Emerging

Limited resources to combat the pandemic

EcoEmerging// 2nd quarter 2020  
5
economic-research.bnpparibas.com  
India  
Limited resources to combat the pandemic  
India was not spared the coronavirus pandemic. The economic slowdown will be all the more severe with a protracted lockdown of  
the population. The government also lacks the fiscal capacity of the other Asian countries to bolster its economy. Already strained  
by the economic slowdown of the past two years, public finances are bound to deteriorate further. Public debt could reach 75% of  
GDP by 2022. Refinancing risks are low, but the cost of borrowing could rise for the long term if the rating agencies were to  
sanction its public debt and deficit overruns. India still has sufficient foreign reserves to cover its short-term liabilities.  
Economic growth: a mild recovery is cut short  
1-Forecasts  
Until February 2020, certain economic indicators suggested a strong  
rebound in activity, buoyed notably by accelerating export orders.  
Industrial output rebounded and electrical power generation swung  
back into positive growth rates after five months of contraction.  
Exports had picked up (+2.9% y/y in February after six months of  
contraction). Business survey results confirmed the rebound as well  
as a slight upturn in corporate lending. Domestic demand, in  
contrast, was still disappointing: automobile sales contracted for the  
2018 2019e 2020e 2021e  
(
1)  
Real GDP growth (%)  
6.1  
4.9  
2.7  
5.2  
(
1)  
Inflation (CPI, year average, %)  
3.4  
4.7  
3.5  
4.0  
(
1)  
General Gov. Balance / GDP (%)  
-6.3  
-7.3  
-8.5  
-7.3  
(
1)  
Current account balance / GDP (%)  
-2.1  
-0.8  
-0.1  
-1.0  
(
1): Fiscal year from April 1st of year n to March 31st of year n+1  
e: BNP Paribas Group Economic Research estimates and forecasts  
16th consecutive month and household confidence indicators  
continued to plunge.  
2- Industrial output  
The slight rebound in economic activity is unlikely to withstand the  
COVID-19 crisis. Growth will slow sharply between March and  
September 2020 and is likely to take a U-shaped profile. After  
contracting in fiscal year 2019/20 (by about 5% according to the  
latest official estimates), the economy could slow again, by almost 2  
percentage points (pp). Another slowdown would present a major  
risk for the banking sector, which is still convalescing, and could  
lead to the erosion of public finances. The economic slowdown will  
be worsened by four negative shocks: tourism, exports, capital flight  
and the confinement of the population, announced on 25 March.  
The only positive shock is the decline in oil prices.  
Industrial output  
Capital goods  
Durable consumer goods  
Y/Y, %, 3 month moving average  
2
1
1
0
5
0
5
0
-5  
-10  
15  
20  
25  
-
-
-
-
Tourism revenues account for only 1% of GDP. During the  
SARS epidemic, tourism contracted by 20%. With the current  
pandemic, tourism revenues could contract by as much as  
2015  
2016  
2017  
2018  
2019  
2020  
Source: CEIC  
-
The lockdown will trigger a decline in household consumption  
(59% of GDP) and delay investment projects (29% of GDP),  
especially since capital outflows will tighten financing  
conditions. Moreover, informal employment still predominates  
in the labour market (83% according to ILO), and undeclared  
workers might not benefit from any assistance during the  
lockdown period.  
50%.  
-
Exports account for nearly 20% of GDP. If the global economy  
were to slow by 2 pp, then exports would contract by 11%. Yet  
the decline in export volumes should be offset by the positive  
impact of sharply lower oil prices. The oil bill accounted for 5%  
of GDP in 2019. If oil prices fall by more than 38% (from  
USD 61.9 in 2019/20 to USD 38 in 2020/21, based on oil  
forward contracts), then oil imports would be reduced by at  
least 2 pp and probably even more if we factor in the impact of  
the lockdown.  
One positive point: according to the central bank, a USD 10  
decline in the price of oil per barrel would have a positive  
impact on growth of about 0.15 pp via household purchasing  
power gains (or a positive impact of 0.35 pp based on our oil  
assumptions). The impact would be slightly smaller, however,  
due to the tax increase on petroleum products adopted on  
The final impact on growth will depend on the duration and severity  
of confinement. If the economy is partially paralysed for one quarter,  
then growth might slow to 2.7% in 2020/21. Yet if the entire  
economy is paralysed for two quarters, then GDP growth is likely to  
reach only 1.5% at best.  
-
Limited support measures  
Faced with intense financial market pressures and massive capital  
outflows, the central bank has already adopted several support  
measures since February to offset the rupee and dollar liquidity  
shortages. The central bank injected INR 1250 bn in liquidity as part  
1
4 March 2020. Moreover, the lockdown could wipe out any  
positive effects.  
EcoEmerging// 2nd quarter 2020  
6
economic-research.bnpparibas.com  
of long-term repo operations (LTRO) and set up USD/INR foreign  
exchange swaps with a 6-month maturity for a total of USD 6.7 bn.  
From a fiscal perspective, the government announced an  
INR 1.7 trillion fiscal stimulus plan (0.8% of GDP) on 26 March. But  
the government has much less manoeuvring room than the other  
Asian countries given its high fiscal deficit and public debt, as well  
as the risk that rating agencies could downgrade its sovereign rating.  
3
- Downward pressure on the rupee and FX reserves  
Exchange rate INR per USD (LHS, inverted)  
FX reserves USD Bn (RHS)  
500  
45  
50  
4
4
3
50  
00  
50  
5
5
Without massive support not only for companies but also for  
households, the banking sector could be hard hit by a very sharp  
rise in credit risk, even though Indian companies are now in a better  
financial situation than in 2013-14. In Q3 2019, corporate debt  
amounted to 44.2% of GDP, compared to 52.9% in Q2 2013.  
60  
65  
7
7
8
0
5
0
300  
250  
Low oil prices will support the rupee  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
2020  
Source: RBI  
Two opposing factors will have an impact on the external accounts:  
declining oil prices and massive capital outflows.  
reduce the cost of energy subsidies, but they have already fallen  
sharply since 2014 (to only 0.2% of GDP). The very sharp slowdown  
in household consumption and corporate revenues, in contrast,  
could trigger a decline in revenues of at least 2% of GDP. The  
government might also postpone the privatisation of certain state-  
owned companies given the collapse in the equity markets  
According to India’s central bank, each USD 10 decline in the price  
of oil per barrel would have a positive impact on the current account  
balance of USD 10 bn. If oil prices averaged USD 38 a barrel in  
fiscal year 2020/21 (vs USD 61.9 in 2019/20), then the current  
account deficit, estimated at less than USD 30 bn in fiscal year  
(
2
privatisation proceeds were estimated at 0.9% of GDP in fiscal year  
020/21). At the same time, alongside the stimulus package (0.8%  
2
2
019/20 (0.8% of GDP) could approach equilibrium during the year  
020/21.  
of GDP), government and state spending on healthcare will also  
increase. The central government deficit could rise to nearly 6% of  
GDP unless measures are taken to sharply cut back non-essential  
expenditures. Public debt could rise above 75% of GDP in fiscal  
year 2021/22. There is no immediate refinancing risk since the debt  
has a long maturity (10 years on average), is held by residents  
Yet according to IFI data, capital outflows from equity and bond  
portfolios over the past seven weeks reached more than USD 20bn.  
In comparison, between May and November 2013, withdrawals from  
bond portfolios amounted to USD 14 bn over 28 weeks, while equity  
disposals were extremely limited.  
(
more than 96%) and is denominated in rupees (97%). Yet the cost  
At 31 March, the rupee’s depreciation against the dollar was still  
mild at only 5.3% y/y. The monetary authorities intervened to  
stabilise the rupee, as illustrated by the slight decline in foreign  
exchange reserves (down USD 12 bn in 4 weeks). Yet given the  
risks to growth, we can assume that the decline will be much  
sharper in the weeks ahead, despite the persistently high spread  
between domestic and US interest rates.  
of borrowing is likely to rise if the credit agencies were to sanction  
these public finance overruns.  
A priori, refinancing risks are small. The external debt is still  
moderate (20.1% of GDP). From a horizon of September 2020, debt  
servicing amounts to USD 239.4 bn (including USD 93 bn in non-  
resident deposits), while foreign reserves were reported at  
USD 474 bn on April, 3.  
Public finances are expected to deteriorate  
For the 2019/20 fiscal year ended 31 March 2020, India reported  
public finance overruns for the second consecutive year. The  
finance ministry is forecasting a 0.4 pp increase in the government  
deficit, to 3.8% of GDP (7.3% of GDP for all public administrations  
combined). Public debt probably exceeded 70% of GDP at the end  
of fiscal year 2019/20.  
For fiscal year 2020/21, before the announcement of the stimulus  
plan, the government’s target was to reduce the deficit by 0.3 pp to  
3.5% of GDP. Under current conditions, however, this target no  
longer seems unrealistic. Granted, the decline in oil prices will  
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