Probable effects of Indian Economy Slowdown amid COVID-19

Indian Economy Slowdown

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The world is suffering with the coronavirus pandemic which has turned out to be probably the worst pandemic of this decade. Several sectors of the world are being hit hard by this pandemic out which the economy is the prominent one. The Indian economy, which was already confronting a recession with the economy expected to grow just by 5%, as compared to 8%, three years ago. With the lockdown being imposed and closed markets, the Indian stock market is experiencing a historical rout. Moreover, the networking and automobile sector of the country was already running low, is also being largely affected by this pandemic. The already low forecasts of GDP are now getting lower.

Discouraging GDP Forecasts for India

Indian Economy Slowdown

Gross Domestic Product (GDP), a monetary value of all finished goods and services made within a country during a specific period, is used to estimate the size of an economy and the growth rate. In India, the GDP growth rate is already at a decadal low and any further dent in economic output will bring more pain to workers who have seen their wages erode in recent times. A source shows that the major rating agencies have forecasted India’s GDP growth rate, and the results does not seem promising at all. Let’s have a look at the forecasts.

On March 27, Moody’s Investors Service sharply slashed its projection for India’s GDP growth in year 2020 from 5.3% to 2.5%. This markdown came after India went into a lockdown for 21 days. Moody’s also cited severe liquidity constraints in India’s banking and non-banking sectors as a hindrance to growth in its Global Macro Outlook 2020-21.

A domestic rating agency Crisil, in a note on March 26 also slashed its base case GDP rate forecast for India in financial year 2021 from 5.7% to 5.2%. It also warned further downside risks if the pandemic is not contained by April-June 2020, or if it spreads rapidly in India. Crisil said that this pandemic threat is bigger in scale than the financial crisis of 2008.

Standard and Poor’s
The global rating agency S&P had earlier estimated India’s GDP growth for 2021 at 6.5%, which it now expects to fall at 5.2%. In the following year, the growth is estimated to be 6.9%, compared to earlier estimate of 7%. Moreover, S&P also said that a recession across Asia-Pacific is guaranteed due to disruptions in China.

Fitch ratings, in its Global Economic Outlook 2020, said that India’s GDP will grow at 5.1% in financial year 2021. The earlier estimate was 5.6%. Along with the covid-19 pandemic, Fitch also cited the risks from failure of Yes Bank, which was recently taken over by a consortium led by state bank of India under the aegis of the Reserve Bank of India (RBI).

CARE Ratings
A Mumbai based agency CARE ratings forecasted the GDP growth to be 4.7% in January-March 2020 quarter. However, it reduced to 1.5 to 2.5% due to the usual ramping of production due in the year end could not be completed due to the lockdown. It also mentioned that the real impact will be felt in the first quarter of the financial year 2021, i.e. months of April-June.

Impacts on the Three Main Pillars of the Economy

Indian Economy Slowdown

All the above surveys are showing the probable GDP forecast which is declining. Primary reasons behind this decline are the effects coronavirus is having on the three pillars of the Indian economy, i.e. Agricultural sector, Industrial sector and Service sector. Let’s have a look at how coronavirus outbreak will impact these sectors.

Agricultural Sector
India is known as an Agriculture-friendly country and the agricultural sector contributes a major part of the Indian GDP. The nationwide lockdown has impacted the economic system big time. Though the agriculture produce is exempted from the lockdown being an essential commodity, this sector is facing a lot of trouble with laborers and movement of goods. Along with the uneven monsoon, the Indian farmers will face another hit due to disruptions from the coronavirus as most of the laborers have fled to their homes amid the lockdown.

Furthermore, the supply chain of agricultural commodities has been impacted by the lockdown. Movement of goods has also been hampered due to the scenario. The cold storages and warehouse owners are facing the hardest hit due to slowness in transportation process. “Breakdown in the distribution channel is more evident than in production. Hence the government must pass transparent guidelines on the local administration levels,” said Madan Sabnavis. Chief Economist at CARE Ratings.

Industrial Sector
India’s GDP largely depends on its industrial sector. The coronavirus and the lockdowns imposed due to to the same are already impacting the industries heavily and are expected to affect this sector in near future also. The changes in GDP forecasts for 2020 are not good news for the Indian economy, but the situation can change from bad to worse if this scenario remains the same. “A prolonged lockdown could result in a freeze on hirings and recruitment in IT firms. If this gets prolonged, we could be looking at a freeze at the promotions, increments for a year,” said Kris Gopalakrishnan, co-founder of Infosys and Chairman of Axilor Ventures.

Various industries like automotive, retail, IT, travel and tourism, healthcare, food are facing the hardest hit due to this pandemic. To combat the consequence, government is also taking the required measures such as removing the long-term capital gains tax of 10% and fixing the total dividend distribution tax at 25%. This is expected to dampen the confronting consequences.

Service Sector

According to data, the service sector contributes a whopping 61.5% to the Indian GDP. No doubt, it is the largest sector in India. However, it has been the mostly affected sector due to the coronavirus outbreak. Services like restaurants, apparels, professionals have experienced a massive loss in the recent weeks. The economic times has reported 35% loss in the Indian restaurants business due to the lockdowns.

In the upcoming business year, as almost every survey has predicted a sharp decline in the GDP, the service sector is bound to go through significant losses. HDFC Bank, in its latest treasury report has suggested that the 21-day lockdown will shave off 74% of the real GDP and the service sector will be the most impacted sector.

To conclude, the already descending Indian economy is on a verge of a significant slowdown. Winning this battle against the coronavirus seems to be the most essential challenge in front of the country. Refer our website for more information about coronavirus.

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