India: Global risks meet domestic concerns

India is the latest to be impacted by the coronavirus spread, with authorities moving quickly to exercise a complete lockdown of the country for 21 days.
Radhika Rao26 Mar 2020
  • India has announced a nationwide lockdown to limit COVID-19 transmission risks
  • Domestic fragilities need to be addressed
  • We revise down FY21 GDP forecast to 4%. Downside risks are significant
  • Complementing RBI’s measures, fiscal stimulus of ~1% of GDP is likely
  • Low oil prices will benefit fiscal math more than inflation
Photo credit: AFP Photo

This is a summary of the note. For the detailed report, please download the pdf file.

India is the latest to be impacted by the coronavirus spread
, with authorities moving quickly to exercise a complete lockdown of the country for 21 days. This global risk adds to the pre-existing domestic concerns of deleveraging by corporates, banks and non-banking institutions. Private investment growth has also been weak, with the spillover of the pandemic risks delay a revival. We assess the evolving macroeconomic outlook against this backdrop:

Drag from the COVID-19 to deepen

India was relatively shielded from the fallout of the COVID-19 spread in the initial wave, but the count jumped to over 600 cases in less than a week, with fatalities at a dozen. Press reports cite limited access of the test kits across the country, which might keep this count rising.

Amongst states, data from the Ministry of Health shows that the count is highest in Maharashtra and Kerala for now, which cumulatively make about 18% of overall GDP.

Since the initial outbreak, focus has shifted to ‘flatten the (pandemic) curve’ i.e. prevent and delay the spread of the virus so that large portions of the population don’t fall sick at the same time. The chart below highlights the case across different countries, with 10-20 days since the number of cases surpass 100 cases is the rough inflexion point for most countries. Stricter social distancing and restrictive lockdowns within this time has shown success in flattening the infection curve. Admittedly, India’s large population, high density and varied extent of health infrastructure development across states, exposes the economy to a greater spread of the infection.

Since our previous note on COVID-19 impact (HTML), the situation has deteriorated as the health crisis has shifted from a supply shock to depressing demand. Impact will be felt via three channels as we discuss in detail under - Spillover through the financial markets and confidence channels has been most telling in the past month, Tourism, supply shock to demand dampener:

Global risk might magnify domestic fragilities

Global risks add to the pre-existing domestic concern of ongoing deleveraging by corporates, banks and non-banking institutions. Private investment growth has been weak, with overall gross capital formation rising 0.1% yoy in FY20.

Growth and macroeconomic outlook

The current lockdown will impact three-fourths of the economy, barring exempt sectors like medical pharma, banking, telecom, utilities etc. A sharp and broad-based, but temporary hurt is likely. Nonetheless, there is high degree of uncertainty around the duration and intensity of the virus. We assess the impact on growth and inflation.

Implication for policies

The RBI joined global peers to take swift liquidity action. Additional action might include an aggressive 50bps rate cut in April (risks of more), dedicated liquidity window for mutual funds (as redemptions jump) and deferred (bad) loan classification. Macroprudential measures comprising of tweaks to the risk weights of selected sectors might also be a part of the toolkit. As a more emergency response, the RBI might widen the scope of bond purchases to include corporate bonds if distress proves to be prolonged.

Besides cheap credit and availability of funds, the health crisis and economic fallout necessitates an urgent fiscal response. Recent measures were focused on regulatory aspects, such as deferment in tax filing deadlines, higher threshold for cases to be admitted to the bankruptcy court, amongst others.


Risks from COVID-19 related developments are evolving, necessitating ample policy support. Resolving financial sector stability and ensuring banks/ non-banks return to health will be crucial. Once the dust settles, focus will return to the need for long-term reforms to revive investment growth, boost incomes and consumption expenditure, along with improving export capabilities.

This is a summary of the note. For the detailed report, please download the pdf file.

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Radhika Rao

Economist – India, Thailand & Eurozone

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