With the number of Covid-19 cases rising across the world and the pandemic bringing most economies to a standstill, think tanks, brokerage firms, global banks and economists are revising down growth forecasts.

Though in India the actual impact of the Covid-19 is still to be ascertained most brokerage firms such as Ambit, UBS, Nomura, etc. started projecting a 2.5% or less GDP growth rate for FY21, nearly 2% to 2.5% lower than their earlier estimates within days of the lockdown. Says Tanvee Gupta, chief economist at UBS: “We now expect India’s GDP growth to slow down to 2.5% in FY21 from the 4.5% estimated in FY20. Economic choices will determine both the depth of the crisis and the strength of the recovery.”

The consensus is that of the four engines of India’s GDP growth only one, government consumption—12% share of the economy, will be firing. It is expected to grow at 15% in FY21 compared to 9.8% in FY20 because of the need to provide fiscal stimulus to a nation caught up in an economic slowdown and lockdown.

The rest of the engines are either sputtering or stalled. For instance, private final consumption expenditure (PFCE)—60% of the GDP—investments or gross fixed capital formation—27% of the GDP—and exports of goods and services—20% of the GDP—are either going to report low growth or even contraction. And that is not good news because it will lead to salary cuts, mass unemployment or even social unrest if growth does not revive.

The lower 2.5% GDP number for FY21, contends Sumit Shekhar, research analyst at Ambit in its March 30, 2020 report, will be driven by a “massive pull-down in investments or GFCF, which are likely to contract 5% in FY21, a 30-year-low.’’ Similarly, private consumption will only see a 4% growth, a 19-year-low in FY21, compared to 5.3% in FY20, while exports of goods and services is likely to see a contraction of 10%, as global growth crashes and many developed nations slip into a recession. The only saving grace will be government spending that is likely to see an increase growing to 15% in FY21, compared to 9.8% in the previous year.

Investments or gross fixed capital formation which comprise 27% of the GDP is likely to see a massive pullback because all its three constituents—private corporate, households and government capital expenditure, are likely to see a sharp fall. Corporate India is unlikely to make any further investments because it is already burdened with excess capacity with the plant load factor down to 69% in the second quarter of FY20, compared to 74% in Q1 FY20, which may fall further as demand contracts in the economy. According to Ambit, the thumb rule that corporate India uses to start further expansion is when the plant load factor touches 80% or more

Households, which account for 38% of the country’s gross capital formation, too, are unwilling to invest, having already cut down on their investments in the past few years because of the economic slowdown, which has forced many to dip into their savings to keep their current spending going. “Their ability to drive capital investments will be further hampered in FY21 as the impact of Covid-19 leads to demand destruction and hence job losses,” argues Shekhar.

Even the central and state governments may find it hard to invest in infrastructure projects as most of their money will be used up in the healthcare sector to fight the virus outbreak. All this will ensure that gross fixed capital formation will contract to 10% in FY21 compared to 5% in FY 20.

The other factors that will take down India’s growth story in FY21 will be a fall in spending in both discretionary and non-discretionary items: the private final consumption expenditure (PFCE). The spread of Covid-19 and the resultant lockdown will have a disastrous impact of discretionary spending or non-essential items, which constitutes 55% of PFCE. Ambit estimates that discretionary consumption will fall to 2% in FY21, while non-essential consumption expenditure—44% of the PFCE—grows by 6% as government comes up with a stimulus package to help the poor and the needy.” A combination of these two will pull down overall PFCE growth to 4% in FY21, a 19-year low.

The last growth engine of the economy, exports of goods and services too is sputtering. If global growth declines by 200 basis points or 2% in CY20 due to the spread of Covid-19 “we estimate that total exports could decline by 11% in FY21 with services contracting by 10% and exports contracting by 12%.” And since India’s top five exports—engineering goods, chemicals, petroleum, gems and jewellery and textiles—are all labour intensive, any fall in exports will result in large-scale job losses in the economy, compounding the problem for the government and policy makers.

More importantly, with real GDP growth slipping to 2.5% and nominal growth not exceeding 6% (inflation stays at 3.5% of GDP), the lowest in five decades, corporate profitability will take a major hit. “Data suggests that corporate profitability is strongly related to nominal growth, corporate profitability for the listed universe is set to decline by 15% in FY21.

Bu it is important to remember that a 2.5% GDP growth is the baseline assumption that the disruption would end by mid-May, but should it continue till September 2020, then India’s growth could contract to 2% in FY21—the first time in post-liberalised India.

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