The Indian economy risks a contraction of the first quarter GDP in FY21 to the extent of 5-6%, with Q2 also likely to post a modest growth in a best case scenario, according to an Impact Analysis done by rating firm Acuité Ratings.
In their impact analysis, the overall GDP growth for FY21 is expected to be in the band of 2-3% which takes into account a significant economic revival in second half of FY21H.
“Acuité Ratings estimates that every single day of the nationwide lockdown will cost the Indian economy almost USD 4.64 billion. Consequently, the 21-day lockdown will result in a loss of GDP of almost USD 98 billion,” Sankar Chakraborti, CEO, Acuité Ratings & Research, said. “We have employed multiple methods to assess real GDP estimates for Q1 FY21 and believe that there is a significant risk that it may contract up to an extent of 5%-6% as compared to a pre-COVID growth estimate of 5%.”
The services that are hugely impacted are transport, hotel and restaurant and real estate activities that account for around 22% in GVA (Gross Value Added) and the expectation is to the extent of 50% loss in these sectors in Q1 of FY21.
The agricultural sector that accounts for 15% of GVA is however expected to be less impacted as crop harvesting and food distribution activities will continue during the lockdown. However, livestock and fishery segments would witness mute demand and lower the sector’s average 3.5-4% growth.
The rapid spread of COVID-19 has not only disrupted the global economy but has also triggered a partial shutdown in many parts of India from early March and a complete shutdown from the last week of March 2020. While the countrywide shutdown is scheduled to be lifted from April 15, 2020, the risk of a prolonged disruption in economic activities exists depending on the intensity of the outbreak.
Karan Mehrishi, lead economist at Acuité, told The Federal it would be “an understatement to say that the ongoing disruption will have a severe economic consequence across the world and also in India”. “IMF along with many other agencies have already forecast a recession for the global economy in CY20. The short term growth outlook for the Indian economy, particularly in H1 FY21, appears grim.”
Mehrishi explained given the almost-complete shutdown in economic activities except for the production and supply of essential goods and services, most firms have discontinued or minimised their production or operations in response to sudden collapse in demand as well as lack of labour availability. Even if the pan India shutdown is lifted by the middle of April, the disruption in economic activities is expected to continue well right into the first quarter of FY21.
The agency has employed multiple methods to assess the real GDP estimates for Q1 FY21 and believes that there is a significant risk that it may contract to the extent of 5%-6% as compared to a pre-COVID moderate growth estimate of 5%. While the pent-up demand which is likely to emerge post lockdown may slightly compensate for the lockdown losses, it may be noted that the relatively active sectors have a low contribution to the overall GVA (gross value added) and therefore, the economy is highly likely to witness a contraction in the near term.
In such a lockdown scenario, the sectors that are most severely impacted are transport, hotel, restaurant and real estate activities. These services account for around 22% in overall GVA and the rating agency expects around 50% GVA loss in these sectors in Q1 of FY21.
Road transport could have faster revival, while other transport mediums would be still affected. Although the transport sector is expected to revive gradually with the end of the pan India lockdown, it may take a few months for various segments such as air, rail and road travel to ramp up to its normative capacity, given the continuing risks of community spread of COVID-19.
On the other hand, the services that are expected to see enhanced activities during this time are communication, broadcasting and healthcare. However, at 3.5%, these sectors have a small contribution in the overall GVA.
The impact of the lockdown is also fairly severe on industrial activities which are set to witness significant contraction except in the pharmaceutical, gas & electricity and medical devices; these industries account for marginally higher than 5% of GVA. Unlike the services sector, these industries can manage demand to some extent with inventory drawdowns until the resumption of production.
The only sector that is expected to be the least impacted on a relative basis, is the agricultural sector and allied activities. This sector which accounts for 15% of GVA is expected to see continuing activity with respect to crop harvesting, warehousing and distribution even in the lockdown period although the lockdown and the lack of availability of labour may have some impact. However, the allied activities are partly impacted as livestock and fishery industries are already experiencing mute demand due to the COVID-19 concerns.
Interview with Karan Mehrishi, Lead Economist Acuite Ratings
The Federal: What would be the impact of COVID-19 lockdown across states? Which state is likely to have the biggest fall of GSDP ?
Karan Mehrishi: While it is difficult to assess at this time since we have just entered the new financial year and our forecasts are estimates, we do believe that some states will be impacted more than others because of the pandemic.
The richer industrialized states will be definitely better off given their better fiscal firepower but poorer agrarian states will not be too far behind. This is simply because agro-based sectors will continue to function normally apart from facing certain supply chain issues.
Having said that, states primarily dependent on travel and tourism, recreation will be more impacted than others. Despite the implementation of work from home, we see impact on financial services and information services as well, impacting states involved.
Federal: Can you explain a bit about your prop model?
Mehrishi: We have followed the daily loss methodology and tried to assess the impact by trying to figure out the actual versus the potential output. Our estimates are based on sectoral impact and how everything pans out over the first and second quarter.
The purpose of the exercise is to give a heads up on the economy to policy makers and analysts. These are difficult times and require unprecedented solutions. These estimates are the means to a strategy to get things back on track.
Supply chain domino
In what is now being called as the ‘Black Swan’ event of 2020, the COVID-19 impact has been particularly strong on the global supply chains. This has forced many companies and entire industries to rethink and transform their global supply chain model.
One fact which is beyond doubt is that it has already exposed the vulnerabilities of many organisations, especially those having a high dependence on China to fulfill their need for raw materials or finished products.
India in this context is no different than the rest of the world. China’s dominant role as the “world’s factory” meant that any major disruption puts global supply chains at risk. Data shows that more than 200 of the Fortune Global 500 firms have a presence in Wuhan, the highly industrialised province where the outbreak originated, and which has been hardest hit.
Keeping in mind the impact of the supply chain disruption in the global economy, Acuite’ impact analysis forecasts that it would take at least 2-3 months to restore the industry supply chain completely in the domestic market even if the lockdown is limited to the 21 days that was announced by PM Narendra Modi on March 22.
If one went by the growth in reported confirmed cases of COVID-19, which continues to be exponential by nature, there are further risks of local lockdown in various regions of the country depending on the extent of the outbreak in those areas and partial disruption in economic activities till H1 FY21. Therefore, the pandemic is likely to impact Q2 GDP to a significant extent.
This means that the outlook in Q2 is also likely to remain weak, notwithstanding the fact that the extent of revival in this quarter is going to shape the economic trajectory for FY21. Acuité estimates that the second quarter may show a moderately positive growth on the back of the expected normalization process, recording a growth of just under 3% although it is also linked to the extent of the spread of the pandemic.
Silver lining in the dark cloud
However, a quick recovery in the domestic economic activities is likely in H2, which may in turn benefit from the fiscal and monetary measures along with lower global oil prices. Therefore, Acuite believes that the average H2 GDP expansion may be in the vicinity of 6.5%.
On the whole, a likely contraction in Q1, even if followed by a modest growth in Q2 will clearly have a severe impact on India’s economic trajectory that has already been under the effect of a prolonged slowdown. On a quarter-wise analysis, the overall GDP growth for the entire FY21 is expected to average 2.6% (with a standard deviation of 50 bps).