Barclays pegs economic cost of lockdown at $234 bn; sees no growth in 2020

Barclays has pegged the economic cost of the lockdown, which has now been extended till May 3 with caveats, at $234.4 billion (8.1 per cent of gross domestic product, or GDP), assuming that India will remain under partial lockdown at least till May-end.

Given this backdrop, Barclays has revised down their GDP growth forecast further to 0 per cent for calendar year 2020 (CY20) from 2.5 per cent earlier, and to 0.8 per cent for FY20-21 (from 3.5 per cent earlier). CY21 GDP growth forecast, too, has been slashed to 7.5 per cent from 8 per cent earlier. 

Those at Nomura, too, have suggested a bleak outlook for the Indian economy given how things stand and expect GDP growth to average a negative 0.5 per cent in 2020 versus 5.3 per cent in 2019. 

“In our base case, we are currently projecting GDP growth at 3.2 per cent y-o-y for Q1, and subsequently to dip significantly to - 6.1 per cent for Q2. We expect some sequential pick-up in H2, but on a year-on-year basis, growth is likely to be lacklustre at - 0.5 per cent for Q3 and 1.4 per cent for Q4,” wrote Sonal Varma, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi

While India’s coronavirus (Covid-19) pandemic outbreak has not officially reached the community transmission stage, analysts at Barclay's believe the existing restrictions on movement are causing much more economic damage than anticipated.

“The negative impact of the shutdown measures on the mining, agriculture, manufacturing and utility sectors appears higher than we had expected. Combined with the disruption in several service sectors, we now estimate that the economic loss will be close to $234.4 billion (8.1 per cent of GDP), assuming that India will remain under a partial lockdown at least until the end of May. This is much higher than the $120 billion we had estimated earlier for roughly the same time period previously,” wrote Rahul Bajoria, chief India economist at Barclays, in a recent co-authored report with Shreya Sodhani.

For their analysis, Barclays has assumed that the lockdown will end by early June, followed by a modest rebound in activity, reflecting inventory rebuilding across certain sectors. “However, if we are still seeing localised Covid-19 outbreaks, which lead to frequent shutdowns, the scope for the economy to recover will continue to decline,” they caution.
 

Stimulus measures

That said, most analysts expect the Government and the Reserve Bank of India (RBI) to continue to provide stimulus to help stem the economic rout triggered by the Covid-19 pandemic. While the government, on its part, has unveiled a host of measures for the poor over the past few weeks, the RBI has undertaken liquidity support measures and cut the key interest rates sharply.

“Future policy response will be dependent on the extent, severity and duration of the disruptions related to Covid-19. If disruptions linger for longer as in our bear case, we expect the RBI to lower rates by another 40 basis points (bps) to 4 per cent and continue with liquidity support and macro prudential measures,” says Chetan Ahya, chief economist and global head of economics at Morgan Stanley.

Nomura expects an additional 75 bps of policy easing, alongside further unconventional measures to boost liquidity and reduce credit risk premia, besides measures to ease cash flow challenges faced by small and medium-sized enterprises and other hard-hit industries.