An employee works on a car engine inside a manufacturing plant in Bengaluru. Reuters

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

Asia’s third largest economy is taking a huge hit from the ongoing 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 poll showed last month.

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

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, 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 cut jobs at the fastest rate in the survey’s history, signaling a high chance of recession.

And indicating major supply-side disruptions, a sub-index tracking supplier’s delivery times declined to a level not seen since the survey began.

A record slump in both 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% for six months, failed to stoke demand.

That gives scope for the central bank, which has already cut its repo rate and reverse repo rate by 75 basis points and a cumulative 115 basis points respectively, to ease further.

Despite the huge slump in activity, optimism about the coming 12 months improved from March’s four-and-a-half year low but was still below the long-term average.

Separately, India expects bad debts at its banks could double after the coronavirus crisis brought the economy to a sudden halt, a senior government official and four top bankers told Reuters.

Indian banks are already grappling with 9.35 trillion rupees ($123 billion) of soured loans, which was equivalent to about 9.1% 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% by the end of the fiscal year, as 20-25% 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 authorized 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.

The Indian economy has ground to a standstill amid a 40-day nationwide lockdown to rein in the spread of coronavirus cases.

The lockdown has now been extended by a further two weeks, but the government has begun to ease some restrictions in districts 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.

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% of overall credit, may be among the worst affected.

This is because all 10 of India’s largest cities fall in high-risk red zones, where restrictions will remain stringent.

A report by Axis Bank said that these red zones, which contribute significantly to India’s economy, account for roughly 83% of the overall loans made by its banks as of December.

One of the sources, an executive director of a public sector bank, said that economic growth had been sluggish and risks had been heightened, even ahead of the coronavirus crisis.

Agencies