Covid-19 fallout: UBS pegs FY21 India growth at -0.4%, a four decade low

The worst-case scenario, assumes that coronavirus (Covid-19) will continue to spread, possibly in waves, all the way through to mid-2021

Weaker-than-expected economic activity due to the nation-wide lockdown due to the coronavirus pandemic and a looming global recession is likely to hit Indian economy hard with UBS expecting real GDP to contract to -0.4 per cent in financial year 2020-21 (FY21). The global research and brokerage house has been trimming its expectations gradually and had earlier forecast a growth of 2.5 per cent.

As a base case, UBS expects current mobility restrictions to remain in place until mid-May and then get lifted, and activity to get largely back to normal by end-June. In the second scenarios, UBS expects mobility restrictions to largely stay in place until end-June, after which they are lifted and it takes until end-August for activity to largely return to normal.

The worst-case (third) scenario, assumes that the virus will continue to spread, possibly in waves, all the way through to mid-2021. Under this scenario, any rise in cases post lifting of restrictions would lead to restrictions being imposed again.

“In our alternate risk scenarios where disruptions could last longer, we assume the economic weaknesses in the short term could intensify and the significant secondary impacts (job losses, reduced income levels, corporate defaults, rising non-performing loans, 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,” wrote Tanvee Gupta Jain, an economist at UBS in a co-authored report with Rohit Arora and Gautam Chhaochharia.

The Covid-19 pandemic, UBS believes, has the potential to slow India's long-term growth to around 5 per cent YoY under alternate risk scenarios, compared with 6-6.5 per cent in their base case. The structural drag to growth, they believe, could be amplified if COVID-19-related disruptions last longer. While UBS does not see an imminent sovereign rating downgrade, a downgrade in outlook (stable to negative) cannot be ruled out at this stage. That said, UBS expects more policy-oriented measures from in order to stem this economic rout, including a 75 basis point (bps) cut in interest rates in FY21.

"We expect the government COVID-19 stimulus to be scaled up to around 3 per cent of GDP in FY21. We think the fiscal slippage could be higher than that seen during the credit crisis at close to 5 per cent of GDP," analysts at UBS said.

Given that the pandemic locked out most economies across the globe, including China that was a major supplier of goods to the world, a number of corporates across the globe are looking to diversify their manufacturing base. This, UBS feels, is a golden opportunity for India to gain market share in the global export basket as COVID-19 increases relocation intentions.