The COVID-19 outbreak could affect India's growth in the March quarter
MUMBAI: The weaker (), Chinese outbreak and supply chain disruptions are likely to have an adverse impact on India's growth in the March quarter (January to March 2020). Due to the blockade in China and the suspension of all import shipments, sectors such as electronics, pharmacy, cars, could see supply interruptions in the value chain. It should be noted that China's share of imports of goods from India was 14% in 2019.
We believe that the impact of this outbreak in India should be limited compared to other Asian peers, as it is not so well integrated into the global supply chain and could benefit in some way due to lower commodity prices (especially the oil). Our Asia Economics team projects a contraction in real GDP in the first quarter for most Asian economies, followed by a partial recovery in the second quarter, which translates into a recovery of growth in the form of V. The political stimulus It should help support this recovery. While the situation is still evolving and the magnitude of the economic impact is very uncertain at this time, we believe that an adverse impact of ~ 20 bp could be felt in India's real GDP growth for the March '20 quarter (compared to 4 , 7% year-on-year implicit according to the estimates of the second advance of the OSC), says a note from UBS.
We expect the Indian economy to see a gradual recovery at 5.6% y/y in FY21 (formerly 5.7% UBSe) in the improvement of monetary transmission, the support of government spending and a favorable base effect. However, we recognize downside risks for our growth forecasts. The slow pace of recovery of activity in China runs the risk of prolonged supply chain disruptions. At the same time, the delay in strengthening the balance of the financial sector (banks and NBFC) and the weak credit boost could continue to be a drag. For the base case, with the expectation that the MPC (Monetary Policy Committee) will reduce the rest rate by another 25 bp in fiscal year 21, we believe that policy makers could explore the case of an early rate reduction . Meanwhile, we hope that the RBI will continue to rely on creative measures (including long-term repos operations) to help accelerate monetary transmission, said economist Tanvee Gupta Jain, UBS Securities India.