India’s economy is forecast to rebound this year despite a sharp slowdown of economic growth in 2020, reports trade credit insurer Atradius.
The India Country Report by Atradius reveals that the repercussions of coronavirus hit an already weakening economy which experienced growth of only 4.9% in 2019, the lowest annual increase in more than six years. Atradius reports this was mainly due to a sharp credit slowdown which negatively affected domestic demand while government consumption remained robust. Atradius forecasts predict a 7.4% contraction in GDP for 2020 due to the coronavirus pandemic.
Atradius cites the government’s response to Covid-19 and the comprehensive lockdown as the driver for economic decline, creating severe consequences for domestic demand. The India Country Report highlights a sharp increase in unemployment driven by social distancing measures and travel bans with an expected contraction in household consumption growth of around 9% last year. Real fixed investment and industrial production are expected to have contracted by 17% and 12% respectively. Government measures to counter the negative impact of the pandemic include tax breaks for small businesses, credit for companies, incentives for domestic manufacturing, providing cash to low-income households alongside an increase in public investments and subsidies on fertiliser. However, the room for further fiscal easing is limited.
Atradius points towards extended supply chain disruptions from China as hurting the Indian industries heavily dependent on imports such as consumer durables, electronic manufacturing and pharmaceuticals: more than 65% of electronic components and almost 70% of pharmaceutical ingredients needed for further processing are imported from China. As a result, payment delays sharply increased.
According to Atradius’ industry performance forecast within the report, the food sector boasts the most positive future outlook compared to other sectors and is ranked as ‘good’. This means the credit risk situation in the sector is benign and business performance is above its long-term trend. The agriculture, automotive/transport, chemicals/pharmaceuticals and consumer durables sectors have a ‘fair’ outlook, with an average credit risk and stable business performance. However, the remaining key industries have a ‘poor’ forecast with a relatively high credit risk situation and business performance below the long-term trend. Construction, construction materials, electronics/ICT, machines/engineering, metals, paper, services, steel and textiles are among the sectors ranked ‘poor’.
Looking forward, after a sharp recession in 2020, Atradius forecasts the economy in India to grow 8.8% in 2021 as a result of private and government consumption and substantial growth of investments . The contribution of net foreign trade to the business cycle will turn negative, with rising domestic demand leading to a strong increase in imports.
Damien Dawson, Regional Manager for Atradius UK’s Southern Region, commented: “The forecast rise in domestic demand in India over the next year is anticipated to lead to a rise in imports. This increase, alongside recent disruption to supply chains, presents an opportunity to exporters. However, with the foundations of international trade having been severely shaken and an uncertain outlook ahead, businesses must ensure they tread cautiously. Careful planning and comprehensive risk mitigation is absolutely critical whether you’re entering new markets or resuming trade relations. In the current climate, the risk of non-payment is considerably heightened and proactive risk management is crucial. Real-time information and analysis of the market you’re trading in and on individual customers must be sought and acted upon with flexibility and the ability to adapt to change essential to success.”