown, resulting in a direct output loss of nearly 4.5 per cent. We expect the central government to soon announce a stimulus package of around 0.7-1.1 per cent of gross domestic product (GDP). Along with the growth hit and poor tax collections, we expect the fiscal deficit for FY21 to balloon by over 1 per cent of GDP,” wrote Sonal Varma, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi.

A sensitivity analysis of the adverse impact of lockdown by Motilal Oswal Research suggests that a single day of complete lockdown could shave off 14-19bp/55-75bp from annual/quarterly growth. “With 14 days of complete lockdown in April (assuming things normalize from mid-May'20), GDP could decline 12.2 per cent YoY in 1QFY21, first ever de-growth since the quarterly data became available since late 1990s. With two consecutive quarters of GDP decline, India could see its first recession since 1990s,” said Gautam Duggad, head of institutional research at Motilal Oswal.

Madan Sabnavis, chief economist at CARE Ratings, however, says it may still be a bit too early to say this. “Typically, there is joblessness, drop in production and demand ahead of a recessionary phase. These three ingredients are already there given the 21-day lockdown. Though the lockdown will result in sharp GDP contraction, it is a bit too early to say India is heading into a recessionary phase,” Sabnavis says.

The sectors exempt from this 21-day lockdown – food and pharmaceutical industries, storage, telecom, electricity, banking and capital markets, etc comprise roughly 25 per cent of the economy as per Nomura's estimates, with the activity in the rest of the sectors coming to a grinding halt – at least for the next three weeks.

“On average, every month of lockdown results in output loss of around 8.5 per cent of the annual total. Hence, if 75 per cent of the economy is locked down for a month, then the output loss will around 6.5 per cent. A three week lockdown – as is the case currently – should result in an output loss of close to 4.5 per cent,” Nomura says.

Even when the lockdown period ends, it will take time for the economy to be fully up and running. The public fear factor, analysts feel, will still result in below-normal activity for a few more months. That apart, there will be lingering effects in private consumption and corporate investment demand, all of which will impact the financial sector, especially banks. 

“Clearly, for the first time in living memory, many industries/SMEs will be running on zero revenues for close to a month. Even the ‘opening up’ after the lockdown is likely to be measured (lest a ‘second wave’ hits back). This means that there will be a permanent impact of this 21-day shutdown even into the longer-term numbers,” says Sunil Tirumalai, head of research at Emkay Global.

Barclays pegs the 21-day shutdown cost at around $120 billion, or 4 per cent of GDP. “We are shaving down our calendar year 2020 (CY20) GDP forecast from 4.5 per cent to 2.5 per cent and FY20-21 forecast to 3.5 per cent (from 5.2 per cent earlier),” their analysts wrote in a recent report.

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