GDP may contract by 5%-6% in Q1FY21 

• Acuité Ratings believes there is a risk of a contraction of Q1 FY21 GDP to the extent of 5%-6% with Q2 also likely to post a modest growth in a best case scenario
• We expect the overall GDP growth for FY21 to be in the band of 2%-3% which takes into account a significant economic revival in H2FY21.
• The economy is expected to lose over USD 4.5 billion every day of the lockdown and almost around USD100 billion during the 21 day mandatory loan India lockdown period.
• The services that are hugely impacted are transport, hotel and restaurant and real estate activities that account for around 22% in GVA. We are expecting around 50% loss in these sectors in Q1 of FY21.
• Agricultural sector that accounts for 15% of GVA will be relatively less impacted as crop harvesting and food distribution activities will continue; however, livestock and fishery segments to witness mute demand and lower the sector’s average 3.5-4% growth.

The rapid spread of Covid-19 has not only disrupted the global economy but has also triggered a partial shutdown in many parts of India from early March and a complete shutdown from the last week of March 2020. While the countrywide shutdown is scheduled to be lifted from April 15, 2020, the risks of a prolonged disruption in economic activities exist depending on the intensity of the outbreak. Clearly, it will be an understatement to say that the ongoing disruption will have a severe economic consequence across the world and also in India. IMF along with many other agencies have already forecast a recession for the global economy in CY20. The short term growth outlook for the Indian economy particularly in H1FY21 appears grim.

Acuité Ratings estimates that every single day of the nation-wide lockdown will cost the Indian economy almost USD4.64 billion. Consequently, the 21 day lockdown will result in a loss of GDP of almost USD98 billion. Given the almost complete shutdown in economic activities except for the production and supply of essential goods and services, most firms have discontinued or minimised their production or operations in response to sudden collapse in demand as well as lack of labour availability. Even if the pan India shutdown is lifted by the middle of April, the disruption in economic activities is likely to continue well through the first quarter of FY21.     

Acuité Ratings has employed multiple methods to assess the real GDP estimates for Q1 FY21 and believes that there is a significant risk that it may contract to the extent of 5%-6% as compared to a pre-Covid moderate growth estimate of 5%. While the pent-up demand which is likely to emerge post lockdown may slightly compensate for the lockdown losses, it may be noted that the relatively active sectors have a low contribution to the overall GVA (gross value added) and therefore, the economy is highly likely to witness a contraction in the near term.

In such a lockdown scenario, the sectors that are most severely impacted are transport, hotel, restaurant and real estate activities. These services account for around 22% in overall GVA. In our opinion, there would be at around 50% GVA loss in these sectors in Q1 of FY21. Although the transport sector is expected to revive gradually with the end of the pan India lockdown, it may take a few months for the various segments such as air, rail and road travel to ramp up to its normative capacity, given the continuing risks of community spread of Covid-19. On the other hand, the services that are expected to see enhanced activities during this time are communication, broadcasting and healthcare. However, at 3.5%, these sectors have a small contribution in the overall GVA.

The impact of the lockdown is also fairly severe on industrial activities which is set to witness significant contraction except in the pharmaceutical, gas & electricity and medical devices; these industries account for marginally higher than 5% of GVA. Unlike the services sector, the industry, however can manage demand to some extent with inventory drawdowns until the resumption of production.

The only sector that is expected to be the least impacted on a relative basis, is the agricultural sector and allied activities. This sector which accounts for 15% of GVA is expected to see continuing activity with respect to crop harvesting, warehousing and distribution even in the lockdown period although the lockdown and the lack of availability of labour may have some impact. However, the allied activities are partly impacted as livestock and fishery industries are already experiencing mute demand due to the Covid-19 concerns. Therefore, we expect a decline from the average 3.5-4% historical growth levels in the sector although the risks of a contraction is lower than in industry and services. 

We believe that it would take at least 2-3 months to restore the industry supply chain completely in the domestic market even if the lockdown is limited to 21 days. There are further risks of local lockdown in various regions of the country depending on the extent of the outbreak in those areas and partial disruption in economic activities till H1FY19 is a realistic scenario. Therefore, the Covid-19 pandemic is likely to impact Q2 GDP print as well to a significant extent. This means that the outlook in Q2 is also likely to remain weak, notwithstanding the fact that the extent of revival in this quarter is going to shape the economic trajectory for FY21. Acuité estimates that the second quarter may show a moderately positive growth on the back of the expected normalization process, recording a growth of just under 3% although it is also linked to the extent of the spread of the pandemic.

On the positive side, a quick recovery in the domestic economic activities is likely in H2, which may in turn benefit from the fiscal and monetary measures along with lower global oil prices. We therefore, believe that the average H2 GDP expansion may be in the vicinity of 6.5%.

On the whole, a likely contraction in Q1 followed by a modest growth in Q2 will clearly have a severe impact on India’s economic trajectory that has already been under the effect of a prolonged slowdown. On a quarter-wise analysis, we expect the overall GDP growth for the entire FY21 to average 2.6% (with a standard deviation of 50 bps).

Table 1: Sector-Wise Assessment

Note: share is calculated based on FY17 GVA; for understanding purposes, IT and computer related services, banking, and education are also included in other services. These services might be intermittently active.