Economic impact & road ahead

The special Covid-19 economic task force announced by Prime Minister Narendra Modi would likely work on an economic package for the sectors most affected by the coronavirus outbreak as also people working in the informal sectors.

With Covid-19 coming into the picture, the Indian economy is going through a major slowdown, which was evident over the recent quarters even before the crisis struck. In the third quarter of the current financial year, the economy grew at a six-year low rate of 4.7 per cent. With rising unemployment, the banking sector distress, interest rates, and fiscal deficit, the Indian economy is witnessing challenging times not witnessed in recent times.

Though India will be better off, in comparison to other countries due to high dependence on domestic markets, economists predict dip of nearly 0.7-1 per cent in India’s economic growth due to coronavirus or Covid-19 outbreak. The Indian GDP is expected to witness growth slowdown to 4 to 4.5 per cent for the financial year 2021 (April 2020 – March 2021). Data from China indicates the virus resulted in a 20 per cent GDP decline in the first two months of 2020; other countries forced to implement aggressive social distancing will likely experience similar effects.

Impact on the consumption demand and industry

Travel, tourism and hotel industries are some of the worst-affected sectors due to travel bans, social distancing and suspension of business activities. Closing of restaurants, entertainment sector and declining footfall in shopping complexes has affected the retail sector by impacting the consumption of both essential and discretionary items. As the consumption of any product or services goes down, it leads to an impact on the workforce. In the current scenario, with all the retailers closing down their services, the jobs of the employees are at a huge risk.

The supply-side impact of shutting down of factories resulted in a delay in supply of goods from China, which has affected a huge number of manufacturing sectors which source their intermediate and final product requirements from China. Some sectors like automobiles, pharmaceuticals, electronics, chemical products etc were impacted big time.

Below are the key fallouts which have emerged for the Indian economy:

Tourism: India has a large and flourishing tourism industry, attracting domestic and foreign nationals throughout the year. But with visas being suspended and tourist attractions being shut indefinitely, the whole tourism value chain, which includes hotels, restaurants, attractions, agents, and operators is expected to face losses worth millions of dollars. Experts believe the tourism industry is likely to take a massive hit, and it could end up crippling the industry for the foreseeable future.

The supplies of auto component parts have been disrupted. China accounts for 27 percent of India’s automotive part imports and it is two to three times higher in the case of the electric vehicle segment. The shipments via sea have been suspended, and hence the Indian OEMs are unable to produce beyond the inventory already lying with them. The positive side is that it has also led companies to look within and source more parts locally, which has given a boost to the local auto components industry.

The impact on the pharmaceutical industry is of major concern for India, as 70 per cent of active pharmaceutical ingredients (API) are imported from China. As Covid-19 is rapidly making its way through India, medication is going to be the number one consumer demand, subsequently traders and the market are witnessing skyrocketing prices. The prices of vitamins and penicillin alone already see a 50 per cent surge.

Most mobile parts are imported from China and assembled in India. Hence the smartphone sales may fall by 10 to 15 per cent in January-March quarter. Textile segment has also been impacted due to suspension of shipments to China. Additionally, China is India’s third largest export partner for export of raw materials like organic chemicals, mineral fuels, cotton, etc.; and a lockdown of the countries is likely to lead to a substantial trade deficit for India. SME segments have been impacted due to closure and lack of access to digital technologies.

Impact of Covid 19 outbreak on consumer behaviour:

• Increased focus and spends on Hygiene will be the new normal
• Consumers deferring their purchases and discretionary spends apart from the health and personal hygiene segment and daily essential
• Faster adoption of remote offices, digital payments, ecommerce and digital media
• Cancellation of travel, weddings, social events and holidays (both domestic and international) due to restrictions
• Significant wealth erosion due to stock market crash has dampened the sentiments amongst middle class households and led to postponement of large investments
• The trauma of the pandemic will force society to accept restraints on mass consumer culture as a reasonable price to pay to defend ourselves against future contagions
• Decreased levels of polarisation as Covid-19 spread is looked as “common enemy”

Healthcare will emerge as key investment

Governments focus on modernisation and capacity expansion of the healthcare delivery infrastructure in collaboration with private investors beyond the current crisis. Increased investments in creating capacities in essential healthcare products and pharmaceutical supply chains in a decentralised manner. This may also drive telemedicine technologies. Capacity creation to skill people in the health care sector shall take center stage and see increased private investments and faster technology adoption.

Supply chain reengineering

Risk mitigation of the supply chain and create manufacturing/engineering capacities outside of China. East European countries and Asian countries like India/Thailand/Indonesia may benefit from this capacity creation.

Segments like textile, pharma, electronics and auto components (especially EV) have witnessed the maximum impact due to supply chain disruptions and shipments via sea being suspended. This will lead to strategic investments for localisation/decentralisation. Investments in safer logistics including screening, packaging, material handling, automation, cold chain and disinfection.

Few other trends that may emerge

Faster adoption of remote offices, digital payments, ecommerce and digital media shall drive the demand for telecommunication infrastructure creation and shift to 5G. This lean period is increasingly used by the organisations to look beyond conventional sectors like automotive, power, oil and gas and focus on emerging sectors like medical, electronics, railways, water, environment and waste management, aerospace, defence.

Impact on commercial real-estate due to disruption of the multiplexes, malls, hospitality and
restaurants segment. This could lead to cancellation in the expansion programs and demand for commercial real estate.

Government interventions to support the economy

India is already running short on its GST revenue collection, and the coronavirus scare could make matters worse. With less than 200 active Covid-19 cases in a 1.33 billion population, the Government of India is not in a rush to make any drastic changes in policy and offer tax relief (even though Indian enterprise leaders are calling for cuts in import duties). They have, however, announced an extension in filings of GST for FY 2018-19 until June 30, 2020. India has also rescheduled the introduction of mandatory e-invoicing until October 1, 2020.

The special Covid-19 economic task force announced by Prime Minister Narendra Modi would likely work on an economic package for the sectors most affected by the coronavirus outbreak as also people working in the informal sectors. Led by Finance Minister Nirmala Sitharaman, this task force has to take drastic steps like relaxation in NPA norms, deferral of tax payments and announcement of income support to the people working in the unorganised sector.

The Finance Ministry, it seems, has already identified some of the worst-affected sectors as the Finance Minister has, on Friday, called a meeting of ministers of civil aviation, MSMEs, tourism, and fisheries, animal husbandry and dairying to assess the impact off coronavirus on these sectors.
Speaking on measures to combat the economic impact from the rapidly spreading coronavirus, Chief Economist of the International Monetary Fund, Gita Gopinath said that Government policymakers would need to implement a substantial targeted fiscal. She also advised on broader monetary stimulus and policy rate cuts to help normalize the economic situation.

The article is authored by K C Mani, Chairman & Managing Director of BDB India.

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