In lockdown, India’s manufacturers see their biggest slump yet

And as the economy comes to a halt, bad debts at banks are expected to surge, sources say.

Indian factories got rid of jobs at the fastest rate since IHS Markit began its survey in May 2005, signalling a recession is looming [File: Danish Siddiqui/Reuters]
Indian factories got rid of jobs at the fastest rate since IHS Markit began its survey in May 2005, signalling a recession is looming [File: Danish Siddiqui/Reuters]

India’s manufacturing activity contracted at its sharpest pace ever in April as a lockdown to combat the rapid spread of the coronavirus led to a slump in demand and significant supply-chain disruptions, a private sector survey showed on Monday.

The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, plunged to 27.4 last month from March’s 51.8, by far its lowest since the survey began in March 2005 and its first time below the 50-mark separating growth from contraction in nearly three years.

“After making it through March relatively unscathed, the Indian manufacturing sector felt the full force of the coronavirus pandemic in April,” noted Eliot Kerr, an economist at IHS Markit.

“Record contractions in output, new orders and employment pointed to a severe deterioration in demand conditions.”

With new orders and output shrinking at the steepest pace since at least early 2005, factories also cut jobs at the fastest rate in the survey’s history, signalling a high chance of recession.

Asia’s third-largest economy is taking a huge hit from the continuing nationwide lockdown, which started on March 25, and its gross domestic product is expected to shrink for the first time since the mid-1990s this quarter, a Reuters news agency poll showed last month.

That was despite the government announcing a spending package of 1.7 trillion Indian rupees ($22.4bn) and a significant easing in monetary policy by the Reserve Bank of India.

Indicating key supply-side disruptions, an IHS Markit sub-index tracking supplier’s delivery times declined to a level not seen since the survey began.

A record slump in input and output prices, suggesting a sharp fall in overall inflation which has held above the Reserve Bank of India’s medium-term target of 4 percent for six months, failed to stoke demand.

That gives scope for the central bank, which has already aggressively cut its key interest rates, to ease monetary conditions further.

Bad debts ballooning

But along with the economic downturn, India’s policymakers also expect bad debts at its banks to double, a senior government official and four top bankers told Reuters.

Indian banks are already grappling with 9.35 trillion rupees ($123bn) of soured loans, which was equivalent to about 9.1 percent of their total assets at the end of September 2019.

“There is a considered view in the government that bank non-performing assets (NPAs) could double to 18-20 percent by the end of the fiscal year, as 20-25 percent of outstanding loans face a risk of default,” the official with direct knowledge of the matter said.

A fresh surge in bad debt could hit credit growth and delay India’s recovery from the coronavirus pandemic.

“These are unprecedented times and the way it’s going we can expect banks to report double the amount of NPAs from what we’ve seen in earlier quarters,” the finance head of a top public sector bank told Reuters.

The official and bankers declined to be named as they were not officially authorised to discuss the matter with media

India’s finance ministry declined to comment, while the Reserve Bank of India and Indian Banks’ Association, the main industry body, did not immediately respond to emails seeking comment.

Bankers fear it is unlikely that the economy will fully open up before June or July, and loans, especially those to small- and medium-sized businesses which constitute nearly 20 percent of overall credit, may be among the worst affected.

The 40-day nationwide lockdown, which ground India’s economy to a standstill, has been extended by an additional two weeks, although the government began to ease restrictions in regions that are relatively unscathed by the virus.

India has so far recorded nearly 40,000 cases of the coronavirus and more than 1,300 deaths from COVID-19, the respiratory disease caused by the coronavirus.

Source : Reuters

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