Parul
ICRA expects a sharp downturn in various indicators of the manufacturing and services sectors, particularly those catering to domestic discretionary activities, such as travel, tourism and recreation, labour intensive sectors such construction and transport activities as well as exports, from March 2020 onwards, which will likely intensify in April 2020, if the prevailing near-lockdown situation in several districts persists.
According to Aditi Nayar, Principal Economist, ICRA, “The likely duration, intensity and spread of the Coronavirus (Covid-19) has injected a lot of uncertainty into the global and domestic economic outlook. The concerns have morphed from the impact of imports from China on domestic supply chains, into a domestic and external demand shock, the duration of which remains uncertain, with social distancing and lockdown raising the prospect of production shutdowns and job losses in some sectors.”
Sectors such as hotels and restaurants, aviation, construction, real estate, retail, hospitals, automobiles, electronics etc., apart from a severe demand slowdown, could see disruptions in payments and an elongation of the receivables cycle, along with the emergence of contractual disputes, all of which would strain the liquidity situation, and may lead to a rise in delays in servicing debt obligations unless forbearance is extended. Additionally, given the flight to safety and increased risk aversion, the availability and cost of credit is likely to emerge as a constraint, with credit spreads expected to widen considerably for borrowers perceived to carry higher risk.
Moreover, job losses, especially of contractual employees in manufacturing as well as retail sectors may rise. Similarly, the temporary halt in activity in some sectors such as construction and transport is likely to result in a permanent loss of daily wages.
In the near term, the negative impact of the Covid-19 outbreak on economic growth and sentiment may be modestly softened by higher Government spending, a brighter outlook for crop yields and emergency stockpiling of essential items. “We have revised our GDP growth projection for FY2020 to 4.7 per cent. Depending on the duration of the near-lockdowns that have been imposed in several districts, GDP growth appears likely to range from 4.7 per cent to 5.2 per cent in FY2021. However, if the unprecedented situation continues into Q2 FY2021, there could be considerable downside risks to our forecasts,” Nayar added.
A mix of conventional and unconventional fiscal and monetary policies would be required to prevent a sharper plunge in economic activity. The loss of economic activity is expected to dampen tax collections in Q1 FY2021, which would constrain the cash flows of the Central and state governments.
Additionally, the dividend receipts and inflows from disinvestment are likely to be below the targets set by the Union Budget for FY2021. Expenditure would rise sharply in H1 FY2021, especially if stimulus programmes are provided for certain sectors and cash transfers are announced to offset the loss in daily wages, which may help to soften the impact of the Covid-19 outbreak on economic growth. As a result, there is likely to be a considerable front-loading of debt raising through Government of India securities and state development loans in H1 FY2021.
“In our view, the correction in the CPI inflation to 6.6 per cent in February 2020 from 7.6 per cent in January 2020 suggests a high likelihood of a rate cut of 25 bps in the next review of the Monetary Policy Committee scheduled to be held in April 2020, in light of the growing concerns regarding economic growth, with a guidance towards additional cuts depending on the evolving growth-inflation dynamics. Moreover, we expect the Central Bank to continue to announce measures to support INR and US$ liquidity,” Nayar added.
In addition, a moratorium on debt servicing may be warranted in the current circumstances, to mitigate liquidity stress that would be inevitable across a large cross section of borrowers.
