India’s Response to the Economic Downturn

Economic Growth Outlook Revision

• Goldman Sachs has downgraded India's FY21 (April 2020–March 2021) growth forecast from a pre-virus projection of 5.8% to 1.6%, representing a 420 basis point reduction.
• The downgrade is driven by three specific factors:
  • Lockdown Impact: Assumes 25% of economic activity is wiped out during the three-week nationwide lockdown, contributing roughly 220 basis points to the reduction.
  • Global Growth Contagion: Downgrades in global growth projections (forecasted at -2% for 2020 annual average) are expected to drag an additional 150 basis points on India's growth.
  • Investment Spillovers: Additional negative investment effects resulting from the lockdown are factored into the total revision.

Sectoral and Temporal Dynamics

• Impact severity varies by sector based on GDP share; for instance, a 95% output hit in transportation (10% of GDP) implies a 10% monthly contraction in that sector while lockdowns persist.
• The 1.6% annual average assumes a deep trough in Q1 and Q2 2020, followed by a strong sequential recovery in the second half of the fiscal year.
• Recovery assumptions rely on:
  • Significant reduction in new infections over the next four to six weeks.
  • Expansion of fiscal support beyond the initial 0.8% GDP stimulus package.
  • Continued monetary easing and liquidity infusion by the Reserve Bank of India (RBI).

Historical Comparisons and Shock Nature

• The projected 1.6% growth is deeper than India's recessions in the 1970s, 1980s, 2009, and the Balance of Payments crisis of 1991, though milder than the -5% contraction in 1979.
• Unlike historical downturns, this crisis involves a physical constraint (lockdowns/social distancing) rather than a financial one, with a high public awareness of the virus driving compliance.
• Current macroeconomic policy support (both fiscal and monetary) is less aggressive than during the 2008 Global Financial Crisis, where both axes were eased by over 400 basis points, despite India's weaker pre-crisis conditions.

Capital Flows and Market Sentiment

• Foreign Institutional Investors (FIIs) have withdrawn over $17 billion from Indian debt and equity markets since March, exceeding the entire 2018 outflow of $11 billion.
• India ranks third among Asian markets for outflows, driven by global investors treating emerging markets as a single asset class.
• Market stabilization is viewed as contingent on four conditions:
  • Flattening of the infection curve.
  • Increased fiscal stimulus.
  • Greater visibility regarding the depth and duration of economic disruptions.
  • Further asset undervaluation and position reduction.
• Current conditions suggest most stabilization criteria are not yet met.

Currency (INR) Forecast

• Despite high outflows, the INR has outperformed other emerging market currencies (IDR, Baht, KRW, BRL, ZAR, TRY) in the last two weeks.
• Strength relative to the 2013 "taper tantrum" is attributed to:
  • Projected inflation near the RBI's 4% medium-term target for FY21.
  • A benign current account deficit forecast of less than 1% (compared to five times that level in 2013).
  • A comfortable foreign exchange reserve position of approximately $440 billion.
• Short-term trend indicates further INR weakening over a three-month horizon.
• Long-term projection estimates a strengthening trend to approximately 72 INR/USD over a 12-month period.