Most brokerages and rating agencies have highlighted the severe
impact of the 21 days total lock down announced by the Government of India. For
example consider the following:
1. JP Morgan estimates
that the lock down will significantly impact 60% of GDP, though the post lock
down rebound could be equally sharp. There will some permanent loss, depending
on the length of the lock down. It expects global economy to enter into
recession in H1'20, and since the India is fiscally constrained, the recovery
will mostly depend upon the monetary easing and regulatory forbearance for
stressed debt.
2. Deutsche Bank feels
that the total lock down has pushed India into uncharted territory. We may see
an unprecedented negative GDP growth print in 4QFY20 and/or 1QFY21. The
government must announce a coordinated & front-loaded fiscal/monetary stimulus
to mitigate the impact of lock down.
3. Jefferies highlights
that the total lockdown shall significantly hit the near-term growth. However,
there is a probability of a V-shaped recovery post lock down. Fiscal support
for the affected workers/business can drive faster recovery. A double digit EPS
decline in 4QFY20 may already be in the price.
4. The initial estimates
of Nomura suggest that ~75% of the economy will be shutdown, resulting in a
direct output loss of ~4.5%. Additionally, there will be indirect effects such
as the persistence of public fear factor (even after the lockdown ends), a high
risk that the livelihoods of the predominantly unorganised workforce will be
hit and a sharp increase in corporate and banking sector stress, which are
likely to further weigh on growth is beyond Q2 in H2 2020. It expects the
central government to soon announce a stimulus package of ~0.7-1.1% of GDP.
Along with the growth hit and poor tax collections, we expect the fiscal
deficit for FY21 (year ending March 2021) to balloon by over 1% of GDP from the
3.5% target set in the budget (i.e. more than the escape clause leeway of 0.5%
of GDP). Noumra feels that the monetary policy proactiveness has been missing
so far; nonetheless it expects at least 50bp of policy easing on or before the
3 April policy meeting, accompanied by a host of liquidity injections and
unconventional policy measures to reduce financial sector tightness, including
large scale open market operations.
5. ING believes that the
three-week nationwide lockdown will significantly dent India’s GDP growth,
making this an even worse year for the economy than the 2008 Global financial
crisis. This demands a stronger policy response. Until then, the looming
economic misery is poised to push USD/INR above 80 in the coming days. As per
ING The biggest whammy will be to private consumption, which accounts for 57%
of India's GDP. With all non-essential consumption dropping virtually to zero
for a week in the current quarter means year-on-year GDP growth plunges to just
about 1%, and with two weeks of a hit in the next quarter could push it to
about -5%. We would anticipate at least one more quarter of drag keeping growth
in negative territory, beyond which the policy support and favourable base
effects should drive recovery back to positive growth. While this shaves a full
percentage point from the yearly growth in the current fiscal year (ends on 31
March 2020) to our estimated 4.0%, we have revised our forecast for the next
financial year to 0.5% from 4.8%. This is a far cry from the government’s
expectation of over 6% growth outlined in the FY2020-21 budget, which will
surely be scaled back significantly as the Finance Ministry prepares fresh
stimulus to stem the crisis. However, citing significant policy support, the
official growth outlook may not be as bearish as ours, though we note that
official growth tends to be overestimated by about 2%.
6. EMKAY Stock Broker
feels many industries/SMEs will be running on zero revenues for close to a
month and 'opening up’ after the lock down is likely to be measured. It expects
permanent impact of 21 day shutdown even into the longer term numbers,
anticipating that the shutdown could push unorganised sector to the brink.
Most other brokerages and rating agencies have expressed similar
views and opinions. Both the macroeconomic growth forecast and earnings
estimates have been materially moderated.
In my view, it is tough to estimate the actual outcome. The real
picture could be very different from what we are anticipating today. For
example consider the following:
(i) The lock down
condition (total or partial) may continue for longer.
(ii) The bad weather has
damaged some Rabi crop in North India. Shortage of labor for harvesting and
transportation of crop to Mandi could cause some further damage. This will add
to the poor data.
(iii) The nationwide
protests against the Citizenship Amendment Law during December-February, had
resulted in some serious disruptions, especially in North and east India. None
of the forecasters seem to be accounting for that.
(iv) There were many
industries, like automobile, who were struggling with high inventory and/or
losses. This lock down could actually be a blessing in disguise for such
businesses.
(v) Under the pretext of
the lockdown, many financial institutions may be allowed to offer concession to
the stressed borrowers. This could work either way - it may increase the NPA
levels, or it may rationalize the provisioning and IBC proceedings, and
actually help both the lenders and borrowers.
(vi) The government may get
a reprieve from global rating agencies for indulging into some fiscal
profligacy. This can actually help kick start the economy.
(vii) The global supply
chain will definitely see a shift from China to other countries. If the government
plays its cards right, the elusive capex cycle can start much earlier in India
then currently anticipated.
