India is likely to post a negative GDP growth rate in the financial year 2021, making it the lowest in four decades, according to an estimate by UBS.
It estimates that the Covid-19 shock-related mobility restrictions will drag FY2021 growth sharply. UBS is downgrading India's growth forecasts on a looming global recession and domestic economic activity being much weaker than expected due to the nation-wide lockdown imposed until May 3.
"We now expect India's real GDP to contract to -0.4 per cent in FY21 (previously +2.5 per cent), compared with 4.1 per cent year on year (previously 4.5 per cent) estimated in FY20. In our base case, we expect current mobility restrictions remain in place until mid-May and then get lifted, and activity is largely back to normal by end-June," UBS said.
In the alternative scenarios where virus containment fails, UBS estimates that disruptions could last longer and the economic weaknesses in the short term could intensify and the significant secondary impacts (job losses, reduced income levels, corporate defaults, rising NPLs, rating downgrade, etc.) could delay a potential recovery. "There is a risk India's real GDP could contract by a much larger magnitude of 3-4 per cent YoY," it said.
UBS has projected that balance sheet concerns could drag India's long term potential growth lower to 5 per cent.
"We assume India's long-term growth could slow to 5 per cent year on year under alternate risk scenarios, compared with 6-6.5 per cent in our base case. The structural drag to growth could be amplified if Covid-19-related disruptions last longer and increase balance sheet concerns facing economic agents (corporates, financial sector, govt & households)," the report said.
For instance, near-term challenges (corporate sector bottom lines are hit and households face lower income levels) could deepen amid the Covid-19 shock. Renewed asset quality concerns are already prompting banks and NBFCs to become more risk averse. The government could face debt sustainability concerns if fiscal support is extended significantly.
"To create a virtuous cycle of higher potential growth, reform momentum would need to pick up. We believe there is a golden opportunity for India to gain market share in the global export basket as Covid-19 increases relocation intentions," UBS said citing the opportunity.
UBS has raised the question if a higher fiscal stimulus will risk a rating downgrade. "While India has only announced modest fiscal support so far (less than 1 per cent of GDP), we expect the government Covid-19 stimulus to be scaled up to 3 per cent of GDP in FY21," it estimates.
"We think the fiscal slippage could be higher than that seen during the credit crisis at close to 5 per cent of GDP. While we do not see an imminent sovereign rating downgrade, an outlook downgrade (stable to negative) cannot be ruled out. The temporary nature of fiscal stimulus and quick rebound in nominal GDP next year will make it relatively easier to return the deficits to more normal levels, after this crisis is over, in our view," UBS said.