The severity of the economic impact will largely depend on two factors – the duration of restrictions on the movement of people and economic activities in major economies; and the actual size and efficacy of fiscal responses to the crisis.
Today the globe faces an economic upheaval potentially more severe than witnessed during the 2008 global financial crisis. The coronavirus pandemic is pushing the Globe to an unprecedented territory, where both the best and worst case scenarios spell a catastrophe. Never before have modern economies shut down at once. The global economy could shrink by up to 1 per cent in 2020 due to the coronavirus pandemic, a reversal from the previous forecast of 2.5 per cent growth, the UN has said, warning that it may contract even further if restrictions on the economic activities are extended without adequate fiscal responses.
Growth in India subdued after the country suffered a sharp slowdown over the last 6 quarters and the global health emergency in the last quarter further puts the economy in the dark. Tourism, Hospitality and Aviation are among the worst affected sectors that are facing the maximum brunt of the present crisis. Consumption demand, the bedrock of Indian economy, has been affected severely as purchasing decisions of both essential and discretionary items are being delayed. Furthermore, India is among the top 15 countries that have been affected most as a result of manufacturing slowdown in China that is disrupting world trade. According to UNCTAD, India’s trade impact due to coronavirus outbreak could be about US$ 348 million. Moreover, China accounts for 27% of India’s automotive part imports, thereby putting auto Components and forging industries in a precarious situation as the Indian OEMs are finding it difficult to plan production beyond the available inventory. The toll on the pharmaceutical industry is of significant concern as well, mainly as 70% of active pharmaceutical ingredients (API) are imported from China. These active pharmaceutical ingredients are essential to a large number of pharmaceutical manufacturing companies in the country the repercussion of Covid-19 have also made the financial market extremely volatile, leading to huge crashes and wealth erosion. Like the health experts, banks have been responding to a fast? moving and extraordinary situation. In addition to these sectoral effects, worsening consumer and business sentiment can lead firms to expect lower demand, rise in business cost and reduce their spending and investment. The same will have an impact on all payments including to those for employees, interest, loan repayments and taxes. In turn, the same would exacerbate business closures and job losses.
The severity of the economic impact will largely depend on two factors – the duration of restrictions on the movement of people and economic activities in major economies; and the actual size and efficacy of fiscal responses to the crisis. Following are some of the critically hit sectors –
Being one of the worst hit sectors with International Air Transport association at mid March 2020 anticipated that airlines globally could lose up to USD 113 billion due to the crisis. Based on the data from Ministry of civil aviation close to 600 international flights have been cancelled between 1st Feb 2020 to 6th March 2020.Historically April to June period is one of the better quarters but due to the lockdown it will be an opportunity lost. Based on Centre of Asia pacific Aviation for Indian aviation to return back to operational fleet of 650 Aircrafts will take an estimated 12 months post lifting the restrictions. Most of the airlines have announced a company wide pay cut and mandatory leave without pay for employees till 14th April 2020.
On 31st March 2020 the Airport Council International urged Indian Government for deferring the aviation specific taxes till 31st December 2020.The government can consider infusing cash to support the airlines to meet the running expenses of employees and maintenance till restrictions are not lifted. Furthermore, the Government can consider waiving interest obligations to avoid situation of bankruptcy.
Real estate and Construction
During the last few years the real estate sector were struggling with funding crisis and economic slowdown leading to declines in valuation, the sector was hoping to recover in 2020 but due to the outbreak it seems very unlikely. Multiple projects have been put on hold and there will be a huge slump in demand. The sector will also face the problems from multiple angles of labour, Financial and demand.
The Government should consider investing in real estate to ensure the supply decline is controlled, they can moreover lease to capitalize the acquired asset at an affordable rate. Furthermore, they can control the authorisation new projects to ensure supply side issues are resolved and kick start the demand.
Since China accounts for 27% of India’s automobiles part a closure will result in delays pertaining to production and delivery of vehicles. According to Fitch Solutions production in India will decline by 8.3% in 2020 followed by an estimated 13.2% decline in 2019. Majority of the manufactures have opted for temporary shutdown due to increased estimated losses.
Consideration for waiving interest obligations for the restricted period will a big relief for the manufactures. The government can consider to subsidise the current market players to manufacture electric vehicles and components (OEM) thus enabling to manage the future demand trend which will shift from petrol to electric vehicles.
Despite being a sub sector, the poultry sector has been adversely impacted and is facing losses up to 200 Crores each day. India being the third largest producer of eggs and 5th largest producer of broilers, there has been a significant demand impact of misinformation regarding consumption and meat and poultry products causing Coronavirus.
Some of the steps the government could take should include compensation in form of direct benefit transfers and ensure media clarifications on poultry products not spreading the coronavirus. These will limit the extent of losses made and slowly increase the demand.
Other affected sectors include Shipping, power, consumer durables and electronics, banking and financial services, entertainment and many other sub sectors. The ongoing economic crisis further added by Covid 19 calls for policy measures and implementation in a swift manner. The Primary focus should be to avert further impact of Covid 19 by more screening, awareness and providing quick resolution of cases. This will lead to containing the outbreak and lifting the restrictions placed at the earliest, thus the start of economic activities.
Post which easing of capital requirements, reduction of capital adequacy ratio and regulatory concessions for fuelling the economic activity. Uncertainty about the duration and depth of the crisis is challenging like never before hence major reforms, lenient regulations and tax holidays along with major sops should be made available.
However, it is not all that gloomy for some sectors may continue at the same levels or even stand to benefit. In case of essential goods, supply may not be as restricted as other good, thereby leading the primary sector to continue to supply uninterruptedly. Further, there is an opportunity in crisis for few industries such as pharma, online entertainment, telecom and gaming. Health awareness and education regarding Covid 19 will cause an upward shift in the demand line of products such as sanitisers, wipes, masks, paracetamol etc, thereby benefiting the pharma sector. Additionally, the telecom sectors will experience an increased demand for data from consumers so will the entertainment?based apps and platforms. In terms of International trade, lower dependence on exports means less exposure to the decline in world trade. This and the low price of crude oil, our biggest import, may mean that India doesn’t suffer an external shock. Some measures have been taken which includes the RBI having cut the repo rate in exchange of Interest moratorium for 3?month period however the financial impact and spill over will make financial institutions more vulnerable. This will cause knock?on effects to downstream firms as the reduction of credit could amplify the downturn. The IRDA has also issued directions in line with RBI for proving moratorium to borrowers of term loan which would assist with the short term cashflow issues.
Government of India in order to support the industry and economy would have to come out with specific sectoral reforms rather than a blanket reform, as each of the sectors have their own challenges. The stimulus and packages should consider short term and long?term measures, as revival timelines will differ for each sector. The lockdown in India was initiated at a very early stage leading to health system to be better prepared for handling the increased cases and incorporate the continuous learnings from other nations. As along as awareness amongst the public is present and followed, we could expect a potentially V?shaped recovery by end of 2020.
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