India May See First Contraction In 40 Years On Lockdown Extension

India’s economy may be heading for its first full-year contraction in more than four decades after Prime Minister Narendra Modi extended the world’s biggest lockdown to contain the coronavirus outbreak. The lengthening of the mandatory stay-at-home period to 40 days from 21 days will result in a direct output loss of more than 8 per cent over that time, according to Sonal Varma of Nomura Holdings Inc.

Varma and Kunal Kundu of Societe Generale GSC Pvt. now predict a decline in gross domestic product for the year to March 2021 of 0.4 per cent and 0.1 per cent respectively. The economy had last contracted in 1980, when GDP shrank 5.2 per cent.

“There will be indirect effects such as the persistence of the public fear factor even after the lockdown ends,” said Varma, head of Asia economics ex-Japan at Nomura. Besides, there will be an “impact on livelihoods of the unorganized workforce, and a sharp increase in corporate and banking sector stress, which are likely to further weigh on growth.”

The index of consumer sentiment plummeted to its lowest level since 2015, immediately after the nationwide lockdown was announced by the government on March 24, according to a report by researcher Center for Monitoring Indian Economy. The index, which has a base of 100, plunged to 52 by March 29, a 47 per cent fall in a single week, showing drastic impact on household sentiment. The index stood at 102.5 in the first week of March.

“This extremely bleak view of the future makes the task of an economic revival after the lifting of the lockdown particularly challenging,” Mahesh Vyas, managing director of CMIE, said in the report. “Data suggests that the economic cost of the lockdown is huge. Incomes of nearly half the households have shrunk and most of them do not have hopes of a revival.”

What Bloomberg’s Economists Say

“A precipitous recession in India is inevitable.”

“We are slashing our fiscal 2021 GDP forecast to a contraction of 4.7 per cent, down 10.7 percentage points from 6 per cent growth we expected before the coronavirus sideswiped the economy.”