Indian economy to witness sharp contraction of 4.5% due to Covid-19 outbreak: ICRA

The concerns have morphed from the impact of imports from China on domestic supply chains, into a domestic and external demand shock; with social distancing and lockdowns leading to production shutdowns and job losses in some sectors.

Apr 07, 2020 11:04 IST India Infoline News Service

gross domestic product
The Indian economy is likely to witness a sharp contraction of 4.5% (de-growth) during Q4FY2020 and is expected to recover gradually, to post a GDP growth of just 2% in FY2021. ICRA has sharply cut its forecast for Indian GDP growth in FY2021, post the Covid-19 outbreak and emanating concerns thereof.  The concerns have morphed from the impact of imports from China on domestic supply chains, into a domestic and external demand shock; with social distancing and lockdowns leading to production shutdowns and job losses in some sectors.

Shamsher Dewan, Vice President & Sector Head - Corporate Ratings, ICRA, “Amid uncertainty as to when the situation will normalize, we expect a sharp downturn in various indicators of the manufacturing and services sectors from March 2020 onwards. This primarily includes the discretionary activities like travel, tourism and hospitality; labour-intensive sectors like construction, transport and manufacturing of non-essential items; exports; and supporting sectors like electricity. The silver lining amid the grim scenario will be the expected healthy outlook for the rabi crop which would provide some support through improved rural demand. Higher government spending would also cushion the extent of the slowdown to an extent.”

Outlook for the Corporate Sector

The COVID-19 outbreak which started in China in December 2019 has morphed into a global pandemic, affecting 203 countries, over one million people and increasing rapidly - European countries, North America and Asia being severely impacted. In India too, rising covid-19 cases has led to the government initiating a nation-wide 21 lockdown, from March 25, 2020 to curb the contagion. This has severely impacted industrial operations (excluding essential services) which have come to a standstill. Coupled with fears of the disease outbreak, these are likely to have prolonged repercussions on several industries.

ICRA expects the ripple effect of coronavirus to impact India Inc. on five major counts – a) Domestic demand slowdown due to regulatory restrictions, lockdown and fear of contagion will impact certain sectors over the near-term, while purchasing power erosion due to job losses or pay cuts and trickle-down effect of demand deferral will have a longer-lasting impact on some other sectors, especially where demand is discretionary in nature; b) Global economic slowdown and lockouts is likely to impact sectors with high dependence on global demand, especially that of key impacted markets like Europe, North America and South-East Asia; c) Impact on commodities like oil & gas, metals etc. will be due to lower global demand and price realisation; d) Foreign exchange rate fluctuations will have bearing on import-heavy sectors with forex-denominated cost structure; and e) Supply chain disruptions globally is expected to impact sectors where there is import dependence for raw materials.

The high impact sectors in terms of risks due to covid-19 are aviation, hotels, restaurants & tourism, auto dealerships, ceramic tiles, gems & jewellery, retail, shipping, ports & port services, seafood & poultry; and  microfinance Institutions.

The medium impact sectors will be automobiles, auto-components, building materials, construction, chemicals, residential real estate, consumer goods, pharmaceuticals, logistics, banking, mining, paper, consulting, ferrous metals, footwear, glass, plastics, power; and trading.

The low impact sectors will be education, dairy products, fertilisers & seeds, FMCG, healthcare, food & food products, insurance, telecom, utilities, sugar, tea, coffee; and agricultural produce.

Financial market globally and in India too have not been an exception to covid-19 impact and the resultant disruptions in international markets. Equity markets too have witnessed sharp correction over recent weeks. The resultant turmoil is likely to have negative credit implications, especially for entities that have high refinancing dependence over the near-term.

According to ICRA, in the current scenario, extended demand disruptions are likely to lead to elongated payment cycles. Since an entity’s liquidity position is of paramount importance to support its credit profile, it is expected that several entities would endeavour to conserve cash, either by invoking force majeure clauses to revoke payments; or by deferring payments to the extent possible. Consequently, many entities are expected to face working capital blockage as their receivables get stretched and inventory doesn’t run-down simultaneously.

Taking into cognizance these aspects and the near-term pressures on entities on account of the nation-wide lockout, the RBI, permitted a three-month moratorium on bank borrowings and announced a significant reduction in repo rates so as to support companies in preserving their liquidity to some extent and reduce the cost of borrowing.

Jitin Makkar, Head-Credit Policy, ICRA, “Notwithstanding RBI intervention and move by banks regarding treatment of moratorium period, ICRA expects entities with weak liquidity buffer (relative to its fixed overheads and non-deferrable debt service obligations) to report significant weakening of their credit profile over the next couple of quarters. On the other hand, entities which maintain a comfortable liquidity buffer in the form of cash and liquid investments or undrawn sanctioned lines, would be better placed to tide over this phase.”

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