COVID - 19 India

Impact of COVID-19 Pandemic in India

GDP Forecasts – A Tough Road Ahead

  • IMF slashed India growth forecast for the current fiscal year to 1.9%, from 5.8% estimated earlier in January, on account of the lockdown to contain Covid-19 pandemic.
  • Moody’s Investors Service (Moody’s), on 27th March, sharply slashed its projection for India’s GDP growth in Calendar Year 2020 from 5.3% to 0.2%. The agency’s forecast for the global economy was even more stark with a total contraction of 0.5% in the ongoing financial year.
  • Crisil marked down its base case GDP growth forecast for India in FY21 from 6.0% to 1.8% following 2 revisions in the past one month. It warned that there are further downside risks if the pandemic is not contained by April-June 2020, or if it spreads rapidly in India, affecting domestic consumption, and investment.
  • Earlier in January, Standard & Poor (S&P) had estimated India’s GDP growth for FY21 at 6.5%, which it now expects to fall to 1.8%.
  • Fitch Ratings, said India’s GDP will grow at 0.8% in FY21. This is a very sharp downward revision of its earlier estimate of 5.8%, made earlier in this year.
  • Moody’s Investors Service (Moody’s), on 27th March, sharply slashed its projection for India’s GDP growth in Calendar Year 2020 from 5.3% to 0.2%. The agency’s forecast for the global economy was even more stark with a total contraction of 0.5% in the ongoing financial year.
  • Crisil marked down its base case GDP growth forecast for India in FY21 from 6.0% to 1.8% following 2 revisions in the past one month. It warned that there are further downside risks if the pandemic is not contained by April-June 2020, or if it spreads rapidly in India, affecting domestic consumption, and investment.
  • Earlier in January, Standard & Poor (S&P) had estimated India’s GDP growth for FY21 at 6.5%, which it now expects to fall to 1.8%.
  • Fitch Ratings, said India’s GDP will grow at 0.8% in FY21. This is a very sharp downward revision of its earlier estimate of 5.8%, made earlier in this year.

Impact on Major Sectors in India

  • IMF has predicted that COVID-19 pandemic will lead to a global recession in 2020. Even before the spread of COVID-19, the Indian economy was slowing down which is now accentuated by the pandemic.
  • Aviation sector accounts for more than USD 70 billion to the national GDP. Assuming a 25% decline in industry revenues, the Indian aviation sector may be staring at around USD 1.5 billion- USD 2 billion of losses, given the current lockdown parameters.
  • China accounts for 27% of India's automotive part imports. According to reports by Fitch Solutions, vehicle production in India is likely to contract by 8.3% in 2020 following an estimated 13.2% decline in 2019.
  • India will set up a nearly $1.3 billion fund to facilitate companies to manufacture pharmaceutical ingredients domestically following supply chain disruptions due to the COVID-19 pandemic, which highlighted the country's reliance on China, and raised the specter of drug shortages.
  • According to ICRA Ratings, electricity demand in the country has already been affected due to shut down of industrial and commercial establishments & non-operational passenger rail services because of the proliferation of Covid-19 disease. It is expected to further decline by 20-25% Y-O-Y.
  • Aviation sector accounts for more than USD 70 billion to the national GDP. Assuming a 25% decline in industry revenues, the Indian aviation sector may be staring at around USD 1.5 billion- USD 2 billion of losses, given the current lockdown parameters.
  • China accounts for 27% of India's automotive part imports. According to reports by Fitch Solutions, vehicle production in India is likely to contract by 8.3% in 2020 following an estimated 13.2% decline in 2019.
  • India will set up a nearly $1.3 billion fund to facilitate companies to manufacture pharmaceutical ingredients domestically following supply chain disruptions due to the COVID-19 pandemic, which highlighted the country's reliance on China, and raised the specter of drug shortages.
  • According to ICRA Ratings, electricity demand in the country has already been affected due to shut down of industrial and commercial establishments & non-operational passenger rail services because of the proliferation of Covid-19 disease. It is expected to further decline by 20-25% Y-O-Y.

Impact of COVID-19 on Trade Industry

  • Exports in March stood at USD 21.41 billion dropping 34.5% compared to USD 32.72 billion a year ago. Meanwhile, Imports also contracted by 28.7% to USD 31.16 billion, making it the steepest fall in monthly exports and imports since 2008-09.
  • World trade is expected to fall by between 13% and 32% in 2020 as the pandemic disrupts normal economic activity and life around the world.
  • The trade deficit declined to USD 9.8 billion in March 2020 from USD 11.0 billion a year ago.
  • US alone accounted for 7.8% of India’s imports in FY2019 especially those related to machinery, precious metals and stones, etc. making it the 2nd largest importer for India.
  • China also accounts for 17.4% of India’s imports in FY2019. Major goods includes electrical equipment, machinery etc.
  • Due to COVID-19, the importers of Chinese goods have faced constraints in India during end of February month.
  • India is also dependent on Germany for imports of transport equipment. Metal articles and instruments are imported from Japan and foodstuffs and beverages from the UK. These countries are heavily impacted from COVID-19 crisis and there may be a negative impact on these sectors.
  • World trade is expected to fall by between 13% and 32% in 2020 as the pandemic disrupts normal economic activity and life around the world.
  • The trade deficit declined to USD 9.8 billion in March 2020 from USD 11.0 billion a year ago.
  • US alone accounted for 7.8% of India’s imports in FY2019 especially those related to machinery, precious metals and stones, etc. making it the 2nd largest importer for India.
  • China also accounts for 17.4% of India’s imports in FY2019. Major goods includes electrical equipment, machinery etc.
  • Due to COVID-19, the importers of Chinese goods have faced constraints in India during end of February month.
  • India is also dependent on Germany for imports of transport equipment. Metal articles and instruments are imported from Japan and foodstuffs and beverages from the UK. These countries are heavily impacted from COVID-19 crisis and there may be a negative impact on these sectors.

Impact on IT Sector and Remittances

  • For the past few decades, IT Sector and Remittances have resulted in net foreign inflow of funds in exchange of necessary services. The sudden decrease in demand for the services in globally crippled economy is going to affect these cash cow sectors for Indian economy. India is also the highest recipient of remittance with a whopping USD 79 Billion in 2018.
  • Many IT Companies in India are plagued by future project cancellations and postponement by clients. These clients are mainly foreign corporation which are impacted by the ongoing crisis in their respective country. Many MNCs have maneuvered to decrease their discretionary spending which have impacted service-based IT Industry.
  • According to CLSA, there could some pressure on pricing since about 60% of clients have requested 20-30% discount over next 2-4 months.
  • Global travel restrictions are delaying the execution of existing projects and hurting the ability of IT companies to ramp up projects and close deals, as crisis-hit clients delay allocation of funds.
  • Migrant workers from India all over the world are facing problems to sustain their work a result of ongoing crisis in global macro-economic condition. As a result, World Bank has predicted India’s sharpest decline of 20% of Remittances in 2020 due to fall in the wages and employment.
  • Many IT Companies in India are plagued by future project cancellations and postponement by clients. These clients are mainly foreign corporation which are impacted by the ongoing crisis in their respective country. Many MNCs have maneuvered to decrease their discretionary spending which have impacted service-based IT Industry.
  • According to CLSA, there could some pressure on pricing since about 60% of clients have requested 20-30% discount over next 2-4 months.
  • Global travel restrictions are delaying the execution of existing projects and hurting the ability of IT companies to ramp up projects and close deals, as crisis-hit clients delay allocation of funds.
  • Migrant workers from India all over the world are facing problems to sustain their work a result of ongoing crisis in global macro-economic condition. As a result, World Bank has predicted India’s sharpest decline of 20% of Remittances in 2020 due to fall in the wages and employment.

Impact on Banking and Financial Institutions

  • Moody’s cited severe liquidity constraints in India’s banking and non-banking sectors as a hinderance to growth in its Global Macro Outlook 2020-21.
  • In 2018-19 the BFSI sector in India saw a boost with NPA ratio decreasing more than 2% from 11% to roughly around 9% through higher recovery. This was a positive indication after consecutively increasing for 10 years.
  • In a recent report, released in March, S&P Global Ratings said that Banks in the country are likely to witness a spike in their NPA ratio by 1.9% and credit cost ratios by 130 basis point in 2020, following the economic slowdown on account of COVID-19 crisis.
  • The report noted that an additional USD 300 billion spike in lenders' credit costs and a USD 600 billion increase in (NPAs) will occur in 2020 due to the adverse impact of coronavirus pandemic.
  • The Bank Nifty lost more than 40% in 2 months. The Banking and NBFC have lost sheen in the market amid COVID-19 witnessing major declines in the financials and the decline correlates with the massive sell-off by foreign investors in the last month led to panic selling in the capital markets.
  • In 2018-19 the BFSI sector in India saw a boost with NPA ratio decreasing more than 2% from 11% to roughly around 9% through higher recovery. This was a positive indication after consecutively increasing for 10 years.
  • In a recent report, released in March, S&P Global Ratings said that Banks in the country are likely to witness a spike in their NPA ratio by 1.9% and credit cost ratios by 130 basis point in 2020, following the economic slowdown on account of COVID-19 crisis.
  • The report noted that an additional USD 300 billion spike in lenders' credit costs and a USD 600 billion increase in (NPAs) will occur in 2020 due to the adverse impact of coronavirus pandemic.
  • The Bank Nifty lost more than 40% in 2 months. The Banking and NBFC have lost sheen in the market amid COVID-19 witnessing major declines in the financials and the decline correlates with the massive sell-off by foreign investors in the last month led to panic selling in the capital markets.

Impact on Banking Sector due to Regulatory Relief by RBI – Part 1

  • RBI reduced the repo rate by 75 BPS bringing it down to 4.4%. Further it aims to pump INR 3.74 lakh crores liquidity to banks through reduction in cash reserve ratio and by increasing the limit for Marginal Standing Facility (MSFs) to 3%.
  • The Reserve Bank of India (RBI) on 27th March also allowed a repayment moratorium for 3 months on all term loans/credit card/overdraft to borrowers of all finance institutions. All lending institutions have flexibility under the prescribed accounting standards to frame policies for providing the relief to eligible borrowers.
  • Moreover, there would also be an asset classification standstill for all accounts from 1st March to 31st May. This will reduce pressure on corporate and will result in no asset classification downgrade.
  • RBI has also directed all the financial institutions to maintain higher provision of 10% on all accounts under the standstill, spread over two quarters, i.e., March 2020 and June 2020. This announcement is done with the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges.
  • The Reserve Bank of India (RBI) on 27th March also allowed a repayment moratorium for 3 months on all term loans/credit card/overdraft to borrowers of all finance institutions. All lending institutions have flexibility under the prescribed accounting standards to frame policies for providing the relief to eligible borrowers.
  • Moreover, there would also be an asset classification standstill for all accounts from 1st March to 31st May. This will reduce pressure on corporate and will result in no asset classification downgrade.
  • RBI has also directed all the financial institutions to maintain higher provision of 10% on all accounts under the standstill, spread over two quarters, i.e., March 2020 and June 2020. This announcement is done with the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges.

Impact on Banking Sector due to Regulatory Relief by RBI – Part 2

  • RBI has sought to ensure the solvency of businesses and small non-bank lenders during the extended lockdown period by making available funds to NBFCs.
  • RBI on 17th April announced INR 50,000 Crores package to banks for investing in investment grade bonds, commercial paper, & NCD’s of NBFCs to provide liquidity under TLTRO 2.0. At least 50% of the investment must go to mid & small sized NBFCs & MFIs.
  • Furthermore, a special refinance facilities of INR 25,000 Crores to National Bank for Agriculture and Rural Development (NABARD), INR 15,000 Crores to Small Industries Development Bank of India (SIDBI) and INR 10,000 Crores for National Housing Bank (NHB). This will benefit to agriculture, small business and housing finance companies.
  • At the same time Commercial Banks and Cooperative Banks are barred from paying dividends for FY2020. This announcement will help banks conserve capital and absorb credit losses.
  • In its urge to incentivize banks to increase their lending RBI slashed the Reverse Repo Rate by 25 BPS from 4% to historical low of 3.75%.
  • RBI on 17th April announced INR 50,000 Crores package to banks for investing in investment grade bonds, commercial paper, & NCD’s of NBFCs to provide liquidity under TLTRO 2.0. At least 50% of the investment must go to mid & small sized NBFCs & MFIs.
  • Furthermore, a special refinance facilities of INR 25,000 Crores to National Bank for Agriculture and Rural Development (NABARD), INR 15,000 Crores to Small Industries Development Bank of India (SIDBI) and INR 10,000 Crores for National Housing Bank (NHB). This will benefit to agriculture, small business and housing finance companies.
  • At the same time Commercial Banks and Cooperative Banks are barred from paying dividends for FY2020. This announcement will help banks conserve capital and absorb credit losses.
  • In its urge to incentivize banks to increase their lending RBI slashed the Reverse Repo Rate by 25 BPS from 4% to historical low of 3.75%.
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