The economic outlook does not look encouraging at all. The country will not only fight a sharp rise in virus cases, but also demand destruction at unprecedented levels, said Sonal Varma, MD and chief economist (India and Asia ex-Japan), Nomura.
Over the weekend, the government said most businesses would reopen on June 8. Estimates in early April showed the economy was operating at 25% of its capacity, which rose to 60% on April 20 when the first round of easing was announced. At the beginning of May, the same percentage rose to 70% and the same will be considerably higher from June 8.
“Covid-19 will cause much lower final demand and cause a bigger shock not only to bank balance sheets, but also to households, businesses and government. The medium-term outlook for India is much more negative, ”said Varma.
Speaking at the Nomura Investment Forum Asia 2020, she said the blow to consumption and services has been substantial and unprecedented.
“The biggest impact of growth will be between April and June. We expect GDP to decline 15-20% year-on-year for this quarter. The growth in the second quarter will likely be a full write-off, ”she said.
Varma, however, pointed out that some of the consumer discretionary sectors like autos could see an immediate increase in sales due to pent-up demand, but once this phase is over there will be a “normal new demand” phase. . And this phase will be much lower than pre-Covid levels, as consumers will fight over money.
The auto sector, which saw no sales in April, saw some recovery in May, but numbers were still far from pre-Covid levels. Thanks to the expected recovery, shares of automakers have since surged. The Nifty Auto Index has gained more than 9% in the past month, led by a 27% rise in M&M stocks.
Nomura said India’s economy would contract 4.8% year-on-year in FY21, but rebound to grow 7.9% next year on a significantly lower basis.
Concerned about the growth outlook, Moody’s lowered India’s sovereign rating to the lowest investment rating on Monday. But Varma does not plan to downgrade to “trash” again anytime soon, “because the rating agencies have set the bar very high to reach that level.”
“Rating agencies will wait and see if there is any significant deterioration before they ‘throw’ India. So at a minimum we are looking at a six month waiting period before any action is taken, which is enough for us to take a call if India is moving towards that status, ”the senior economist said.
She said, however, that Fitch’s comment would likely reduce India’s outlook to “negative”. S&P, however, may take a little longer to decide whether it wants to take similar action.
Companies & jobs
The impact of the foreclosure is going to be crippling for many businesses, especially small and medium-sized businesses that operate on low cash reserves, Varma said. This, in turn, will affect the already non-existent labor market.
“Companies had two months of zero sales even as they continued to pay fixed fees. So the hit on them is much more severe and they will likely be in cost cutting mode. This will lead to job cuts and the halt of investment plans, which will lead to further reduction in demand from businesses, ”she said.
According to CMIE, a private surveyor, India’s unemployment rate stood at 23.2%, with urban areas seeing more than a quarter of its labor force jobless while rural areas saw 22.3% of its population. unemployed on June 1.
The poorest states that supply a large portion of the migrant labor force, such as Bihar and Jharkhand, have unemployment rates of 46 and 59 percent, respectively.
Postcode to be mounted
Financial sector balance sheets, which were already weak due to the 2018 cycle of non-performing assets (NPAs), are again a major concern for analysts, including Varma, expecting bad loans to rise.
NBFCs, which count commercial real estate and MSMEs among their main borrowers, are already experiencing defaults. NBFC gross NPAs stood at 6.1% at the end of March 2019. Varma expects that figure to hit double digits soon.
The shock of Covid-19 will cause another round of NPAs for the banking industry, as they are also exposed to NBFCs and MSMEs, she said.
“Even on the retail side, if household balance sheets are affected, wages are reduced and jobs are not created, there will be a fallout, especially in the unsecured lending sector. Overall, the gross NPAs of the banking sector will reach the middle of adolescence compared to the current 9.5%, ”predicted Varma, adding that the true status will not be known until after the end of the moratorium period.
The recent revival is not enough
Stressing that the stimulus measures recently announced by the government will not be enough because they have barely provided fuel to survive, Varma said further stimulus is needed.
The government, in a series of announcements last month, outlined various measures to attract investment and relieved the hardest hit segments of society and business. However, some criticized the fact that none of them were focused on an immediate recovery of the economy.
“These tax measures are not going to fuel growth. Final demand will be low. The government will have to intervene again with a sort of stimulus in demand. Likewise, there has to be a clear solution in the financial sector as well, ”she said.
Nomura expects the RBI to maintain its accommodative stance and offer another 50 basis point rate cut. The central bank has already cut short-term lending rates to a record 4 percent.
Varma said beyond a point, a cut in rates and easy cash flow wouldn’t help if it didn’t reach borrowers who needed it. “This is why weak corporate balance sheets, downgrading and aversion to credit risk among lenders need to be addressed,” she said.
“It’s no longer about lowering rates and injecting liquidity. The problem is not credit risk and politics must address it. The financial sector, which will go through a cycle of deteriorating asset quality, will not take this risk. This is why the Indian government has to take the risk, ”she said.