As the number of Covid-19 cases across the country is on a gradual uptrend, the government has extended the nationwide lockdown by another two weeks. The lockdown which began on March 25 for 21 days, was extended for the first time in mid-April to last till May 3.

However, the second extension, which will last until May 17, proposes more relaxations than the first extension. During the second extension, basis the levels of risk and spread of Covid-19, the country stands demarcated into three zones; green, orange, and red. A total of 130 districts are designated as red zones, which will continue to remain under stringent lockdown.

About 284 districts have been classified as orange zones, and the remaining 319 districts are demarcated as green zones. Both the orange and green zones will witness significant relaxations.

“It is worth nothing that urban areas and economically more relevant cities such as Mumbai, Delhi, Pune, Chennai, Bengaluru, Hyderabad, and Kolkata are all red zones, hence economic normalcy will take longer to emerge,” warns Rahul Bajoria, chief India economist, Barclays. The red zone, which accounts for 18% of India’s total districts, accounts for large swathes of the country’s economic activities.

An extension of lockdown is already factored into Barclays' GDP forecasts for India.
An extension of lockdown is already factored into Barclays' GDP forecasts for India.
Image : Source: Barclays Research

However, Bajoria retains his outlook on growth. He maintains his projection of 0% GDP growth for calendar year 2020, and 0.8% for FY21 (April 2020 to March 2021).

“Right from the beginning of the lockdown, we have maintained that India’s lockdown is likely to be longer than announced, and we remain comfortable that the lockdown may continue on a partial basis until June 6, as part of the precaution in containing the outbreak,” Bajoria adds.

Separately, a day before the second lockdown extension was announced, rating agency CRISIL warned that the Covid-19 pandemic could cull corporate revenue by nearly 10% during the current fiscal, cause a permanent loss of 4% to India’s GDP, and a lockdown beyond May could lower the GDP growth to zero.

Basis a mix of assumptions; the effect of the pandemic subsiding materially in the current quarter, besides a normal monsoon, and minimum fiscal support of ₹3.5 lakh crore, CRISIL has cut its growth outlook for India in FY21 down to 1.8%, from 3.5% estimated earlier.

The rating agency pointed out that increased fiscal support may be needed at the central and state levels to ensure relief reaches, apart from vulnerable households, even vulnerable firms, especially micro, small and medium enterprises (MSMEs).

CRISIL also highlighted that a global recession is now guaranteed with deep contraction in advanced countries. S&P Global, CRISIL’s parent, has marked down its global GDP forecast to -2.4% in 2020 compared with 0.4% growth earlier. “Risks to our India forecast are tilted to the downside, manifestation of which could take GDP growth to even zero,” CRISIL warned.

CRISIL’s chief economist Dharmakirti Joshi, however, sees a V-shaped recovery at over 7% real GDP growth in FY22. “But even assuming growth sustains at this level for the next three years, real GDP will stay below its pre-Covid-19 trend path,” he says.

Needless to say, the lockdown has started hurting already. CRISIL pointed out that in March, automobile sales contracted by an annual 44%, and exports fell 35% with the worst yet to come. The rating agency had warned that this deep slowdown across the board leaves large swathes of India’s informal workforce vulnerable, particularly in construction, manufacturing, and services sectors.

In India, casual labourers form almost 25% of the workforce and would take the first hit due to shutdowns and lay-offs. The situation is, however, bad for the formal workforce too.

India Inc. set to log its worst performance in a decade.
India Inc. set to log its worst performance in a decade.
Image : Source: CRISIL Research

According to CRISIL Research, an analysis of over 40,000 companies with employee cost of ₹12 lakh crore indicates that about 52% of the employee cost is incurred by companies in sectors that will see material increase in stress in case of an extended lockdown. And, the sharp deceleration in growth and increased income uncertainty is certain to pull demand down.

Shape and time of recovery to vary widely across sectors.
Shape and time of recovery to vary widely across sectors.
Image : Source: CRISIL Research

In the year ahead, CRISIL Research expects consumer discretionary services and products such as airlines, hotels, automobiles, and consumer durables to be the worst-hit. Also, non-pharma exporters, real estate, and construction companies also face one of their worst years. And, even resilient sectors such as information technology (IT) services will see muted growth as global budgets on IT spending fall.

Further, MSMEs are more vulnerable than larger players, especially on the liquidity front. CRISIL Research’s analysis suggests that even in a relatively milder slowdown than it had expected in the current fiscal, MSME working capital can stretch by over a month.

According to Prasad Koparkar, CRISIL’s senior director and head of growth, innovation and excellence hub, as India Inc. stares at a double-digit slide in revenue this fiscal, the worst in at least a decade, it’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) is set to fall sharply – by over 15% – in CRISIL Research’s base case scenario of 1.8% GDP growth.

“The adverse impact of operating leverage due to sharp revenue decline will drown all the benefits accruing from lower material and energy costs following across-the-board decline in commodities,” Koparkar adds.

The agency also highlighted that poor credit growth, including retail loans, along with rising non-performing assets (NPAs) and credit costs will singe banks and non-banking finance companies (NBFCs). The research outfit expects banking sector NPAs to rise to 11%-11.5% by March 2021, from an estimated 9.6% as of March 2020, with sharply lower recoveries and rising slippages.

The worry is that NPAs are expected to swell for NBFCs too, with microfinance, MSME loans and wholesale/developer funding witnessing the sharpest spike. The silver lining, however, is that the asset quality deterioration is expected to remain moderate in housing loans and gold finance with less than 50 basis points, or 0.5%, increase in NPAs.

Clearly, the second extension, which takes the total day-count of the lockdown to 54, from the earlier proposed 21 days, is bound to add to the challenges which the economy was already facing before Covid-19 took its pandemic shape. And yet, the worst seems far from over.

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