Impact On The Indian Economy
In the wake of the coronavirus pandemic, India has gone into complete lock-down since 25th March 2020, the largest in the world, restricting 1.3 billion people.
This corona-induced lock-down has only heightened the economic slump India was already going through over the last few months. In the third quarter of the 2019-2020 fiscal year, the economy grew at a six-year low rate of 4.7%. The low rate of expansion in the economy seen in the December quarter was mostly an extension of weak manufacturing, falling exports, and weak consumer demand and private investment. several stimulus measures have been taken to bring back the economy on a growth path. There was a strong hope of recovery in the last quarter of the fiscal. However, the new coronavirus epidemic has further pulled down growth prospects in India. and has presented fresh challenges for the Indian economy now, causing a severely disruptive impact on both demand and supply-side elements.
The demand Side Impact of the pandemic has been first seen in tourism, Entertainment (cinema halls, restaurant and hotels), and Aviation sectors as they are among the worst affected sectors that are facing the maximum brunt of the crisis even the retail sector is affected by impacting consumption of both essential and discretionary items. Spending is getting impacted due to job losses and a decline in income levels. job-destruction caused by the nation-wide lock-down in India is worse than anything that has ever known. According to a report by Mint, 136 million jobs are at risk in post corona India. This has to lead to the demand side getting severely impacted as people are postponing their purchase decisions because of uncertain employment conditions.
On the supply side, There have been severe disruptions in the supply chain because of shutdown of factories and the resulting delay in the supply of goods from China has affected many Indian manufacturing sectors. Some sectors like automobiles, pharmaceuticals, and electronics which heavily rely on imports are facing the brunt. Not only are the imports getting affected by the lock-downs around the world but it is even hampering India’s exports.
With the major shock to the demand and supply India, Major financial institutes lower India’s growth prospects which can be seen in the graph below.
Greater uncertainty about the future course and repercussion of Covid-19 has also made the financial market extremely volatile, leading to huge crashes and wealth erosion. In just weeks, the Coronavirus pandemic has shaved off nearly a third of the global market cap. One of the major slides in the domestic equity markets was seen on March 12, when following the trend of the global equity markets, both the BSE Sensex and NSE Nifty crashed by more than 8% in a single day. The BSE Sensex dropped over 2,919 points – its biggest one-day fall in absolute terms while the NSE Nifty dropped by 868 points. An estimated Rs 10 lakh crore of market cap was reportedly wiped off due to this single-day fall.
Currently, a partial relaxation was announced for 60% of the economy in ‘green zone’ districts and lock-down restrictions are slowly eased, The financial markets have been showing a positive trend after this free fall but even after this the economy will likely struggle to normalize, as companies will have to deal with labour, raw materials, and demand shortages.
This will eat into the corporate profits and bankruptcies will rise which will inevitably impact jobs and consumption.
There has been an unprecedented decline in passenger traffic, internationally which is something never seen in history.
Globally the aviation sector has been the first industry to be hit. It is among the worst-affected sectors amidst the Covid-19 crisis that has taken the scale of a pandemic. According to the International Air Transport Association (IATA) which accounts for 82% of airlines around the world, airlines globally can lose in passenger revenues of up to $113 billion due to this crisis.
India’s aviation sector is one of the worst-hit globally, with the suspension of international and domestic travel many believe, this crisis is a greater threat than the financial meltdown of 2008-09 along with travel restrictions, grounded fleets, benched staff, schedule uncertainties, ticket liabilities and cash burn, it faces questions around its very survival.
The Coronavirus pandemic is expected to bring not only the Indian aviation but the global aviation industry to a halt as many as 29.32 lakh jobs are likely to be at risk in India’s aviation sector during the year 2020.
The report also said that the revenue of the sector in India may fall by $11,221 million this year compared to 2019. Further, passenger demand is likely to fall by 47% in the country.
Usually, the number of Indian travellers to both domestic and international destinations peak during March and April. However, this time around nearly 90% of bookings of hotels and flights for the peak time has been cancelled.
IndiGo, the biggest airline in the country is also feeling the hit and announced a pay cut for its staff of 20%. CEO of IndiGo Ronojoy Dutta said that the virus’s impact on the aviation sector has been particularly severe and the company must reduce costs in line with the fall in revenues. He believes that airlines have to pay careful attention to cash flows so that they do not run out of cash
India has already faced a casualty concerning the aviation industry and there will be more casualties if governments do not step in urgently to ensure airlines have sufficient cash flow to tide them over this period.
The government of India has already started taking steps for a recovery in the aviation sector and is planning a rescue package of up to $1.6 billion which would be in the form of tax cuts to aid airlines battered by coronavirus.
- This pandemic is going to change how we travel forever, safety and hygiene assurance is needed to be given by airlines for it to encourage people to continue flying.
- The fall in fuel prices is godsend for the aviation sector, therefore better credit policies for fuel given to the airlines will help them survive.
- Financial aid in terms of reduction in airport charges, overflight fees and instead levy fees from passengers to maintain safety and hygiene standards.
Indian pharma industry enjoys an important position in the global pharmaceutical industry. The Indian pharmaceutical market is the third-largest in terms of volume and thirteenth-largest in terms of value. It’s amongst the global leaders in providing quality generics to the world and supplies drugs to the developed economies such as the US, EU and Japan.
There is a general myth regarding the fact that the pandemic is beneficial for the pharma sector but that is not the case as even though the Indian pharmaceutical industry is not as severely impacted as some of the other sectors since its exempted from the lock-down that does not mean it is not negatively impacted by the pandemic.
India has been facing stiff competition from China in the pharmaceutical sector because of China’s lowest cost APIs (Active Pharmaceutical Ingredients) which is a key ingredient in making any drug.
To benefit from low-cost APIs made in china, India has increased its import from China tremendously. Currently, India’s import dependency on China is nearly 70% of its total requirement and not only this but in the case of intermediates of stages before APIs and key starting materials (KSMs) which are the building blocks for drugs, wherein, in some cases, China is the exclusive supplier.
This is alarming because as a result of lock-down and factory closures in China, India is facing disruptions in its supply chain which have caused significant shortages of essential drugs and are increasing their cost. The cost of paracetamol has gone up from Rs 250-300 kg to 400-450 kg. Similarly, the prices of vitamins and penicillin have also increased by 40-50% in India.
Supply chain disruptions are so serious that a committee has been formed by the Department of Pharmaceuticals to regularly review the availability of stocks of API and the government has restricted exports of certain medicines to deal with the situation. The government is also planning to grow in the API sector in India in the future by encouraging domestic manufacturing of APIs so that the reliance on china is reduced.
Even though the production partially resumes in china, the logistics between the two countries are still impacted making imports costlier. This is a problem as many drug prices are controlled by the government in India therefore the margins of these companies will be impacted.
Inter-state transport challenges are also a major issue. It has become difficult for companies to reach retailers. The distributers are also facing transportation issues for supplying medicines in other states. The government eased rules as part of its latest set of efforts to supply goods and services during the coronavirus-induced lock-down. Problems regarding the non-availability of labour and social distancing have also hampered the production volumes in the sector.
There is also the potential for negative impacts of both a medium- and longer-term nature on R&D and manufacturing activities, as well as a delay on projects not related to the core supply chain/data management operations.
- Address the labour shortage issue by providing the means to commute, so that they can commute and not inconvenienced during the lock-down period.
- Reduce dependence on China for the import of raw materials and create partnerships with other countries.
- The promotion of E-Pharma companies will help boost customer reach.
The automobile sector is one of the largest employers in the country, employing about 37 million people, directly and indirectly. The automotive industry, moves in sync with the economy of India and accounts for more than 7% of the country’s GDP has been in the grip of an intense slowdown since a year and was dealing with idle capacity, low demand, and high cost of production has only been exacerbated by the coronavirus-induced lock-down. The industry was witnessing a revenue loss of Rs 2,300 crore per day.
The pandemic has affected the industry in many ways even before the virus entering India, China accounts for 27% of India’s automotive part imports. Owing to the closure of the factories of these companies, there had reportedly been a delay in the production and delivery of vehicles.
As things begin to normalize in China, the problem with disruption in the supply chain is expected to be solved.
A great slump in demand exists since this segment is significantly impacted by economic sentiments, and consumer purchasing power, and with a shutdown of all non-essential services, the demand for commercial vehicles has further plummeted to such an extent that the entire industry has reported zero sales in April.
To add to that the automotive value chain is highly complex, integrated, and interdependent, if any element in any segment does not commence operations, the value chain will not be able to restart and with problems regarding the availability of contract labour for operations and support functions can be an issue even after the lock-down is lifted also the continued cash flow tightening will impact the market further.
The auto industry collectively has asked the government to allow them to restart their entire value chain immediately as the lock-downs have seriously affected the industry and many MSMEs in the sector are struggling to stay afloat.
Even though the government has announced relaxations in the ‘green and orange zone’ but it’s not enough as there have been no relaxations in the red zones hence making it difficult for the industry to restart completely as segments of the industry’s value chain operate in those zones.
In a report published by Bloomberg, experts believe that once stay- at – home orders are lifted, there could be a surge in car sales around the world. Sales have already rebound in China (which has been indicated in the graph below) as consumers are purchasing personal vehicles to ensure their safety to avoid traveling in crowded public transports.
This is in contradiction to what is generally believed as post lock-down there would be a severe cash crunch faced by the consumer and they would not have enough cash to invest in a car.
In India, the two-wheeler segment might see a rebound but the future of four-wheelers remains bleak.
The graph below indicates China’s weekly car sales which have shown to be rebounding as China slowly restarts its economy.
- Consumer attractiveness by allowing income tax deduction on the auto loan
- Giving incentives in the form of rate cut resulting in a reduction in interest rates for retail customers.
Information Technology (IT)
India is the largest exporter of IT in the world this is because of its cost competitiveness in providing IT services, which is approximately 3-4 times more cost-effective than the US, this continues to be its unique selling proposition in the global sourcing market. This makes the IT industry heavily influenced by the change in the global market and any recession globally will negatively impact the IT sector in India.
This is why it is feared that Covid-19 will significantly impact the $180-billion Indian IT sector, and the impact may be worse than that of the 2008 global financial crisis.
This fear is justified as the IT sector in India relies heavily on exports, their exports form more than 80% of the revenue with countries like the USA, UK and Europe accounting for most of it, considering the US and Europe, are among the worst affected geographies by the pandemic. Clients could significantly reduce their IT spending this year.
The global IT services industry is predicted to report a revenue decline by 3-4% because of the economic slowdown induced by the pandemic and with India being at the forefront of IT services it is expected to take a hit.
A decline in IT sector is predicted, this will be because of IT companies that are exposed to industries that are highly impacted by the pandemic such as travel, hospitality, manufacturing and retail where projects will be put on hold. Projects from other industries are also likely to be stalled as companies will be forced to revisit their IT spending and will even negotiate their existing contracts, However, on the positive side, business-critical IT such as core banking, call centres and e-commerce will continue to operate and may witness a surge in short-term demand.
The pandemic has caused significant displacement in the operating model as travel restrictions are already delaying the execution of existing projects and hurting the ability of IT companies to ramp up projects and close deals. Further, pricing pressure will lead to lower deal wins and renewal.
IT giants TCS and Infosys suspended promotions and freeze salary hike to deal with the pandemic but are going to honour all new job offers.
In retrospect, the IT sector is not directly or as severely impacted by the pandemic as some of the other sectors but its impact is correlated to the other sectors. Even though the IT sector faces a temporary setback because of the pandemic, it’s future is bright.
- It is evident that in the long run, that there will be an environment where businesses are done virtually and where technology will play a big role in innovations and designing the infrastructure and applications of this new reality.
- With e-commerce and online schooling becoming the new norm, the IT sector is going to benefit from it.
One of the few things that seem fairly certain is that the current downturn is fundamentally different from recessions we have seen in the past. This is not just another turn of the business cycle, but a shakeup of the world economic order. While countries and companies continue to comprehend the scale of this pandemic, it is certainly undeniable that we are staring at more permanent, structural changes to the way we live, work, and play.
The collective experience of going through this common crisis will lead to questioning of fundamental assumptions and priorities which will be both a challenge and an opportunity.
We need to focus on ideation and actions to create the difference and emerge stronger and enable actions to seize opportunities in the new normal.
Here are some ways in which we can embrace the new normal:
- With customer focus shifted to online, more efforts in e-commerce will be crucial in building a long- term customer base.
- Good management of cash flows to ensure that any business disruption does not affect employees or outsourced workers.
- Supply chain resilience is key and growing a decentralized supply chain can provide stability to operations and reduce external dependencies.
- Even when things start going back to normalcy, several people will lose their purchasing power or be more conscious of making purchases. Hence, customers will prefer brands that promise value for money, and meet customer expectations during dire conditions.
- With the shift to rural retail, and with the newly associated customer base, retailers should focus on a rebalance that strengthens rather than weakens their position in the market.
- On a positive note, Indian manufacturers have the opportunity to establish themselves as manufacturing hubs and leverage the void created in Chinese manufacturing.
To conclude, COVID – 19 is likely to lead to a new normal, and being aware of and preparing for these shifts will help businesses and economies navigate in the post COVID-19 world.