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Last Updated : Mar 27, 2020 07:19 PM IST | Source: Moneycontrol.com

Will FY21 be a washout? Chances are high after COVID-19 hit

Workforce in the unorganised sector has been the worst-hit, as they remain stranded across Indian cities, with no place to go as all state borders have been shut.

Representative Image
Representative Image

The coronavirus outbreak has sent shock waves across the world and the Indian economy is looking at ways to mitigate its deadly impact.

In two weeks, trading on India's bourses was halted for 45 minutes twice. Most of the informal sector has been brought to its knees, after the government announced a 21-day lockdown to tackle the health crisis.

Demand has collapsed except in essential, everyday items. Workforce in the unorganised sector has been the worst-hit, as they remain stranded across Indian cities, with no place to go as all state borders have been shut.

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Aviation and hospitality sectors have taken the worst beating. First, international flights were cancelled as the government battled to stop thr virus from spreading. As fears of possible community spreading rose, domestic flights too were indefinitely grounded.

Aviation consultancy CAPA has projected initial losses to the tune of $3.3-3.6 billion for the Indian aviation industry in the first quarter of FY2021 in the eventuality of all air services including domestic remain shut until June due to the coronavirus pandemic.

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Restaurants across the country have been shut for a week now. The whole of the hospitality and food and beverages sector have remained shut to help contain the spread of the virus.

The hospitality sector is estimating losses worth Rs 600 crore along with layoff of workforce.

Like most of the global economies, the Indian economy is bracing for a recession.

In macro-economic parlance, recession refers to a significant decline in general economic activity in a designated region. It is typically recognized as two consecutive quarters of economic decline, as reflected by gross domestic product (GDP), in conjunction with monthly indicators like a rise in unemployment.

India has seen a period of negative growth in 1979.  Except for the four years since independence - 1950s, 1965, 1972 and 1979 - India hasn't seen what's technically defined as a recession.

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"When we talk of recession, traditionally we take two quarters of negative GDP growth. Now, India shutdown will happen for about three weeks. So one-third of the effect will come in 2019-20, and two-thirds in 2020-21," said Madan Sabnavis, Chief Economist at CARE Ratings.

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According to government data released in February, India's GDP grew 4.7 percent in the October-December quarter of 2019-20. GDP growth in the previous quarter had been revised to 5.1 percent.

India’s GDP grew 4.5 percent in July-September 2019, the lowest since the fourth quarter of 2012-13. The economic slowdown came at the back of 5 percent GDP growth recorded in April-June and 7.1 percent in July-September last year.

The Economic Survey 2019-20 has pegged India's economic growth at 6-6.5 percent in 2020-21.

"One month of activities coming to an end is a big blow... We have a situation where we are running short of essentials. Agricultural production has been good, rabi crops have been good. But distribution is hurt so farmers' income will ger affected because they won't be able to sell, but in terms of output it has been good," Sabnavis added.

Depending on whether India is able to control the spread of the virus by April or if it takes longer than that, manufacturing is expected to pick up faster and gradually come back on track. However, services will take more time.

"So, Q1 FY21 will be a washout. The government has announced higher spending so certain segments like FMCG, food processing. Pharma will do well because there will be a lot of focus on medicines. Therefore we could expect a minimal growth in Q1, like 1.5-2 percent, but we won't be surprised if it's negative," Sabnavis said.

If the coronavirus outbreak is tackled by April-end, there may not be what we technically understand as recession.

However, all the feelings of recession would persist, like joblessness. People would be unable to buy goods as they would not be available.

"So there will be feelings of recession, may not be a recession. But there'll definitely be a slowdown and one can say fiscal 2021 will be another washout," Sabnavis said.

On the tax front too, the picture looks gloomy.

There is a tardiness in the money cycle and after the coronavirus panic settles down,  the demand and supply would take some time to pick up pace.

"This will have a direct impact on the tax collections of exchequer. With dwindling tax collections, government may have to rationalise its expenditure on welfare scheme as well to contain the massive outshoot of fiscal deficit," said Amit Singhania, Partner at Shardul Amarchand Mangaldas & Co.

The next few months would be crucial and will set the tone for the entire fiscal year.
First Published on Mar 26, 2020 06:13 pm
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