New Delhi: A �top view of �the deserted roads near Ramlila Maidan on the second day of the complete lockdown in the national capital to contain the spread of nover coronavirus disease (Covid-19), in New Delhi, March 24, 2020.��(PTI Photo)(PTI24-03-2020_000317B) (PTI)
New Delhi: A �top view of �the deserted roads near Ramlila Maidan on the second day of the complete lockdown in the national capital to contain the spread of nover coronavirus disease (Covid-19), in New Delhi, March 24, 2020.��(PTI Photo)(PTI24-03-2020_000317B) (PTI)

With  economy in  lockdown mode, fiscal  stimulus key to stem  the tide

  • Economists are lowering India’s FY21 GDP growth estimates; more downsides in store
  • Calls for a stimulus package from the government have increased, and it is a crucial issue

India has gone ahead of various countries in imposing strict restrictions on its citizens to fight the spread of Covid-19. The entire country will be in lockdown mode with cases of the viral disease increasing at a fast clip over the past few days. Several companies such as Maruti Suzuki India Ltd, Titan Co. Ltd, Dabur India Ltd and Asian Paints Ltd have closed their manufacturing facilities. All domestic passenger flights are being suspended for the month.

While there is a general agreement that social distancing is the need of the hour, there are growing concerns over the severe economic impact of an extreme lockdown situation.

Economists are trimming their growth forecasts, while pointing out that more downgrades may follow depending on how things evolve.

For the second time in March, UBS Securities India Pvt. Ltd has lowered its FY21 gross domestic product (GDP) growth estimates. “For the full year, we now expect India’s real GDP growth to slow further to 4% year-on-year in FY21 (previously 5.1%) compared to 4.8% year-on-year (estimated) in FY20," it said in a report. Analysts have not accounted for such an extreme lockdown, as announced on Tuesday.

Growth Pangs
Growth Pangs

“Considering the situation is still evolving and the scale of the economic impact is uncertain at this point, we still think risk to our forecasts are skewed to the downside," said Tanvee Gupta Jain, chief India economist at UBS Securities, in a note to clients.

“Our month-wise simulation of economic activity suggests a real/nominal GDP growth of 3.5-4%/6.5-7% for India in FY21 with 1QFY21 nominal GDP growth likely stagnating at ~0-1%," wrote analysts at Jefferies India Pvt. Ltd in a report on 24 March.

With growth estimates going into a tailspin, calls for a stimulus from the Indian government have increased, with some experts suggesting borrowing from the future to fight the current economic crisis. While India’s stretched fiscal position has been a concern, the alternative of not doing anything to keep the fiscal deficit from slipping is an even scarier option, say some economists.

“We believe at least 1 ppts (maybe more) fiscal target easing would be required," added Jefferies’ analysts.

Jefferies India’s GDP estimates assume that the country-wide lockdown may last through April, and business activity will start to gradually recover from May, reaching normal levels by the second half of FY21. “Nearly about 25% of manufacturing, about half of trade and transport activity and one-third to half of construction activity could be severely curtailed," it said.

One of the biggest fallout of the current shutdown is concerns of massive job losses. This would have a further adverse impact on the already muted demand. Apart from the Covid-19 outbreak, India’s financial system is also grappling with the recent troubles of a private sector bank. The recent stress in the credit markets is something policymakers need to address quickly as well.

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