COVID-19: Impact On Indian Economy
Things will get worse if the pandemic spreads and does not come under control quickly.
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The global impact of Coronavirus is being felt in full measure on the Indian economy. While the number of cases in India are not yet significant (they will increase), the economic toll is immense. This, in addition to the moratorium at Yes Bank and a sharp collapse in oil prices has boosted unpredictability, leading to a further slowdown of economic activity. There are now impositions and restrictions on trade, travel and a near lockdown situation. Things will get worse if the pandemic spreads and does not come under control quickly.
India Inc. has stepped up to help in the governmental effort to contain the spread of this virus. Foreign travel has been cancelled across the board and domestic travel is restricted to need-basis. Employees are being encouraged to work from home and avoid travel in crowded public transport wherever possible. Offices are working with skeletal staff. There is undoubtedly an impact on productivity and output, but overall clients and consumers have been patient and understanding of the situation.
Disruption has become the norm of the day.
In general, service sector is the hardest hit. Anything related to travel and hospitality has been hit brutally. Airlines have had to reduce capacity and cut working hours of their staff. Hotels and restaurants are running near empty. The gig economy which revolves around the services industry is also hard hit, with lower utilization of services like Uber, Ola, Zomato, Swiggy etc. In addition, several municipalities have asked restaurants to close leading to further disruption. Anything related to services will also take a hit, like airports, toll roads, utilities and so on. An unintended victim of this virus was poultry consumption, which has fallen by Rs 1,500-2,000 Crs per day! We also expect the tourism industry to take a hit, as this summer holiday season will see very few travelers going out of,or coming into India. These are specifically tough times for small and mid-size businesses which were already facing difficulties due to the economic slowdown. Even larger businesses which are geared aggressively are facing increasing difficulties.
As we write this, there has been less disruption in February and part disruption in March. However disruption is multiplying every day. At this speed, there could be a full shutdown as early as last week of March. This will definitely impact demand and therefore earnings. Depending on how long this lasts, the impact could be from moderate to severe. If the situation does get back to normal by early–April, the impact could be moderate. However a prolonged shutdown will cause severe economic pain. At this point, it is difficult to estimate the economic impact of a prolonged slowdown.
Equity markets are in a free fall. As of 19th March, Nifty has fallen by 26% since the beginning of this month. From the peak, Nifty has lost 33%, most of it in fewer than 20 trading sessions. Global markets have also fallen similarly in the said time frame. No asset class has been spared – stocks, bonds, gold, commodities, everything has been sold. Investors seem to have lost confidence and are now running to sell all their holdings and just sit with cash. The challenge is that foreign investors are still selling India equity, largely to meet ETF redemptions from the developed world. This situation could continue till there is some semblance of a bottom for new coronavirus cases in Italy.
Import and Export
Falling Crude Oil prices has a silver lining - at current market prices, Indian import bill could be lower by $ 30 BN in 2020, which will be used to meet the government’s fiscal deficit by way of increased duties. Other non-oil imports will become dearer due to the depreciation of the rupee, which could add to inflation. As the developed world recovers from the virus, they will consume less of everything. Our consumer (jewelry, handicrafts) and IT exports will therefore face headwinds.
GST and GDP
As we have commented above, services industry is likely to be hit hardest, which will also reflect in lower GST collections. We expect GST collections could fall below ₹ 100,000 Crs in March. The slowdown will also shave between 0.5% - 1.0 % of our GDP Growth estimate. Current estimates for GDP growth are between 5% - 5.50% for FY21.
At this time, it is important to look at the human side of this virus. This is the time to protect our vulnerable citizens and ensure that they survive this epidemic. Currently, the outcome is unpredictable and therefore causes panic. Once there is a certainty of cure or prevention, we will be able to count the economic cost in its totality. Either way, the costs will be significant.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.