A stay at home will cost India's huge unorganised sector dearly. It will further deepen the pain for an economy that has stalled. Image Credit: Reuters

Mumbai: India’s economy, already in the grip of a slowdown, is in for more pain after Prime Minister Narendra Modi appealed to citizens to stay at and work from home to curb the coronavirus outbreak.

The services sector, which accounts for about 55 per cent of India’s gross domestic product, is poised to be the most hit after Modi, in a late evening address on Thursday, urged citizens to go on a self-imposed curfew for a day and private companies to allow employees to work from home for longer. In the country’s vast informal sector, social distancing measures could mean a dent to productivity and consumption because of job or pay losses.

“The impact of a partial lock-down or social distancing will be significant,” said Rahul Bajoria, a senior economist at Barclays Plc in Mumbai. “If there’s a widespread community outbreak, GDP could fall as low as 3.5 per cent in the year starting April 1.”

Adding to the burden

Shrinking output may worsen growth in an economy that’s already set to expand at an 11-year low of 5 per cent in the current year to March 31. Before the virus outbreak, India had forecast growth to recover to 6-6.5 per cent in the next fiscal year. S&P Global Ratings and Fitch Ratings have already slashed their growth forecast by 50 basis points.

“The current social distancing measures will severely impact airlines, hotels, malls, multiplexes, restaurants and retailers,” according to analysts at Crisil Ltd., the local unit of S&P Global. “Lower footfalls and occupancies, decline in business volume and sub-optimal operating efficiencies will impact cash flows of companies in these sectors.”

In a televised address, Modi advised all citizens to stay at home for a day on March 22, as he sought to stem the spread of the coronavirus - cases of which are relatively low in India at about 200 compared with more than 200,000 infected people globally. His government also barred incoming flights for a week from that day, joining a growing list of countries effectively sealing their borders.

“Consumption being the biggest component of GDP, a lock-down is bound to have a big impact on the economy,” said Devendra Kumar Pant, chief economist at India Ratings and Research, the local unit of Fitch. “Modeling uncertainty in any system will be very difficult, but one can say the slowdown could deepen or prolong further.”

Home bound

While companies, including billionaire Mukesh Ambani-controlled Reliance Industries Ltd., are asking employees to work from home, the option isn’t feasible in India’s vast informal sector.

“The option to work remotely simply won’t exist for most,” said Shilan Shah, an economist with Capital Economics Pte..

As many households don’t have savings buffers, the government would probably have to back this up with large-scale cash handouts that reach the poorest, he said.