The national lockdown of three weeks will significantly curb India’s GDP growth, which will make the economy worse this year than the 2008 global financial crisis.
26 March, 2020 | AtoZ Markets – The total number of cases in India reached 649, including 13 deaths until now, the respiratory disease caused by the coronavirus, which was first detected in China. It has since infected more than 440,000 people worldwide and killed more than 19,000 people, according to the World Health Organization.
Prime Minister Narendra Modi said people would not be allowed to leave their homes for three weeks after the order came into effect. He also said that $ 2 billion would be allocated to strengthen India’s medical infrastructure and treat patients infected with the virus.
India’s decision to place its 1.3 billion people under quarantine for 21 days to contain the coronavirus epidemic will have a disproportionate impact on the informal sector. Kunal Kundu, an Indian economist, said:
“When we talk about aggregate demand, it is important to realize that 65-70% of India’s economy is unorganized. These are the people who would certainly be most affected, even small and medium-sized businesses.”
The Kundu explained that they were going to spend three weeks without interruption, without any cash flow, because their customers stayed inside. This period may be longer if the lock is extended after 21 days. However, many of them would lose their wages during the lockout, and some may find themselves unemployed. He added that the federal government must act quickly and introduce certain tax measures. It can guarantee that money will continue to flow into the bank accounts of affected individuals and small businesses. “Their survival depends on daily cash flows,” he said.
Coronavirus Impacts on India’s GDP
Like everywhere else in the world, India’s economy is preparing for the fallout from this unprecedented event. The lockdown may significantly reduce GDP in the current quarter and subsequent quarters, while the economic gloom will continue for the rest of the year.
Brokerage firm Barclays cut GDP forecasts for the calendar year 2020 from 4.5% to 2.5%. It has also raised its fiscal deficit projections to 5% of GDP from 3.5% earlier. Barclays said:
“We now take into account four full weeks of stop, followed by another eight weeks of partial stops throughout the country until the end of May. The COVID-19 precautions are likely to remain in the system. We estimate the cumulative costs of the shutdown to be approximately $ 120 billion or 4% of GDP”.
The foreign brokerage firm expects the RBI to make larger and deeper rate cuts than those previously considered. “We now see the RBI advancing almost 65 basis points at its April meeting. We believe that an additional 100 basis points are needed to stabilize market sentiment (165 bps cumulative to bring rates to 3.5%). It is also needed bond purchases through OMO, possible forfeiture of bank loans and targeted liquidity windows for banks and NBFCs, “said Barclays.
Barclays expects the government to invoke the natural disaster management clause to find fiscal space. It might even imply that the RBI is placing funds directly with the government, it said.
The brokerage said there could be a 100bp slippage due to weaker growth on its budget fiscal projections of 5% of GDP. “This will bring the consolidated fiscal deficit to -8.2% of GDP, with risks clearly on the rise.”
Supply-Side Contagion Effect on India’s Economy
The “supply-side contagion effect” will have an impact on manufacturing, agriculture and the pharmaceutical industry, said Bornali Bhandari, an economist at the National Council of Applied Economic Research. Sectors such as consumer durables, automotive and pharmaceuticals will be the most affected by supply constraints.
“In addition to the likely slowdown in consumption, production will also affect,” said DK Pant, chief economist at India Ratings and Research. In the current situation, “no one is going to pile up inventories”.
According to Mr. Sabnavis, banks will also have to be wary of an increase in non-performing assets (NPA). If travel agencies and shopping centers closed for a month or more, a zero income situation would certainly have an impact on the ability to service loans.
Finance Minister Nirmala Sitharaman has announced a series of support measures. However, they only include exemptions and loosening of tax and bankruptcy codes. No material stimulus still seems to be underway. There is talk in the street of a stimulus plan of around $ 20 billion (1% of GDP). But according to the scale of the crisis, it could be more serious than that.
RBI First BI-Monthly Policy
The Reserve Bank of India (RBI) first bi-monthly policy review will announce on 3 April. RBI is to cut rates significantly. Moreover, it is safe to assume that the budget deficit targets will be exceeded.
The foreclosure will associate with a significant drying up of the financial system liquidity in the coming weeks. However, the RBI has injected cash into the system through pension auctions. It will be ready to do more to support any increase in liquidity demand post-lockdown.
Markets are pricing in a massive economic impact of this health crisis. Monday, the BSE Sensex suffered its biggest fall in a day, by 13%, after lockdown on Sunday. But this new, longer blockage will probably push it even deeper into the negative today. The stock market remains open to trading during the lockout.
Government bond yields remain under upward pressure as the 10-year bond rose 30bp to 6.3%. It is after reaching its lowest level in more than ten years at the beginning of the month. And the Indian rupee (INR) continues to depreciate regularly, trading at over 76 against the US dollar. We don’t see an end to these market trends until we have signs of Covid-19 control.
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