India’s Economy is Expected to Rebound if the Second Wave of COVID can be Avoided

The spread of COVID-19 in India and the subsequent lockdown has led several agencies to update their Indian Economic growth projections. A couple of the large credit rating agencies see the Indian economy slowing in the H1 of 2020 but then experiencing a sharp rebound in the H2.

Mobility in India has been slow to recover. According to Apple’s mobility app, the amount of movement throughout the country has been slow to recover. When compared to a period right before the lockdown in February, India’s mobility is down 45%. This compares to approximately 85% at the lows in April.

Growth is Likely to Slow

The lack of mobility around the country has slowed the volume of exports, and also reduced imports. The latest import information for April in India shows that import Import cargo handling last month was at 80% of April 2019  levels at Jawaharlal Nehru Port. Overall throughput was down by 37% when compared to April 2019 levels.

Growth is likely to decline for the full fiscal year in India, which ends in March of 2021. The Organisation for Economic Co-operation and Development (OECD) sees India’s growth at -3.7% for the ongoing fiscal and growth could even drop further to -7.3% in the event of a second Covid-19 outbreak. The reduction in the growth forecast compares to a 5.1% growth rate projected by the OECD for the FY21 in March.

The growth downgrade reflects forecast trends from other global organizations. For example, the World Bank is expecting -3.2% growth for India this fiscal year. The OECD’s second wave scenario at -7.3%, was the lowest estimate for India’s growth so far. In terms of the global outlook, the report projected a sharp 6% contraction for global growth in 2020 followed by a strong 5.2% rebound next year. Exports could benefit from the reduction in the value of the India Rupe in forex trading making their goods less expensive following the weakening of the Rupe.

S&P the credit rating agency reports that India’s recovery from the impact of the Covid-19 outbreak and the lockdown would be key to maintaining its sovereign rating. The report put the general government fiscal deficit at 8.2%-8.9% in FY21 reflecting collapsing tax revenue. S&P sees India’s economic growth potential in medium and long-term is 6.5-7% but reforms are critical for the country to get back to recovery. The Indian government fiscal deficit will also play a role in whether the country can recover quickly from the lockdown and subsequent decline in economic growth. The rating agency expects the general government deficit to be 11% this year, and decline to 10% next year. S&P expected the deficit to decline to 7-9% over medium-term and said India’s fiscal position will weigh in credit rating for the long term.

Fitch sees a similar pattern when it comes to contraction and then growth. After a contraction in the current financial year, India's economy is forecast to bounce back with a sharp growth rate of 9.5% next year provided it avoids further deterioration in the financial sector. The coronavirus pandemic will lead to shrinking of the already slowing economy in 2020-21 that started in April. Fitch Ratings forecast a 5% contraction in the GDP in the current financial year.

The Bottom Line

The bottom line is that Indian needs to avoid a second wave of the virus and slowly get back to work. A second-round would be devastating and destroy the countries ability to bounce back especially in the trade sector. Most of the global agencies see India’s growth rebounding in the H2 of the next fiscal year if there is no second wave of the virus.