DBS Bank Slashes Indias FY21 GDP Forecast To 1%

With the lockdown now in place for two months, Singapore-based DBS Bank has cut India’s FY21 GDP forecast to 1 per cent vis-a-vis 1.5 per cent projected on April 9.

This forecast is based on its assumption of an end in the lockdown in the June quarter, reopening of all sectors by third quarter (October-December) and catch-up production, normal monsoon, fiscal support measures of at least 3 per cent of GDP and direct lending support by the authorities.

Risk scenarios point to a possible decline in the headline GDP if the extension prolongs or partial restart is rolled back, DBS Bank said in a report.

The report cautioned that the general government (the Centre and States) deficit is likely to rise to 10-10.5 per cent of GDP in FY21 vs around 6 per cent of GDP earlier. This would entail the public debt level to rise from 70 per cent of GDP to 75-80 per cent, with the shrinking GDP (denominator effect) also ballooning the debt burden, it added.

Stressed sectors: Authorities to reach out directly

“With commercial banks still in midst of cleaning their own books, and the additional burden of provisioning against potential increase in stressed assets, has not surprisingly magnified their already weak credit and duration appetite.

“This was reflected in the weak uptake of recent cheap financing facilities, meant for banks to borrow and lend to lower rated corporate and non-bank papers,” said Radhika Rao, Economist, DBS Bank.

To get around this hurdle, expectations are high for the authorities to directly reach out to the stressed sectors, through measures.

The report said the measures could include a) creation of a special purpose vehicle (SPV) to directly purchase corporate bonds (to arrest widening spreads vs government securities and temper volatility); and b) direct institutional (from the RBI or government) support to backstop credit facilities to quell contagion and systemic concerns, while supporting banks lower their credit aversion.

Fiscal support: Smaller headroom

Beyond the first package announced in wake of the late-Match lockdown, the report said further steps are awaited.

“This is particularly as India’s lockdown is amongst the most stringent in the region, but also where the fiscal package is amongst the smallest.

“With a smaller headroom, we reckon that measures announced will be incremental, targeted and undertaken in phases,” Rao said.

In this regard, the government may consider further cash transfers under the Jan Dhan channel or through higher payments under the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) route; fund assistance for companies to cover fixed costs during the lockdown period; interest subvention schemes for selected sectors; and further financing support to State coffers.

The report also suggested bunched up repayments for past arrears of government services, amongst others; targeting immediate relief to MSMEs (contributes to a third of GDP), a credit guarantee facility might be in the offing, which will require the centre to partially guarantee loans that banks could offer affected businesses.

With ₹1.7 lakh-crore (relief package for the poor to help them fight Covid-19) already outlined by the government, DBS Bank estimated that another ₹1.5-3 lakh-crore might in the works.

“A package of this size will fall short of compensating all affected economic agents. But might provide some respite through a well-targeted approach to cushion MSMEs (micro, small and medium enterprise) along with more vulnerable households,” the report said.