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April 03, 2020

Indian Economy: Bout of viral

Worries about growth slowdown in India have suddenly paled in the light of the world’s black swan event – the novel coronavirus (Covid-19) pandemic. The pandemic has eclipsed the anticipated mild economic recovery of the economy in fiscal 2021.


In the wake of the pandemic, external risks have risen significantly and pose a further downside risk to global growth. S&P Global (as on March 29) expects recession in the United States (US) and euro zone and cut China’s GDP growth forecast to 2.9% from 4.8% expected.


In a scenario of global slowdown, Indian exports will continue to face a weak global environment. Over the last few days, risks to India’s growth and stability have expanded from being external to internal with the spread of Covid-19 within India and the consequent lockdown to tame it. India’s growth is revised down further, to 3.5% from 5.2% expected earlier. The forecast is tilted to the downside and rests on the assumption of a normal monsoon and global crude prices at $35-40 per barrel in 2020 compared with $64 per barrel in 2019.


The spread of the virus and depressed sentiments have fuelled uncertainty and prompted government and central bankers to act. The Reserve Bank of India (RBI) recently cut the repo rate by 75 basis points (bps), the reverse repo rate by 90 bps and the cash reserve ratio by 100 bps, among other liquidity easing measures. The government meanwhile has announced an economic stimulus package to the tune of 0.8% of GDP that largely provides income and food support to the poorer and more affected sections of the economy.


Yet, given the lockdown, spending will take a hit as discretionary consumption is reduced. Factory shutdowns will further crunch manufacturing and investment. Services such as transport, retail trade, hotels, and entertainment will be debilitated. The impact of the shock will stretch longer for these sectors, as some demand will be permanently lost, and a quick rebound may not be imminent.