Impact of COVID-19 on Indian Economy

 

Impact of COVID-19 on Indian Economy

The outbreak of Corona-virus disease 2019 (COVID-19), first identified in Wuhan, the capital of Hubei, China, in December 2019 and since then having spread globally, has been recognized as a pandemic by the World Health Organization (WHO) on 11 March 2020. India is widely affected by this pandemic. As on 29.04.2020, more than 31000 cases of Corona-virus have been confirmed in India with more than 1000 deaths.

Taking into consideration its severe intensity, seen in the context of India having the highest rate of density population in the world, the Governments, both at Union and State levels, commenced necessary actions on war footing to prevent the spread of this pandemic. It was all the more so when it is known that this deadly disease has no medicinal cure.

The effect of Corona virus is badly felt and noticed in the world's most developed countries like USA, Britain and Germany etc. Obviously, India was bound to be affected not only because of its domestic slowdown but also because of international recession. Learning the lessons from the developed countries like Spain and Italy, India put all its machinery and material into motion to curb and/or prevent the disease. What started as one day Janta Curfew on 22.03.2020 by the Prime Minister of India and lock-downs by some of the state governments, the entire country was declared to be under lock-down from the midnight of 24.03.2020, and the same continues to be so till now or at least till 03.05.2020, unless extended.

 

With COVID-19 spreading rapidly in India, policymakers are worried about how to fight the virus and minimize its impact on the economy. There are no easy answers. In addition to containing the spread of the disease and support those who are affected, policymakers have to be prepared for the long-term challenges and opportunities that may arise once the crisis is over (and it will eventually be).

The rampant spread of COVID-19 outbreak, across borders and geographies, has severely impacted almost the whole world and triggered significant downside risks to the overall global economic outlook.

Due to the lock-down announced by the Indian Government, the economy may slow over the next few months. For most businesses, the slowdown could be in the form of supply disruptions, fall in consumption demand, and stress on the banking and financial sectors. 

Where is the emergency exit?

Studying past trends of similar infections can help in drawing inferences as to what might help us going forward. What would it take to see this pandemic through?

Mass Vaccination

Herd Immunity

Social Distancing

Life in the time of COVID

It might be a mouthful but here’s a look at what’s to come in the immediate future. Liquidity is expected to remain tight as the cost of borrowing in real terms will jump upwards. This is despite central banks’ efforts to reduce interest rates. Banks and financial institutions will be under immense pressure as the fear of NPAs, insolvency and bankruptcies increase multi-fold. The government will focus on meeting hyper demand for essential goods while non-essential businesses will focus on recovering their receivables/outstanding money due from debtors. New strategic alliances or business partnerships will not emerge during this period.

Adversely affected Sectors

Apparel & Textile will get hit adversely due to disruption in labor supply, raw material unavailability, working capital constraints and restricted demand due to limited movement of people and purchasing ability.

Auto sector (which includes automobiles and auto parts) will continue to face challenges on account of lack of demand, global recession and falling income levels.

Aviation & Tourism is one sector which has the highest probability of going under without direct government intervention. In the next 12 months, it’s highly unlikely people will travel for leisure apart from very essential travel.

Shipping and Non-Food Retail – Non food retail chains and global shipping businesses will find this 12 month period very challenging.

Building & Construction businesses are generally leveraged and hence will face the dual challenges of high-interest payments and lack of sales.

Technology & Future of Work

Technology for many businesses, until today, was considered to be a support function with it being used as a means to get to an end. This is set to change as technology will now become the front-line requirement in most organizations. Its importance will be comparable to that of revenue-generating functions – sales and business development.

Trends will accelerate. Automation will gain momentum as the spend on sophisticated IT infrastructure outpaces human resources. Job creation will be limited with more offers being rolled out on a contractual basis than on a full-time basis. This sort of gig economy will emerge in the emerging markets as well as the more developed markets. Work from home will be the new normal. Firms in some sectors will realize that employees working from home are equally productive as compared to when they are working from the office. This will also help in saving infrastructure costs.

Challenges & Solutions

There is no doubt that COVID-19 will have a large impact on the Indian economy. With respect to India, the discussion can be bifurcated into 2 parts – India’s economy, and its stock markets.

The recovery of the underlying economy will be slow, and it will take around 2 years for normalcy to come back across sectors. While the overall economy might take a hit because of the government lock-down, some sectors are set to see immense growth in the post-COVID era – FMCG, B2C specialized lenders, gold-dependent companies, food retail and pharmaceutical companies to name a few.

What can the Government do?

Like its counterparts across the globe, the Indian government has announced a slew of measures to prevent total collapse. However, it isn’t enough. This works to alleviate some of the pain, not counter it. My 2 cents (or one barrel of oil) on what the government ought to do:

Loosen its purse and spend money on infrastructure development –  ‘Rebuild India, Rejuvenate India’

Public sector financial institutions need to be further capitalized and nudged by the RBI to lend out low-ticket loans below INR 1 Crore in the form of working capital to ensure that liquidity comes back into the system

Banking sector needs to be nudged to pass on rate cuts induced by RBI to the borrowers

Personal tax cuts & tax holidays for 6 – 12 months can be adopted to revive consumption, which will help spur economic growth

Conclusion

This may be the time to reset. Never before has the world come to a standstill where one can pick apart the many moving pieces – like Tom Cruise in Minority Report. We have the opportunity to rethink everything. If we do things right, we may be able to fix challenges that face humankind – environmental damage, inequality etc.

More importantly, we must ensure something like this never happens again. History says that humankind has never learnt from history. Let’s hope that it’s a thing of the past.

As the disruption from the virus progresses globally as well as within India, it is for us to forget, at least for the time being, all talking only about economic recovery, and instead join hands whole heartedly to tackle the outcome of COVID-19.