Sept 2020

Impact on GDP in FY20-21 due to COVID-19

Objective – To estimate if there would be a significant drop in GDP growth for FY20-21 and
therefore, what could be its likely impact on Equity markets.

The Indian economy remained under near-total lockdown for roughly 45 days (12% of the year) during
the April-June 2020 quarter. Six months on, since the first imposition of the lockdown, various
restrictions continue. If economic activities stop for a period, as happened during the lockdown,
production for those days gets lost, and value of GDP shrinks.

The first-quarter GDP numbers published on August 31, 2020, show that the Indian economy
contracted by 24% in real terms and 20.6% in nominal terms (not adjusted for inflation) when
compared to same period last year.

We estimate 6.4% contraction in GDP in nominal terms in 2020-21 and 9.8% growth in 2021-22. Our
quarterly growth estimates suggest likely recovery in the second half of 2020-21. The details can be
seen in the table below:

Table 1: Estimate of India’s yearly nominal growth

(Rs. Lakh crore, current prices) Growth, %
Comment
2019-20 2020-21 2021-22 2020-21 2021-22
2021-22 output marginally better vs.
Nominal GDP 183.43 171.64 188.44 -6.4 9.8
2019-20
Agriculture 32.57 35.04 37.50 7.6 7.0 Strong buoyancy to continue
Industry 50.40 42.48 45.78 -15.7 7.8 Bigger turnaround in construction
A Manufacturing 27.76 23.39 25.14 -15.7 7.5 Would still be below 2019-20 level
B Construction 13.85 10.99 12.09 -20.6 10.0 Strong bank credit, tendering started
C Utilities 4.87 4.87 5.16 0.1 6.0 Demand already at 2019-20 level
D Mining 3.93 3.22 3.38 -18.0 5.0 Only partial recovery in 2021-22
Services 100.46 94.12 105.16 -6.3 11.7 Mixed bag with trade highly impacted
A Financial 38.43 38.84 43.31 1.1 11.5 Strong deposit growth, policy focus
B Trade, hotel 33.17 26.50 30.47 -20.1 15.0 Would remain well below 2019-20 level
High Govt. spending led
C Public admin 28.87 28.78 31.37 -0.3 9.0
growth/recovery

Table 2: Estimate of India’s quarterly nominal growth

Growth rate, current prices
Apr- Oct- Jan-Mar Comment
Jul-Sep’20
Jun’20 Dec’20 ’21
Nominal GDP -20.6 -8.4 -0.5 3.0 Expect better outcome in second-half
Agriculture 5.7 7.0 8.0 9.0 Bumper output of Rabi and Kharif crop
Industry -39.5 -18.8 -6.0 0.9 Normalising, PMI shows growth in Aug'20
A Manufacturing -39.3 -18.0 -6.0 - Expect normalcy by Mar ’21 quarter
B Construction -51.4 -27.0 -8.0 3.0 Strong tendering, labour issue getting sorted
C Utilities -5.3 -1.0 2.0 5.0 Already matching 2019-20 activity levels
Lower demand during the lockdown,
D Mining -41.3 -20.0 -8.0 -4.0
normalising
Services -18.4 -7.2 -1.4 2.0 Impact on trade, hotel to linger longer
A Financial -4.3 -1.0 3.0 9.0 High deposit and investment growth
B Trade, hotel -47.4 -20.0 -9.0 -6.0 The most impacted segment of the economy
C Public admin -5.0 -3.0 2.0 4.0 High government spending-led recovery

Source: RBI, CSO, SIAM, Ministry of Commerce & Industry, CGA Page 1
 Sept 2020

Impact on GDP in FY20-21 due to COVID-19

Moreover, high frequency data such as those on manufacturing production, infrastructure activities,
electricity generation, movement of cargo traffic, exports, imports and car sales show that the worst
is behind us. In most areas, there are month-over-month improvements.

Table 3: All monthly data (Actuals) show Apr’20 was the worst month and improvement since
then
Indicator Unit Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20
Bank deposit Rs. Lakh crore 133.2 133.3 135.7 137.2 139.4 139.2 141.6
Bank investment Rs. Lakh crore 37.3 37.8 37.5 39.7 40.8 41.7 42.9
Cement Index 164.1 160.7 129.8 22.5 117.3 137.8 126.8
Coal Index 164.7 171.1 209.7 103.7 109.4 104.3 100.3
Crude oil Index 85.0 75.6 85.0 80.2 82.0 79.6 83.0
Electricity Index 155.6 153.7 146.9 125.5 150.6 156.2 NA
Export US$ billion 25.8 27.7 21.4 10.4 19.1 21.9 23.6
Fertiliser Index 116.5 107.8 98.3 85.0 113.4 114.6 119.4
Four wheeler sale 000 306.2 307.0 181.0 NA 48.5 130.3 217.0
Import US$ billion 41.1 37.5 31.2 17.1 22.2 21.1 28.5
Industry Index 137.4 134.2 117.2 53.6 89.5 107.8 NA
Infrastructure Index 137.4 134.0 134.0 81.2 106.9 115.6 119.9
Inter State goods (E-Way Lakh 234.7 236.8 163.6 24.4 84.0 160.7 185.2
bill)
Intra State goods (E-Way Lakh 334.6 335.0 243.0 61.7 170.9 273.6 298.4
bill)
Life insurance premium 000 crore 206.2 185.3 254.1 67.3 137.4 288.7 229.9
Manufacturing Index 137.9 134.2 111.6 41.5 83.6 106.9 NA
Mining Index 124.3 123.3 131.0 78.7 87.5 85.4 NA
Natural gas Index 65.3 58.3 60.1 53.3 57.2 58.1 61.2
Non Tax 000 crore 101.3 110.6 630.8 57.7 50.5 43.7 94.3
Non-life insurance 000 crore 172.3 139.6 157.8 NA NA 139.6 170.1
premium
Petroleum Index 134.4 128.9 135.3 94.2 102.0 110.6 114.5
Steel Index 155.4 152.9 133.2 26.9 92.1 118.8 126.9
Tax Index 930.9 1,166 2,412.5 214.1 124.4 1,010 679.7
Two wheeler sale Index 1,646 1,607 1,085.2 NA 376.2 1,209 1,462
PMI-Manufacturing Index 55.3 54.5 51.8 27.4 30.8 47.2 46.0
PMI-Services Index 55.5 57.5 49.3 5.4 12.6 33.7 34.2

Conclusion:
1. In April 2020, we had released a note titled “COVID 19 – Should logic takeover Fear” where
we had analysed the different components causing fear and stated how development in each
of these components would reduce fear and bring down the market volatility.
2. Post this, towards the end of June 2020; we released our analysis on the first quarter result of
Nifty companies. Our analysis had indicated that almost 68% of the Nifty universe could
declare profits, and therefore one might not witness significant volatility in markets. However,
the actual results turned out to be better than our anticipation, with almost 89% of the Nifty
universe making profits.

Source: RBI, CSO, SIAM, Ministry of Commerce & Industry, CGA Page 2
 Sept 2020

Impact on GDP in FY20-21 due to COVID-19

3. We had also highlighted that liquidity has been in the positive range, and that would support
the market, thus limiting significant correction. This situation continues to remain the same
with August 2020 receiving net flows worth Rs.27, 000 crores from DII and FII put together.
4. We shared another note titled “COVID-19 – Opening doors for innovation” in August 2020.
The note indicated that innovation adds to economic activity. Considering there is enough
evidence of large innovations happening in our economy, we believe that in the next 1 – 2
years, there should be significant economic growth.
5. Our prognosis on GDP along with other indicators as shown in the tables above indicate that
from second-half onwards there should be an improvement in GDP and the full-year GDP
growth rate in nominal terms would be -6.4%. High-frequency indicators have shown an
improvement in the last 2-3 months. Therefore, there cannot be a significant drop in the
market on account of the GDP numbers.
6. In our view, we may not witness large volatility in the short term. However, the downside if
any, can be in the range of 8% - 10%.
7. Keeping this in mind, one should continue to build portfolios as per the strategy in the
sequence of the best return to risk trade-off. Therefore, portfolio gaps should be filled in the
below sequence:
a. Debt Structured Products
b. Equity Structured Product
c. Equity Mutual Fund
d. Debt Mutual Fund

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mentioned in this report.

Source: RBI, CSO, SIAM, Ministry of Commerce & Industry, CGA Page 3