India: COVID-19 impact revisited

Content

Summary

We expect a sharp decline of the Indian economy in the second quarter of 2020 of -5.7% (y-o-y). This contraction is especially caused by the three week lockdown, which results in a sharp decline in private consumption (-7.2% y-o-y) and investment (-4.6% y-o-y)

Especially in the sectors education, hotels and restaurants and transport we expect a quarterly supply side shock on total hours worked of approximately -15%

Exports in Q2 are also expected to drop by -20% due to subdued demand from abroad caused by lockdowns imposed across the globe and disrupted global supply chains

For calendar 2020 as a whole, we expect now growth at around 1.3% and for 2021 we expect a sharp rebound of 7.6%

The Indian government has launched a coronavirus relief package of USD 22.5bn, which is adequate in providing aid to people which are the most vulnerable. Nevertheless, millions of migrant workers are in distress due to the lockdown. This situation requires additional support measures by the government

The RBI injected additional liquidity into system of about 3.2% of GDP and has cut its policy rates by 75bps in March. We expect another 50bps cut during the next Monetary Policy Committee (MPC).

The INR is expected to hover between 76 and 77. This projection is based on the premise that the lockdown is limited to three weeks

Nationwide lockdown

On 24 March, Prime Minister Narendra Modi announced a nationwide lockdown from 25 March until 12 April in an attempt to fight COVID-19, effectively asking more than 1.3 billion Indians to stay at home. Although relatively few cases have been reported on Indian soil (4,300) compared to the global level of 1.3 million cases (with the US currently being the epicentre with more than 340,000 cases), the fear is that the virus will quickly spread in a similar fashion that we have seen in China, Europa and the US. This could have a devastating impact on the health situation in the densely populated country with limited healthcare capacity (Figure 1). India has 2.3 intensive care units per 100,000 inhabitants, which is less than in China (3.6), Italy (12.5) and the US (34.7). The lockdown is also causing a humanitarian disaster of epic proportions as millions of migrant workers have been stranded in the cities without proper access to shelter, food and clean drinking water. Others try to reach their villages on foot, sometimes hundreds of miles away.

Figure 1: Healthcare capacity is lower than the global average

Figure 2: Impact of three weeks lockdown on total hours worked

Impact on the economy

The lockdown will also have a huge impact on the Indian economy. We have recently updated our global economic forecasts and expect the Indian economy to grow by 2.5% in 2020Q1 and contract by 5.7% in 2020Q2 (see Figure 3). The contraction is caused by private consumption dropping by -7.3% due to the lockdown. Especially in the sectors education, hotels and restaurants and transport we expect a quarterly supply side shock on total hours worked of approximately -15%. Exports in this quarter are also expected to drop by -20% due to subdued demand from abroad and disrupted global supply chains.

Figure 3: India’s economy is expected to contract in Q2 by 5.7%

Policy response

On 23 March, Finance Minister Nirmala Sitharaman announced the Pradhan Mantra Garib Kalyan package of INR 1.7 Lakh Crore (USD 22.5bn), which focuses on food security and direct cash transfers to India's poorest over the next three months. Additional measures are, e.g., a medical insurance for healthcare workers and a welfare fund for construction workers. Although the fiscal policy response is a step in the right direction, the government should keep track if the current package is sufficient to aid the most vulnerable. The RBI has also stepped in by cutting its policy rates by 75bps to 4.4% after an emergency meeting on 27 March. Moreover, the RBI injected additional liquidity into system of about 3.2% of GDP which consists of: i) targeted long-term repo operations of a three-year tenure, ii) a cut of the cash reserve ratio by 100 bps to 3%, iii) a six-month dollar-swap facility and iv) an increase of the marginal standing facility (MSF) from 2 percent of the statutory liquidity ratio (SLR) to 3 percent. Going forward, we expect the RBI to continue to announce liquidity-boosting measures in the upcoming months and a cut of the repo rate of 50bps at the next meeting of the Monetary Policy Committee (MPC).

INR

Meanwhile, EM currencies are facing much stress due the heightened risk-off sentiment that caused a run on US dollars. This has resulted in a surge in portfolio outflows of almost 16bn in March and an INR that has depreciated by almost 7% against levels experienced at the beginning of the year. Going forward we expect the rupee to continue to hover between 76 and 77 (see Figure 5) in the upcoming months on the back of expected ongoing US dollar strength. Be advised that all our forecasts are based on the premise that the lockdown in India remains limited to three weeks. However, the risks are clearly tilted to the downside and an extension of the lockdown is a possibility. In that case we also foresee more stress on firms, the financial system, India’s fiscal metrics and the INR.