Home >News >India >Economy could contract 3.1% if lockdown is extended, says UBS

As India contemplates an exit strategy from the nationwide lockdown, Swiss bank UBS on Wednesday projected the country’s economy to contract 3.1% if mobility restrictions largely stay in place until end-June and economic activity returns to normal by end-August.

However, for the base case scenario, assuming current mobility restrictions are lifted by mid-May, and economic activity is largely back to normal by end-June, it projected growth to shrink to -0.4% in FY21, moving its earlier estimate of 2.5% down to negative growth territory.

“The challenges for India vs its peers are starker if infections spread rapidly considering India’s higher population density per capita, weaker health infrastructure and limited resources for intensive testing," UBS said in India Economic Perspectives report.

Under a third scenario of the coronavirus continuing to spread, possibly in waves, all the way through to mid-2021, UBS said the economy could shrink to as low as -4.2% in FY21. “Any rise in cases post lifting of restrictions would lead to restrictions being imposed again. That said, we assume restrictions would be more selective in areas where the infected cases are higher vs a one-size-fits-all approach on a pan-India basis," it added.

India has recently announced some relaxation in its lockdown, permitting the resumption of agriculture and limited manufacturing mostly in rural areas. In his review meeting with chief ministers on Monday, Prime Minister Narendra Modi signalled a cautious reopening of economic activity while continuing the fight against covid-19. Some states are, however, in favour of extending the lockdown, when it runs its course on 3 May.

Rating agency Moody’s Investors Service on Tuesday slashed its 2020 growth forecast for India to 0.2% from 2.5% earlier as economic costs of the virus crisis amid the near shutdown of the global economy are accumulating rapidly.

Fitch Ratings warned that any deterioration in India’s fiscal outlook as a result of lower growth could put pressure on its sovereign rating.

Moody’s said there are significant downside risks to its forecast in the event that the pandemic is not contained and lockdowns have to be reinstated.

“Even without longer-duration lockdowns, a self-perpetuating dynamic could take hold, resulting in large-scale destruction of businesses and entire sectors, as well as a structurally high unemployment rate, a permanent loss of human capital, and persistent malaise in consumption and investment," the rating agency said in its Global Macro Outlook update.

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