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Covid-19: Impact on Indian and Global Economy

R Basil

Let's get started with the latest threat the global economy is facing- coronavirus.

Q. How do you think it will pan out and what will be the impact on the global economy?

A: We see a larger loss of economic activity in FY21, as the virus has now spread widely outside China, and the experience of other countries indicates a high possibility of a further spread in India. We recently lowered our 2020 global growth forecast to 3% from 3.3%, the weakest since the global financial crisis. We see sharp downside risks to our projections, as the US and some European countries have since been directly hit by the outbreak, disrupting economic activity.

Q. What will be the impact of this threat in India?

A: The impact of the coronavirus outbreak on India is likely to play out via two channels– direct and indirect. The expected direct impact would be loss of demand which is due to slower economic activity both globally and domestically. Whereas, the indirect impact is likely to be felt via supply-chain disruptions and worsening sentiment. We expect GDP growth to slow to 4% in Q1-FY21 from 4.3% in Q4-FY20 on a combination of global and domestic factors. We expect loss in economic activity due to weaker global growth, supply-chain disruptions, and loss of domestic demand in Q4-FY20 and Q1-FY21. We assume loss in domestic demand due to the coronavirus impact to be one-fifth that during the demonetisation quarter. Slower global growth and supply chain disruptions, rather than loss of domestic demand, are likely to drag down FY21 GDP.

Q: How do you see the global trade getting impacted?

A: Global trade would be adversely impact both via exports (due to slower global growth) and imports (due to supply chain disruption given China’s relevance in global trade). Based on our analysis, supply-chain disruptions in Asia are likely to adversely impact India’s production of chemicals and pharma products, basic metals, computer electronics and optical products, and basic metals. Given that India’s exports have an import intensity of 19.5%, exports could also suffer due to inadequate availability of intermediate goods. Similarly, a decline in imports of final goods to India would impact consumption. Close to 50% of final goods imports to India come from Asia (including China), followed by Europe. Inadequate availability of final products such as computer electronics, food products and machinery (including equipment) would affect overall consumption.

Figure 1: Intermediate goods imports from Asia contribute significantly to gross imports (% share of gross imports)

R Basil

Figure 2: Computer Electronics, food products and machinery and equipment consumption may suffer on slower

R Basil

Q: What is your forecast on global growth numbers for this and next fiscal year?

A: As stated above, we expect global growth at 3% in 2020, with a marginal recovery to 3.3% in 2021 on coordinated global monetary and fiscal policy response along with favourable base effects. There are sharp downside risks to our global growth forecasts which is likely to be the lowest since global financial crisis.

Q: Your estimates on Indian growth numbers?

A: We expect India’s GDP growth at a decade low of 4.9% in FY20, with the impact of the coronavirus outbreak concentrated in the last month of fiscal while average growth of 5.1% in the first three quarters should help offset Q4 slowdown.

R Basil
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