Impact of COVID-19 on Indian Economy: 9th September 2020

Impact of COVID-19 on Indian Urban Mobility by Sam Ghosh 19th July 2020

Impact of COVID-19 on Indian Economy by Sam Ghosh 9th September 2020
Q1 FY 2020-21 Credit and Investment
Production and
Consumption
Inflation and Asset PricesPolicy
Executive Summary
● Results released by the National Statistical Office shows that the GDP of India contracted by 23.9% at
Constant (2011-12) Prices and 22.6% at current prices during the Q1 of FY 2020-21.
● Gross Fixed Capital Formation decreased by ~50% from March to June 2020. This is really alarming.
● While the figures are alarming, let us keep perspective. The contraction in the economy was not
spontaneous but due to a forced shut down of the economy.
● While the economic pain is far from over, improvements in IIP and manufacturing PMI figures give us some
optimism. Q1 Industrial Outlook Survey shows mixed expectations for Q2 but a positive overall business sentiment
● We need to keep in mind that while some sectors may pick up growth spontaneously after the lockdowns
are completely lifted, other sectors may need considerable policy hand-holding.
● Medium and small size companies need special attention as they may struggle to get the policy benefits as
reflected by drastically different credit uptake by companies of different sizes.
● We can be cautiously optimistic that the economy improves rapidly in the coming quarters but the fear of a
fresh wave of infection still looms.

Q1 FY 2020-21
Production and
Consumption

Production and
Consumption
Q1 FY 2020-21: Production
● Q1 of 2020-21 GDP at Constant (2011-12) Prices at Rs.26.90 lakh crore, as against Rs.35.35 lakh crore Q1 2019-20,
showing a contraction of 23.9%. Q1 2020-21 GDP at Current Prices was at Rs.38.08 lakh crore, as against Rs.49.18
lakh crore in Q1 2019-20, showing a contraction of 22.6%.
● Q1 of 2020-21 Quarterly GVA at Basic Price at Constant (2011-12) Prices: Rs.25.53 lakh crore, as against Rs. 33.08 lakh
crore in Q1 of 2019-20, showing a contraction of 22.8%. Q1 2020-21 GVA at Basic Price at Current Prices was at Rs.
35.66 lakh crore, as against Rs. 44.89 lakh crore in Q1 2019-20, showing a contraction of 20.6%.
Data: MOSPI
Production Financial Sector Prices External Sector

Production and
Consumption
Q1 FY 2020-21: Production
● If we consider the factors of GDP, only Government Final Consumption saw an increase from Q1 2019-20
levels as GOI increases fiscal spending.
Data: MOSPI

Production and
Consumption
Q1 FY 2020-21: Financial Sector
● Coming to the financial sector, bank deposits and credits grew although at a slower rate than Q1 of 2019-20.
LIC Premiums for non-linked policies decreased by 14.7%.
Data: MOSPI

Production and
Consumption
Q1 FY 2020-21: Prices
● Consumer prices increased by 6.6% but wholesale prices decreased by 2.3%.
Data: MOSPI

Production and
Consumption
Q1 FY 2020-21: External Sector
● Coming to the external sector, the Indian rupee depreciated compared to all major currencies except Pound
Sterling in the whole Q1.
● India improved on trade deficit amid shrinking imports and exports. In June 2020, India reported a positive
trade balance.
Data: RBI

Credit and Investment
Production and
Consumption

Credit and Investment: Money Stock
● RBI’s expansionary monetary policies resulted in increasing currency in the system.
Production and
Consumption
Data: RBI
Money Stock Credit Growth Investment

Credit and Investment: Credit Growth
● All sectors experienced negative credit growth as the lockdowns were announced - a reversal from the pre-COVID
2020.
Production and
Consumption
Data: RBI

Credit and Investment: Credit Growth: Priority Sector
● In the priority sectors, export credit got a boost after the lockdowns started. All other priority sector credit
experienced slow down especially the manufacturing sector. The month of June saw some improvements.
Production and
Consumption
Data: RBI

Credit and Investment: Credit Growth: Industry
● If we consider industry by size, credit to medium and small size companies saw reduction while large companies
increased credit uptake taking advantage of lower interest rates. This paints a grim picture of the small and
medium-size companies.
Production and
Consumption
Data: RBI

Credit and Investment: Credit Growth: Service
● In the case of credit to services, the shipping industry is severely impacted while credit to NBFCs saw an
improvement from the pre-lockdown period.
Production and
Consumption
Data: RBI

Credit and Investment: Credit Growth: Personal Loans
● Personal loans also saw a decrease. Credit card outstanding decreased compared to the beginning of 2020.
Production and
Consumption
Data: RBI

Credit and Investment: Investment
● Now coming to Investments, investment by the Foreign institutional Investors saw improvement during the lockdown
period.
Production and
Consumption
Data: RBI

Credit and Investment: Investment: Fixed Capital Formation
● Gross Fixed Capital Formation decreased by ~50% from March to June 2020.
Production and
Consumption
Data: CEIC

Production and
Consumption
Policy

Production and
Consumption
Policy: Relevant Policy Response: GOI and RBI
● RBI on 16th March 2020: COVID-19- Operational and Business Continuity Measures
● GOI on 24th March 2020: MHA guidelines state that banks, insurance offices, ATMs including IT vendors for banking
operations, Banking Correspondent and ATM operation, and cash management agencies are exempted from the
lockdowns.
● GOI on 14th May 2020: Extended Partial Credit Guarantee Scheme offered to Public Sector Banks (PSBS) to:
○ Purchase of pooled assets of rating BBB+ or above from sound NBFCs and HFCs.
○ Portfolio guarantee for purchase by PSBs of Bonds of Commercial Papers (CPs) with a rating of AA or below
issued by NBFCs/ HFCs and MFIs.
● RBI 27th March - Moratorium on Term Loans - All commercial banks (including regional rural banks, small finance banks,
and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance
companies and micro-finance institutions) were permitted to allow a moratorium of three months on payment of
installments in respect of all term loans outstanding as on March 1, 2020. On 23rd May 2020, the moratorium has been
extended till 31st August 2020.
● RBI 27th March - Deferment of Interest on Working Capital Facilities - For working capital facilities sanctioned in the form
of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on payment of
interest in respect of all such facilities outstanding as on March 1st, 2020. Relevant provisions have been made in the
asset classification norms. On 23rd May 2020, this also been extended till 31st August 2020
Policy Response Policy Rates Treasury Bills

Production and
Consumption
.
● RBI 27th March - permitted the banks in India which operate International Financial Services Centre (IFSC) Banking Units
(IBUs) to participate in the NDF market with effect from June 1, 2020.
● RBI 23rd May - Easing of Working Capital Financing - In respect of working capital facilities sanctioned in the form of CC/OD
to borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may, as a one-time
measure,
○ recalculate the ‘drawing power’ by reducing the margins till August 31, 2020. However, in all such cases where such a temporary enhancement
in drawing power is considered, the margins shall be restored to the original levels by March 31, 2021; and/or,
○ review the working capital sanctioned limits upto March 31, 2021, based on a reassessment of the working capital cycle.
● RBI on 27th March 2020 - Reduction of the policy repo rate under the liquidity adjustment facility (LAF) by 75 basis points to
4.40% from 5.15%. The Marginal standing facility (MSF) rate and the Bank Rate were reduced to 4.65% from 5.4%. On 22nd
May 2020, the policy repo rate under the liquidity adjustment facility (LAF) got further reduced by 40 bps to 4.0% from 4.40%.
Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stood reduced to 4.25% from 4.65%. The reverse
repo rate under the LAF stood reduced to 3.35% from 3.75%.
● RBI on 28th March 2020 - Reduction of the cash reserve ratio (CRR) of all banks by 100 basis points to 3.0% of net demand
and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28 2020, till March 26 2021, unlocking
Rs.1.37 lakh crore primary liquidity in the banking system.
● RBI on 28th March 2020 - Also, a reduction in daily CRR maintenance requirement to 80 percent from 90 percent currently till
June 26 2020, had been made.

Production and
Consumption
● RBI 27th March 2020 - Targeted Long Term Repo Operations (TLTRO) - auctions of targeted term repos of up to 3
years tenor of different sizes for a total amount of up to Rs. 1,00,000 crore at a floating rate linked to the policy repo
rate. A second TLTRO was announced on 17th April 2020.
● RBI 27th March 2020 - Increase in the borrowing limits in the marginal standing facility (MSF) to 3% from 2% of the
Statutory Liquidity Ratio (SLR). This is intended to provide comfort to the banking system by allowing it to avail an
additional ₹ 1,37,000 crore of liquidity under the LAF window
● RBI 27th March 2020 - Widening of the Monetary Policy Rate Corridor from 50 bps to 65 bps - Under the new
corridor, the reverse repo rate under the liquidity adjustment facility (LAF) is set to be 40 bps lower than the policy
repo rate.
● RBI 27th March 2020 - Deferment of Implementation of Net Stable Funding Ratio (NSFR) from April 1st, 2020 to
October 1st, 2020.
● RBI 27th March 2020 - Deferment of Last Tranche of Capital Conservation Buffer from March 31 2020, to September
30 2020.

Production and
Consumption
● RBI 27th March 2020 - reduction of the interest rate on fixed-rate reverse repo under the Liquidity
Adjustment Facility (LAF) by 25 basis points from 4.00% to 3.75%.
● RBI 17th April 2020 - Reduction in the Liquidity Coverage Ratio requirement.
● RBI 17th April 2020 - Refinancing Facilities for All India Financial Institutions (AIFIs).
● RBI 17th April 2020 - Extension of Resolution Timelines under the Prudential Framework on Resolution of
Stressed Assets.
● RBI 24th June 2020 - Guidelines for increased transparency related to loans sourced by Banks and NBFCs
over Digital Lending Platforms
● RBI 1st July 2020- Special liquidity scheme for NBFCs/HFCs through a Special Purpose Vehicle (SPV) to
avoid any potential systemic risks to the financial sector.

Production and
Consumption
Policy: Policy Rates
● The policy rates are lowered to record low
levels to deal with impending economic
distress.
Data: RBI

Production and
Consumption
Policy: Treasury Bills: Yields
● After a spike in bond yields in March, RBI took many measures to increase liquidity in the system. These measures
resulted in decreasing short term bond yields.
● The yield for 10-Year G-Sec decreased in April but increased gradually after that.
● The difference between short term and long term yield is showing an increasing trend.
Data: RBI

Production and
Consumption
Policy: Treasury Bills: Outstanding Position
● Outstanding T-Bills saw a gradual increase after the sell-off in March. August also experienced some sell-off.
Data: RBI

Production and
Consumption
Policy: Treasury Bills: Ownership
● The ownership pattern of the T-Bills changed as well. Between March and June 2020, Commercial Banks decreased
their share of T-Bill ownership whereas Mutual Funds increased.
Data: RBI

Production and
Consumption
Production and Consumption

Production and
Consumption
Production and Consumption: Industrial Production
● Industrial production took a severe hit as the lockdowns began. Things were far from positive even in June.
Data: RBI
Production Consumption

Production and
Consumption
Production and Consumption: Industrial Production
Data: RBI

Production and
Consumption
Data: IHS
Production and Consumption: PMI
● Both Manufacturing and Services were negatively impacted but the impact on services was drastic. Sentiment for
services was negative even when the lockdowns started and while Manufacturing PMI for August 2020 shows
positive sentiment, Services PMI still shows negative sentiment.

Production and
Consumption
Production and Consumption: Industrial Outlook
● Q1 Industrial Outlook Survey shows mixed expectations for Q2 but a positive overall business sentiment. Profit
Margins are expected to be severely impacted.
Data: RBI
Net Response (NR) is the difference between
the percentage of respondents reporting
optimism and those reporting pessimism. It
ranges between -100 to 100. Any value
greater than zero indicates
expansion/optimism and any value less than
zero indicates contraction/pessimism. In other
words, NR = (I – D), where, I is the
percentage response of ‘Increase/optimism’,
and D is the percentage response of
‘Decrease/pessimism’ and E is the percentage
response as ‘no change/equal’ (i.e.,
I+D+E=100). For example, increase in
production is optimism whereas decrease in
cost of raw material is optimism.

Production and
Consumption
Production and Consumption: Consumption: Steel Consumption
● The period April-May 2020 saw a ~70% drop in steel consumption from the same period a year ago while exports
increased by 74%.
Data: Ministry of Steel

Production and
Consumption
Production and Consumption: Consumption: Energy Consumption
● A drop in energy demand also shows the impact on industrial activity. The average energy demand in April 2020 was
24% lower than the same month a year ago.
Data: POSOCO

Production and
Consumption
Production and Consumption: Consumption: Export
● Export volume in terms of USD in April 2020 was 76% lower than the April 2019 value. Export volumes improved in
the following months. Still, June 2020 export volume was 50% lower than that of June 2019.
Data: RBI

Production and
Consumption
Inflation and Asset Prices

Production and
Consumption
Inflation and Asset Prices: Inflation: Consumer Prices
● The lockdowns have increased the consumer prices as reflected by Urban and Rural CPI.
Data: RBI
CPI WPI Asset Prices

Production and
Consumption
Inflation and Asset Prices: Inflation: Wholesale Prices
● At the same time, the wholesale prices decreased due to the lockdowns. Fuel and power prices were
impacted the most.
Data: RBI

Production and
Consumption
Inflation and Asset Prices: Asset Prices: Financial Assets
● Now, coming to asset prices. The slide in the equity market started even before the lockdowns were
announced. From February 14th to March 23rd, the drop in the Nifty 50 Index was 37%. The index improved
during the lockdown period.
Data: NSE

Production and
Consumption
Inflation and Asset Prices: Asset Prices: Financial Assets
● BSE Market Cap shows a similar trend.
Data: RBI

Production and
Consumption
Inflation and Asset Prices: Asset Prices: Non-Financial Assets
● Gold prices increased rapidly during the lockdowns. Silver prices dropped significantly in March but
improved after that.
Data: RBI

Thank You

Impact of COVID-19 on Indian Economy: 9th September 2020

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