India Will Now Have To Battle An Economic Slowdown

The Indian economy was already slowing down considerably, before the coronavirus began infecting people. Now, one has to brace for a sharper economic slowdown and if the situation gets worse, even a recession.

How the coronavirus will impact the Indian economy?

There are many rough estimates going around, with many renowned rating agencies like Fitch and S&P revising India's GDP forecast for 2020 and 2020-21 lower. Fitch Ratings on Friday cut India's growth forecast to 5.1 per cent for FY 2020-21,

Most of these are at best estimates, given that the coronavirus is a big known and nobody can estimate, how long it will last.

The real impact on GDP will come from the hotel sector, banking sector, aviation sector, where there could be increasing joblessness. It is estimated that in the next few months the tourism sector could lose as much as $7 billion in these months. If restaurants and hotels see a prolonged shutdown because of the virus, one may see a permanent shutdown. Joblessness is a high possibility for sure, but, than the first impact falls on the banking sector, by way of retail defaults.

Joblessness and closure of companies and establishments, could result in bank defaults and this could see a sudden spurt in non performing assets. It's going to be pretty precarious for the banking sector for sure. Already, the Yes Bank episode has proved that some of the banks are really vulnerable to a virtual collapse.

The global economy is sure to see a virtual collapse, with countries having a lockdown.

"We envisage a slowdown in the global economy to under two per cent for this year, and that will probably cost in the order of $1 trillion, compared with what people were forecasting back in September," said Richard Kozul-Wright, Director, Division on Globalization and Development Strategies at UNCTAD.

Massive wealth erosion

There has already been a massive erosion of wealth in the stock markets. Remember, when investors wealth is destroyed, their ability to spend will dwindle and this will compound the slowdown. Stocks have collapsed over the last few weeks, like ninepins. Unfortunately, there is no reprieve and Monday has seen another lower circuit filter for the stock markets.

Over the last few years, there has been an increasing awareness among Indians of investing in financial assets, particularly mutual funds. Given the way the markets have fallen and returns turning negative over a 1 to 3 year period, the hopes remain that investor faith in mutual funds would not be shattered.

Government will have to go out and spend

The government in the next few months will have to go out and spend, no matter what. It's likely that the fiscal deficit for 2020-21 would surge, but, at the moment spending is paramount. The RBI would also have to lend support and cut interest rates sharply. The US Federal Reserve has already cut interest rates drastically and many central banks have followed suit. Nobody is able to predict what the future holds. But, at the moment things look a lot bleak and signs of the .