Coronavirus effect: India's GDP growth to contract by 25% in Q1 FY21, says Axis Bank report

India's gross domestic product (GDP) may contract sharply by 25 per cent per cent in first quarter of financial year 2020-21 (Q1 FY21) due to the nationwide lockdown, according to a report by Axis Bank. The report, however, said that relaxation in restrictions from 4 May may lift economic growth from Q2 FY20 onwards.

"As the impact of lockdown mostly seen in Q1 FY21, real growth to contract by 25 per cent," Axis Bank said.

"Although our method is admittedly quite heuristic, the sheer magnitude of the contraction is quite unprecedented," it said.

Since 1997, when quarter wise GDP first began to be released, the lowest real quarterly growth reported by India was 1.7 per cent in Q3 FY03, followed by 1.8 per cent in Q4 FY01 and 3.5 per cent in Q4 FY09 (post global financial crisis).

"A minus 25 per cent de-growth, hence is quite uncharted territory, with caveats for the changing GDP computation methodologies involved," the report said.

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The economic lockdown is mirrored in the drop in consumption of petrol and diesel sales, reflecting the virtual transport standstill during end-March and a large part of April, it said.

Axis Bank has also cut India's Q4 FY20 GDP growth forecast to 1 per cent against 4.7 per cent earlier.

The bank expects March IIP (Index of Industrial Production) to be around minus 15 per cent compared to 4.5 per cent in February 2020 and 2.7 per cent in March 2019. This was attributed to contraction in the consumer durables and infra / construction goods segments.

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The lender said leading indicators show the reason for this pessimistic forecast. While the Manufacturing Purchasing Managers Index (PMI) reported a decent 51.8 expansion in March (for the period prior to the lockdown of March 25), the eight sector core industries growth stood at minus 6.5 per cent in March.  Meanwhile, auto sales, which was already extremely weak since early January 19, had almost collapsed in March although a large part of this was the impending transition to BS-VI; to reduce pressure on dealerships.  

Analysts at other global brokerage Nomura has cut India's FY21 GDP growth forecast to minus 5.2 per cent against minus 0.4 per cent earlier. Goldman Sachs also expected the economy to contract steeply in FY21. "We expect GDP growth of -20 per cent in Q2; while we have upgraded our expectations of recovery after mid-year, with a 10 per cent and 14 per cent q-o-q annualised GDP gain in Q3 and Q4, respectively," it said in a note.