The extension of the lockdown in the country is likely to cost over Rs 10 lakh crore or 5 percent of GDP, according to a report by Axis Capital. The FY21 GDP growth is expected to decline by 1.7 percent led mainly by a steep contraction in manufacturing and trade transport and communication.

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The only sectors which do not see negative prints for the year as a whole are agriculture, public administration and to a small extent finance & business services.

“June quarter 2020 will almost certainly be the trough point but the extent of the decline is still unknown. If the starting point at the end of June quarter is -10 to 15 percent YoY and the speed of the recovery is 4 to 5 percent, we should end the year with near-zero growth,” the report states.

However, in its base case scenario, Axis Capital assumes that the recovery from June will be restrained by supply even if there is some pent up demand. Therefore, the report expects 2020 would be the first negative print in around 40 years.

The report goes on to say that due to base effects, growth numbers will be optically boosted to about 10 percent in FY21. The gradual normalization of supply chains and some pent-up demand will be the main driver of growth in the coming quarters of 2020. 2021 will be supported by the normalisation of investment trends.

Analysts at Axis Capital do not expect the current set of policy measures will support growth as they are mainly designed to provide relief and partly absorb losses.

Inflation

Inflation is now near the upper end of Reserve Bank of India's (RBI) 6 to 2 percent target zone and expected to move towards the lower end of the target led largely by a correction in food prices, the report added.

However, this outlook depends largely on the fate of supply – both from the lockdown and upcoming monsoons. Non-food inflation is likely to be lower due to weaker growth and the fall in international commodity prices. Since inflation will be mainly driven by broken supply chains which is not a permanent feature, weaker than expected demand will be the dominating trend over 12-18 months. It expects inflation to remain a bit elevated in the coming months due to supply risks which then eases off.

Fiscal policy

The fiscal deficit is likely to print higher than budget due to weaker growth. The FRBM rule book will most likely be disregarded. Axis Capital sees FY21 fiscal deficit for the central government at 5.5 percent as against budgeted 3.5 percent and 3.1 percent for states versus 2.6 percent expectation.

Direct tax collections are assumed to grow in line with nominal GDP while indirect taxes see a sharp rise of around 16 percent YoY due to higher excise on oil. Non-tax collections would also be weaker due to the impaired profitability of PSUs and we take divestment assumption of Rs 50,000 crore. These assumptions indicate Rs 5 trillion in additional borrowing.

Monetary policy:

The report expects another 40-90 bps in rate cuts by the Reserve Bank of India (RBI). Since market mechanisms are breaking down, the RBI will have to actively intervene to direct capital and unclog the market, it added.

Analysts expect the next steps to be a first loss credit guarantee from the government to targeted sectors so that finance flows easily and the creation of a public AMC to buy stressed assets.

“We expect RBI to buy 6 to 7 percent of GDP (around Rs 13 trillion) worth assets in 2020; (a) 2 percent of GDP to buy legacy stressed assets in power and real estate to remove risk aversion and (b) 4-5 percent of GDP to buy public debt so that capital costs don’t rise,” the report said.

Twin Deficits:

India’s exports, imports, and capital account are expected to take a knock due to the balanced impact on the external account as COVID-19 is a global pandemic.

Current Account Deficit is estimated to fall to 0.4 percent of GDP in FY21 and possibly a modest surplus in the risk scenario, but what is of consequence is BoP balance.

According to the report, “As cases begin to peak, lockdown gets lifted and activity begins to normalize, the only durable impact for the external account would be weaker oil prices, capital markets flush with liquidity and potential measures from RBI that ease risk aversion.”