ECONOMIC IMPACT OF COVID IN INDIA

OVERVIEW

• India’s real GDP growth decelerated to its lowest in over six years in 3Q 2019-20, and the outbreak of the COVID-19 posed fresh challenges.
• Steps taken to contain its spread, such as the nationwide lockdown have brought economic activity to a near-standstill, with impacts on both consumption and investment.
• While Indian businesses, barring a few sectors, can possibly insulate themselves from the global supply chain disruptions caused by the outbreak due to relatively lower reliance on intermediate imports, their exports to COVID-19 infected nations could take a hit
• In sum, the three major contributors to GDP - private consumption, investment and external trade will all get affected.

IMPACT ON SUPPLY SIDE:

• External input:
  • Foreign value-added component in India’s gross manufacturing exports is 26%.
  • Hence, shutdown of factories and the resultant delay in supply of goods in the COVID hit countries, could result in a significant shortage of both raw materials and intermediate goods for Indian companies importing from there
  • Reason to smile:
    • Steep decline in global demand together with price war between major oil producing nations has led to a decline in oil prices
    • Falling oil prices will have a positive fallout on the Indian economy, as 80 per cent of its oil requirement is met through imports
• Domestic input:
  • Disruption of domestic supply chains caused by the lockdowns will create a shortage of inputs for Indian firms when they restart their operations

IMPACT ON DEMAND SIDE:

• SHORT-TERM
  • The lock-down is likely to have a sizeable impact on the economy, most significantly on consumption, which is the biggest component of GDP
  • Around 37 per cent of employees in urban India are informal workers. They faced uncertain income due to stalling of urban activity. This income shock resulted in a massive reverse migration
  • Essential commodities: Domestic supply chain disruption caused by lockdown affected the availability of essential commodities
  • Non-essential commodities: Significant reduction in urban transactions could lead to a steep fall in consumption of non-essential goods
  • Impact on cash flow: Cash flow problems created by the demand shock would impair Indian firms’ debt servicing ability
• LONG-TERM
  • Cost cutting measures would lead to labour layoffs, which mean lower household income. It results in:
    • Reduction in savings and hence affect financial market liquidity.
    • Decline in government’s tax revenue
  • Post COVID-19, some economies are expected to adopt de-risking strategy and shift their manufacturing bases from China, which could create opportunities for India

ANALYSIS OF SECTORAL IMPACT:

1.AGRICULTURE SECTOR:

• Sector contributes 16.5 per cent of GVA and 43 per cent of employment
• Limited availability of labours: Harvest of crops may get impacted due limited availability of labour force amidst of movement restrictions, especially in Rabi season
• Price volatility in agriculture commodities due to disruptions in logistics, raw materials and consumer demand
• Food exports: Indian food export-based companies will be impacted due to low global consumer demand and port hurdles
• Food wastage: During the lockdown, food wastage increased due to affected supply chains, affecting small farmers.

2.SERVICE SECTOR:

• Telecommunications:
  • Global disruption in supply chains will significantly impact the manufacturing of electronic products, since such products are heavily integrated to global supply chain.
  • Likely to impact the much awaited 5G auctions as operators are focusing on servicing current demand surge and quality of service
• Transport and logistics:
  • Positives: Crude price reduction is likely to impact the transportation costs positively in the short term
  • Negatives: Pace of infrastructure project development is expected to slowdown possibly leading to time and cost overruns over the course of project development
  • Reduced demand for logistics due to reduced production across sectors will put downward pressure on prices across various transportation and logistics sub-sectors like warehousing, freight transportation etc.
  • Ports are also expected to experience reduced traffic volumes
  • Reduced asset utilisation in road and rail infrastructure
• Education :
  • Public schools and low-fee private schools especially are likely face a larger impact on teaching and learning, owing to heavy reliance on brick and mortar means of delivering lessons
  • Additional economic burden for parents in the absence of school provided mid-day meals
  • Placements, internships for students could also be affected with companies delaying the onboarding of students
• Skilling:
  • Lockdown would decrease the available skilled manpower. This coupled with sluggish human resource demand is likely to increase unemployment rate in the country.
  • Post-COVID-19, many job roles are likely to change; skill institutions will need to be prepared for this impact
  • Owing to low margins, private training partners might become insolvent and unable to service their loans
• Banking and NBFCs
  • Banks profitability will be under pressure due to reduced offtake of loans under recessionary market conditions and; fall in transaction banking income due to lower cross border trade
  • Potential risk of defaults and insolvencies affects bank’s balance sheet
  • Weaker private banks, co-operative banks and Small Finance Banks may be impacted due to their customer’s ‘flight to safety’, as they begin to place deposits with stronger banks
  • Proportion of banking services availed through digital channels will increase, hence required higher focus on digital infrastructure
• Financial market:
  • Stock markets witnessed higher fluctuations
• Insurance:
  • Awareness of health products has increased given the current pandemic scenario
  • Insurance renewals may get delayed due to shortage of household income
• Tourism:
  • World Travel and Tourism Council (WTTC) estimates the crisis to cost the tourism sector at least USD 22 billion, resulting in a loss of 50 million jobs
• Healthcare
  • Increase funding, manpower and infrastructure: Directly, it questions the health-burden carrying ability of systems across the globe, forcing governments to rethink and increase funding, manpower and infrastructure allocated to health
  • Sanitation, self-hygiene products and bio-waste disposal: Healthcare sanitation, self-hygiene products and bio-waste disposal are areas that will indirectly gain fillip due to a paradigm shift in people’s awareness regarding contamination, infection spread, quarantine
  • An increase in government’s focus on strengthening paramedical staff may be expected
• Defence sector:
  • Capital acquisitions in defence got stalled for a temporary period.
• Government sector:
  • Impact on fiscal: Lower tax revenue due to decreased economic activity and increased government spending through stimulus package could affect fiscal prudence

3.MANUFACTURING SECTOR:

• Apparel and Textiles:
  • Demand shocks are expected to hurt India's textile exports over the next few quarters
  • The sector is one of the largest employers in the country, with a sizeable number of contract labourers as well. The lockdown has led to temporary closures of factories and lay-offs.
• Automobile:
  • Passenger vehicles: Demand likely to decline due to reduction in consumer purchasing power
  • Commercial vehicles: Production shutdown across the country will significantly reduce the demand
• Building and Construction:
  • Slowdown in the U.S. and European economies results in curtailed investments in commercial real estate
  • Delayed construction owing to disruption in the supply chain network
• Chemicals and Petro-chemicals:
  • With the weakening in crude oil prices and the cascading impact on petrochemicals coupled with uncertain domestic and global demand, petrochemicals sector is hard hit
• Retail sector:
  • Lockdown restrictions affect sales. Companies are compelled to explore newer distribution channels focused on a ‘direct to consumer’ route, which requires investment and time
  • Raw material supplies could be a challenge due to disrupted supply chains
• Metals and mining:
  • Highly labour intensive sector and supply disruption here will hit operations; also logistics sector employment is driven by this sector
  • The steep slowdown in infrastructure, construction and automotive sectors is likely to affect metal demand; especially iron and steel
• Oil and gas:
  • Positives: Crude prices have fallen so India import bill will reduce
  • Negatives: Demand slowdown from customer side owing to limited travel and reduced consumption leading to closure of refinery industries in India
• Pharmaceuticals:
  • Positives: Increase in exports as developed countries stock- up on essential medicines, testing kits
  • Negatives: Generics drugs are most impacted – reliance is high on imports (~70 per cent) from China
  • Non-availability of labour and physical distancing has bottlenecked production volumes
  • Supply disruptions due to raw material shortages, price increases, factory and freight shutdowns – have impacted access to medicines
• Power:
  • Demand for electricity will reduce on account of shutdown of industrial and commercial activity (which contribute to ~50 per cent demand)
  • Reform measures likely to be delayed due to economic uncertainties amidst the spread of pandemic

PRACTICE QUESTION

Q. How far coronavirus pandemic affects manufacturing sector in India?