Covid to act as speed-breaker, but won't derail economy, say experts

Some improvement likely when enough people are vaccinated in the later part of the year

The pandemic and ensuing lockdowns would push up bad debt and shrink the economy, but some improvement could be expected when enough people are vaccinated in the later part of the year, economists say.

“The April-June quarter will face the direct economic cost of the lockdown, contracting 13 per cent quarter on quarter, seasonally adjusted, which is half the contraction in the same quarter last year. The rebound in the next quarter could be a tad soft amidst the weight of new uncertainties. The exuberance is likely to come in strongly in the second half of fiscal 21-22, when a critical mass of the population is vaccinated,” wrote HSBC India economist Pranjul Bhandari.  

HSBC revised its gross value added (GVA) forecast to 7 per cent for FY22 from 10.2 per cent earlier. The corresponding forecast for GDP growth was revised to 8 per cent from 11.2 per cent.

“Nothing else matters for India at this moment apart from containing the second wave of Covid-19 and limiting its devastating impact on lives and livelihoods," wrote Deutsche Bank economist Kaushik Das wrote.

Das expects localised lockdowns/restrictions to be in place at least through June in most states, probably extending to July as well, though there could be some concessions made from the second half of June, if the improvement in the Covid-19 trajectory maintains a satisfactory momentum.

Nomura, which recently lowered its GDP growth forecast for FY22 to 10.8 per cent from 12.6 per cent, due to a larger lockdown-led loss of sequential momentum in the second quarter, said it expected localised hit in the second quarter but expected the medium-term tailwinds, such as vaccination, global recovery, easy financial condition, to remain intact.

“For every month of current localised lockdowns, the output loss would now be  about Rs 1.25 trillion versus Rs 75,000 crore as per the restrictions seen in mid-Apr’21,” wrote Emkay economists Madhavi Arora and Hitesh Suvarna. The monthly loss to GVA growth, as per the economists, would be around 90 basis points. They lowered their GDP forecast to 9.9 per cent, from 11 per cent earlier.  

In a separate note, Emkay researchers said the extent and nature of lockdown will impact credit growth for banks and non-banks by as much as 160 basis points. The self-employed category will be most-affected:  

Banking credit could moderate by about 160 basis points to 9.3 per cent in FY22. NBFC credit will similarly slow by 140 basis points to 12.8 per cent, assuming 'negligible impact’ on corporate demand, Emkay noted. If the micro-lockdowns extend beyond a few months, the corporate demand can get impacted negatively.

However, the Emkay researchers do not see non-performing assets rising beyond 30-40 basis points due to the crisis. That is because the sectors directly impacted by the pandemic and the weakest exposures within that have either been recognized or restructured. The banks and non-banks, therefore, are entering lockdown 2.0 with a relatively clean asset quality.  

“Despite the strictest lockdown in FY21, most banks have experienced far superior outcomes – about 50-100 bps of slippages over normalised levels and restructuring  about 100 bps on average – at a magnitude lower than what was initially feared (400 bps of slippages and 500-600 bps of restructuring). There is both economic recovery and policy template to fall back on,” the researcher said, adding most banks and non-banks are now well-capitalised.