CRISIL has revised its growth outlook for India in fiscal 2021 down to 1.8%, from the 3.5% estimated earlier, factoring the nationwide lockdown to stem the Covid-19 pandemic. The forecast assumes the effect of the pandemic subsiding materially in the current quarter, besides a normal monsoon, and minimum fiscal support of Rs 3.5 lakh crore.

Fiscal support may need to be even increased at the central and state levels to ensure relief reaches, apart from vulnerable households, even vulnerable firms, especially micro, small and medium enterprises (MSMEs).

There is also a possibility that parts of the economy will continue to face restrictions beyond May 3, 2020, when the 40-day lockdown would end. Also, a global recession is now guaranteed with deep contraction in advanced countries. S&P Global has marked down its global GDP forecast to -2.4% in 2020 compared with 0.4% growth earlier.

Risks to our India forecast are tilted to the downside, manifestation of which could take GDP growth to even zero.

Says Dharmakirti Joshi, Chief Economist, CRISIL, “We see a permanent loss of ~4% of GDP. Fiscal 2022 is likely to see a V-shaped recovery at over 7% real GDP growth. But even assuming growth sustains at this level for the next three years, real GDP will stay below its pre-Covid-19 trend path.”

The lockdown, has started hurting already. In March, for instance, automobile sales contracted 44% on-year even as exports fell 35% with worst yet to come. This deep slowdown and across the board pain leaves large swathes of India’s informal workforce vulnerable, particularly in construction, manufacturing and services sectors. The most affected are daily-wage earners and those with no job security. In India, casual labourers form almost 25% of the workforce and would take the first hit due to shutdowns and layoffs.

The situation is bad for the formal workforce, too. A CRISIL Research analysis of over 40,000 companies with employee cost of Rs 12 lakh crore indicates that about 52% of the employee cost is incurred by companies in sectors that will see material increase in stress in case of extended lockdown.

The sharp deceleration in growth and increased income uncertainty is certain to pull demand down. In the year ahead, we expect consumer discretionary services and products such as airlines, hotels, automobiles and consumer durables to be the worst-hit. Non-pharma exporters, real estate and construction companies also face one of their worst years. Even resilient sectors such as IT services will see muted growth as global budgets on IT spending fall.

MSMEs are more vulnerable than larger players, especially on the liquidity front. Our research suggests that even in a relatively milder slowdown than we expect this fiscal, MSME working capital can stretch by over a month.

Says Prasad Koparkar, Senior Director and Head – Growth, Innovation and Excellence Hub, CRISIL, “As India Inc stares at a double-digit slide in revenue this fiscal, the worst in at least a decade, Ebitda is set to fall sharply – by over 15% – in our base case scenario of 1.8% GDP growth. The adverse impact of operating leverage due to sharp revenue decline will drown all the benefits accruing from lower material and energy costs following across-the-board decline in commodities.”

Poor credit growth, including retails loans, along with rising NPAs and credit costs will singe banks and NBFCs. We expect banking sector NPAs to rise to 11-11.5% by March 2021 from an estimated at 9.6% as of March 2020, with sharply lower recoveries and rising slippages. NPAs are expected to swell for non-banking finance companies, too, with microfinance, MSME loans and wholesale/developer funding witnessing the sharpest spike. Asset quality deterioration will, however, remain moderate in housing loans and gold finance with less than 50 bps increase in NPAs.