SlashingIndia s base case GDP growth 50 bps

The Novel Coronavirus (Covid-19) has cast a long shadow over a much-anticipated mild recovery in the Indian economy in fiscal 2021, with the World Health Organization (WHO) declaring it a pandemic.

External risks to global growth has increased significantly now.

S&P Global foresees a recession in the US and the Eurozone, and has its forecast for China’s growth slashed to 2.9% from 4.8% announced on March 5.

Domestically, some hit to consumption demand because of social distancing is likely, though it is too early for that to reflect in data. Currently, the other downside to growth is also due to the financial sector stress now percolating to private sector banks.

In view of this, Crisil has cut its base-case gross domestic product (GDP) growth forecast for fiscal 2021 to 5.2%, from 5.7% announced recently. This factors in the huge uncertainty because of Covid-19, with risks to the forecast tilted downwards. The forecast will be reassessed continuously as new information becomes available.

A serious downside to our base case can emerge from two developments. One, the pandemic is not contained by April-June 2020 globally, and makes the global slowdown more severe. And two, it spreads rapidly in India, affecting domestic consumption, investment, and production. These would further hurt confidence and the financial markets (see flow chart below).

Channels of transmission

In any case, India has little policy firepower to give a meaningful push to growth, and the pandemic is making it more difficult. While there will be steeper deceleration in global growth and India’s trade, what is unclear is the extent of impact on economy through domestic channels of production (supply) and consumption (demand).