Impact: Negative (Economic Sentiment); Negative (Fiscal Deficit)

Brief: The monsoon induced floods lashing Kerala for the last ten days has had severe repercussion on the state economy. Our initial analysis reveals that 2.2% of the state's annual GDP has been already impacted. Without Central Grants-in-Aid, the state Fiscal Deficit may exceed 5% this FY

We believe that the economy of Kerala has been significantly impacted by the recent bout of floods, lashing the state for over ten days. As per our estimate, the state economy faces notional value loss of nearly Rs. 10,765 crores. This figure is 2.2% of the state's annual GDP.

Further analyzing the economy, sector wise, we assess that the largest contributors come from tourism and agro based industries. This characteristic of the state economy is inline with Kerala's overall socio-economic predisposition. As per this assessment, Hotels & Shopping Complexes, Food Processing, Rubber, Textiles, Paper and Hospitals have suffered a collective loss of nearly Rs. 1,540 crores.

Considering other general segments of the economy, we believe that sectors such as Financial Services, Road Transportation, Metals and Mining and Real Estate Ownership have lost over Rs. 3,000 crores, additionally. These assessments are based on the loan disbursements as well as sectoral share of overall GDP. We consider the overall state economy as an eco-system and believe that such calamities magnify the impact, given the entire value chain is at risk.

As far as the Fiscal Deficit of the state is concerned, the event is expected to add 220 bps to Kerala's FD/GSDP. What this means is that as a result of rebuilding finance requirements, the year's fiscal deficit may jump to 5.4% from the currently estimated 3.2%. This is a big blow to the otherwise consolidating state finances, which were estimated to reduce the fiscal deficit by 20 bps as compared to FY18. However, these estimates do not take into account Central support in terms of Grants-in-Aid and other contingency funding. Other Indian states may also contribute in the exercise. Normalization of economic activity may however take time, given the complexities involved at this time. A situation that may prolonged the heart burn and bleed precious finances further.