Economy Lockdown

A complete halt to Indian Economy may effects – job losses, stretched balance sheets, lower capex and weak consumer demand – are to be tamed.

The first two rounds of coronavirus outbreak have already wiped off Rs 52 lakh crore worth of equity investor wealth, with benchmarks Sensex and Nifty languishing at multi-year lows after falling 35 per cent from their January peaks.

January was the month when the virus was spreading in China at a rapid pace. It brought about the first round of impact on India, where companies saw supply-side disruptions, owning to their over-dependence on Chinese imports.

Sectors like autos and pharmaceuticals were impacted severely due to shortage of imported components. As the virus began spreading in India, it paved way for the second-round effect, where economic activity came to a halt due to lockdowns.

A host of companies from Service and manufacturing companies have announced temporary shutdowns.

On Tuesday, the government announced a nationwide lockdown for 21 days, which is likely to bring all economic activity to a grinding halt.

“The third round effect will likely materialize, as these shocks transmit to the rest of the economy, i.e. corporates facing a hit on bottom lines. Weaker firms will face cash flow shortages and workers will face pay cuts or retrenchments. This, in turn, can create a vicious cycle of lower corporate capex and weaker consumer demand,” Nomura India warned.

Here is how the situation might evolve from here on for the domestic economy and markets in different scenarios.

SCENARIO-1
In case the situation worsens in India and globally, there would be further selling in domestic stocks, and India’s GDP growth may drop to 3.5-4 per cent levels even as the global economy slips into recession, it said.

SCENARIO-2
In a rosy situation, the virus will be contained in India, and the shutdown would not extend beyond April 15.

In such a case, “we would be gradual buyers in equities. Indian economic impact will be limited and FY21 GDP target will be 4.5-5 per cent. But the March quarter impact will be severe,” Phillip Capital said.

SCENARIO-3
In the third scenario, the virus will be contained in India, but the crisis would worsen globally. In such a case, Indian equities will outperform and India’s GDP would grow at 4-4.5 per cent amid a global recession.

SCENARIO-4
Lastly, if the situation is contained in India and globally, Indian markets may outperform. “We will be aggressive buyers in such a scenario at current levels. There would be manageable economic impact on India and the global economic slowdown will last 3-5 months,” Phillip Capital said.

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