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The precipitous fall in India’s economic growth may have reached its bottom at an estimated 5% for FY20, and the December quarter (Q3) gross domestic product (GDP) data scheduled for Friday will perhaps confirm this.

According to a survey of economists by Bloomberg, GDP growth was 4.7% in Q3, a marginal improvement from the 4.5% in the September quarter.

While economists believe the slowdown may have bottomed out, there is caution since high-frequency data from auto sales to Purchasing Managers’ Indices have been a mixed bag. December quarter growth is likely to have improved over Q2 due to an improved farm output and higher government spending.

But importantly, the recovery in growth to 6% in FY21 looks difficult, unless the economy can weather the disruption by the coronavirus outbreak. India is closely linked to China through trade and, according to State Bank of India’s (SBI’s) research, more than half of the country’s imports in 19 categories come from China. The virus outbreak has already quarantined parts of the global supply chain.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

SBI’s economists said FY21 GDP growth could be lower than the 6% forecast by the Reserve Bank of India (RBI) and the government. Others such as Nomura Financial Advisory and Securities (India) Pvt. Ltd agreed. “In FY21, we expect GDP growth of 5.7% y-o-y, below the RBI’s forecast of 6%. A key downside risk in the near term, both on the supply and the demand side is the adverse impact from the COVID-19 (coronavirus) outbreak," said Nomura in a note.

Another threat is to exports, which have already shrunk in the September quarter. The share of exports in the country’s GDP may have come down from 30% in FY11 to about 20% now, but it is still significant, and one of the main factors weighing on the economic recovery.

Since fear spreads faster than fact, the financial and sentiment channel is another way through which India’s economic recovery could be hit. Domestic equity indices have begun to recognize the disruptions to business.

To be sure, India may look better than other Asian nations, which are far more vulnerable to the epidemic. In fact, a 7 February scorecard on coronavirus impact by Nomura put India at the bottom, with minimal impact based on the experience in the previous cases of SARS in 2013.

However, a 25 February report by Nomura economists raised similar concerns as SBI’s. “On the supply side, China accounts for 14% of India’s imports and the outbreak is likely to disrupt supplies for key industries such as pharmaceuticals, auto, electronics and solar power. The production shortages will likely weigh on industrial activity starting February," said the Nomura report.

When a storm is brewing, one battens down the hatches. Indian policymakers thus have to fortify the economy for it to withstand the expected trouble from the external sector.

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