We have been analyzing the impact of the covid-19 on various sectors and this will be a continuous process. We have also carried out a Survey on the same and there were views presented by other practitioners. To gauge the impact on GDP growth we need to make a number of assumptions because the overall regulatory situation from the point of central and state governments are changing. Also, there is a lot of uncertainty on how long the shutdown will last. What appeared to be 8 days has become 21 days and there is no way to ascertain whether this will become 30 or 60 days. Hence, it is hard to guess the impact as the conditions are constantly evolving.
Also, when we say that there is a shutdown, has production really come to a standstill? Probably not because all essential goods are to be produced which means the food segment should be up. The same holds for agriculture because while at the practical level food grains are not reaching the cities’ towns and villages, GDP numbers look at production and not distribution and would hence register normal growth even if it means inventories are increasing. Hence while farmer income may not increase, production is recorded. Also, in these times there can be a prop provided to the healthcare and pharma sectors where the emphasis is on increasing production or provision of services.
In case of services, those which are not used like airlines, railways, tourism, hotels, restaurants are value foregone and GDP comes down automatically. But in case of manufactured goods, there is a big possibility of deferred purchase which was witnessed post shocks like demo and GST. Hence output lost can be regained to an extent. It can happen in services too where more holidays are taken or more discretionary spending incurred on services once the virus is behind us.
There is a counterargument here. In case of demo there was definitely a sharp reduction in economic activity as cash was not available which led to large scale layoffs especially in the SME sector. The same held for GST albeit to a lesser extent as enterprises in this sector confronted a dual shock. But the scale of unemployment is more serious this time as it is a result of a closedown for what can be considered to be practically an undefined period as nobody knows. This recovery could hence be muted. Further, unlike the disruption caused by GST and demo, this pandemic led disruptions are not restricted to India the impact on trade could be protracted. Also, as India is an important component of global value chains and with the USA and European countries being key trading partners of India, the impact will not only be in terms of lower export growth but also lower inputs which are required to manufacture. Given these possibilities it is even more difficult to conjecture the GDP impact.
One way of going about it is to look at real GDP in FY20 which is to be around Rs 140-150 lakh crore. Assuming 300 working days we can be looking at Rs 45-50,000 cr of daily output which can potentially be lost due to shutdowns. Assuming 80% is lost while 20% still functions, there could be something like Rs 35-40000 cr of GDP lost every day. The 21 days lockout spills over to FY21 with 14 days going into the next year. Hence the total loss which can potentially be in the region of Rs 6.3-7.2 lkh crore assuming 18 working days will be split across the two years. With 2/3 of the impact being passed on to the Q1, the loss can be in the region of Rs 4.2- Rs 4.8 lkh crore. This can potentially lead to a de-growth in GDP in Q1 under ceteris paribus conditions where it is assumed that there is no or low growth in the subsequent period.
Last year GDP was Rs 35.5 lkh crore in Q1, which at a modest 6% growth meant increase of Rs 2.13 lkh crore in this quarter. Now with a fall of Rs 4.2-4.8 lkh crore, there would have to be a lot of recouping to be done to escape the negative growth trap. This has to happen in the next 10 weeks following the shutdown. There would be the limitation however of all sectors not getting back on rails with specific industries like pharma, FMCG probably showing acceleration. While entertainment may pick up due to pent up demand, travel, tourism and hotels would come back on track with a hiatus. More importantly reverse migration of all those who left their jobs due to the shutdown would take time which could be at least a month.
An optimistic picture would mean recouping of losses and further an increase of not more than 3% growth that can hold only in case the lockdown ends on 14th April and normalcy returns. Two sectors that have to aggressively drive this recovery have to be the government with frontloading of expenditure and the banking sector which would be involved in augmenting credit to all the sectors that require funding so that they are able to recover. Growth could be lower at 1.5-2% if this does not happen.
This may still look difficult and is this is the extremely best case scenario. Quite clearly the infection pattern would need observation as it is only when the incremental cases plateau would the lockdown be removed. We are also assuming that the cash transfers announced by states would actually work immediately to ensure that demand for food remains stable (which may not be the case). There are also several schemes announced by centre and states which if they fructify can reverse the Rs 4.8 lkh crore of GDP loss through compensatory measures. However, production of essential goods needs to be back on track, which is not the case now given the ambivalence in the communication made at the top and the receipt of the same at the ground level.
What does this mean for Q4-FY20? GDP in real terms was to increase by Rs 1.74 lkh crore in Q4 i.e. by 4.7%. Based on the above estimate, the loss could be above this amount unless there was very strong growth in the first two months. While growth may not be negative, it could go down to 1.5-2.5% in Q4 as the usual ramping up of production due to the March-end phenomenon could not be implemented due to the shutdown.
