What Economists Have To Say About India’s Extended Lockdown

Economists lowered India’s growth forecast for this year as they expect the nationwide lockdown, now extended by another three weeks, to lead to an economic loss.

Prime Minister Narendra Modi extended the lockdown through May 3 as India steps up its fight to contain the spreading of coronavirus among the 1.3 billion citizens. The government will evaluate every town, district and state until April 20 for adherence with the lockdown, Modi said in a televised address on Tuesday. Areas that are less likely to turn into a hotspot may be allowed to open up certain essential activities from April 20.

Asia’s third-largest economy has so far reported more than 11,000 cases of infection, including over 300 deaths, according to data released by the health ministry. That compares with nearly 2 million cases worldwide and over 126,000 deaths.

Here’s what they have to say…

Nomura

• A 40-day lockdown for about 75 percent of the economy will result in a direct output loss of more than 8 percent.
• There will be indirect effects such as the persistence of public fear factor (even after the lockdown ends), impact on livelihoods of the unorganised workforce and a sharp increase in corporate and banking sector stress, which are likely to further weigh on growth beyond second quarter in 2020.
• Some sequential pick-up in the second half is expected. But on a year-on-year basis, there may be a contraction of 0.5 percent for third quarter and a growth of 1.4 percent for the fourth quarter.
• Overall, GDP is expected to contract 0.5 percent in 2020 versus a growth of 5.3 percent in 2019.
• So far, the government has announced fiscal stimulus of 0.8 percent of GDP, primarily designed as a social security net for the most vulnerable.
• While the government may choose to expand some of the measures in light of the extended lockdown, the next tranche are likely to be aimed at cash-flow challenges faced by small and medium-sized enterprises and other hard-hit industries.
• The central government’s fiscal deficit will widen to 5.1 percent of GDP in 2020-21, well above the 3.5 percent budget target.

Barclays

• Cut GDP growth forecast for calendar year 2020 to zero from 2.5 percent projected earlier, and to 0.8 percent for FY20-21 from 3.5 percent estimated earlier.
• Expects a weaker profile for recovery, given the deteriorating global backdrop, and rising risk of Covid outbreaks leading to local-level shutdowns.
• Lowered calendar year 2021 GDP growth forecast to 7.5 percent from 8 percent earlier.
• Despite being characterised as essential sectors, the negative impact of the shutdown measures on the mining, agriculture, manufacturing and utility sectors appears higher than expected.
• Combined with the disruption in several service sectors, the economic loss is expected to be close to $234.4 billion (8.1 percent of GDP), assuming that India will remain under a partial lockdown at least until the end of May. This is much higher than the $120 billion estimated earlier.

Deutsche Bank

• The 40-day nationwide lockdown will cause severe economic damage to the economy and exacerbate the distress, particularly those of informal sector workers, migrant laborers and daily wage earners.
• It estimates 1.2 percent year-on-year real GDP growth for FY21, which factors in at least 5 percent year-on-year contraction in April-June, with the possibility of flat or negative year-on-year growth rate in July-September as well.
• It is reasonable to expect a second round of fiscal package announcement this week, particularly for the poorer section of the society and for small, medium, micro enterprises that have been severely affected due to the extended lockdown.
• Adding the government’s spending related to extra budgetary resources amounting to 0.8 percent of GDP, total fiscal deficit could touch 11-11.5 percent of GDP, pushing up the debt/GDP to 76-77 percent in FY21 from about 71 percent in FY20.
• This can raise the risks of a subsequent ratings outlook downgrade, given the mix of low growth and rising deficit/debt.

Morgan Stanley

• India’s fiscal response to Covid-19 has been virtually non-existent.
• It could be that the government is debating the extent of fiscal stimulus, given the shallow spread of the virus.
• The economic impact is likely to be high and in absence of a large fiscal package, there are risks to India’s GDP growth, earnings and stock price performance.
• Risks: a deeper and wider spread of Covid -19, shortfall in fiscal response, strain on capital account, financial system stress, corporate India turns defensive with massive cutbacks on costs/capex and FPIs going underweight on India.