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Economy likely to contract by 4.5% in Q4FY2020: ICRA


New Delhi: Ratings agency ICRA on Tuesday predicted that India's economy is likely to witness a sharp contraction of 4.5 per cent during Q4FY2020 and is expected to gradually recover to post a GDP growth of just 2 percent in FY2021.

ICRA has sharply cut its forecast for Indian GDP growth in FY 2021, post the Covid-19 outbreak.

"Amid uncertainty as to when the situation will normalise, we expect a sharp downturn in various indicators of the manufacturing and services sectors from March 2020 onwards," ICRA's Principal Economist Aditi Nayar said in a report.

"This primarily includes the discretionary activities like travel, tourism and hospitality; labour intensive sectors like construction, transport and manufacturing of non-essential items; exports; and supporting sectors like electricity."

According to Nayar, the silver lining amid the grim scenario will be the expected healthy outlook for the rabi crop which would provide some support through improved rural demand.

"Higher government spending would also cushion the extent of the slowdown to an extent," she said.

Furthermore, ICRA said that it expects the ripple effect of coronavirus to impact India Inc on five major counts of domestic demand slowdown due to regulatory restrictions, lockdown and fear of contagion will impact certain sectors over the near-term.

Purchasing power erosion due to job losses or pay cuts and trickle-down effect of demand deferral will have a longer-lasting impact on some other sectors, especially where demand is discretionary in nature.

"Global economic slowdown and lockouts is likely to impact sectors with high dependence on global demand, especially that of key impacted markets like Europe, North America and South-East Asia; Impact on commodities like oil & gas, metals etc. will be due to lower global demand and price realisation," the report said.

"Foreign exchange rate fluctuations will have bearing on import-heavy sectors with forex-denominated cost structure; and supply chain disruptions globally is expected to impact sectors where there is import dependence for raw materials."

As per the report, the high impact sectors in terms of risks due to Covid-19 are aviation, hotels, restaurants and tourism, auto dealerships, ceramic tiles, gems and jewellery, retail, shipping, ports and port services, seafood and poultry; and microfinance institutions.

"The medium impact sectors will be automobiles, auto-components, building materials, construction, chemicals, residential real estate, consumer goods, pharmaceuticals, logistics, banking, mining, paper, consulting, ferrous metals, footwear, glass, plastics, power; and trading," the report said.

"The low impact sectors will be education, dairy products, fertilisers and seeds, FMCG, healthcare, food & food products, insurance, telecom, utilities, sugar, tea, coffee; and agricultural produce."

Besides, in the current scenario, the agency predicted the occurence of extended demand disruptions which will lead to elongated payment cycles.

"Since an entity's liquidity position is of paramount importance to support its credit profile, it is expected that several entities would endeavour to conserve cash, either by invoking force majeure clauses to revoke payments; or by deferring payments to the extent possible," the report said.

"Consequently, many entities are expected to face working capital blockage as their receivables get stretched and inventory doesn't run-down simultaneously."

The Covid-19 outbreak which started in China in December 2019 has morphed into a global pandemic, affecting 203 countries, over one million people and increasing rapidly - European countries, North America and Asia being severely impacted.

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