Garima Soni
OVERVIEW
India’s real GDP decelerated to its lowest in over six years in third quarter 2019-2020, adding onto it the COVID-19 outbreak posed fresh challenges. To stop its spread, nationwide lockdown for 21 days has bought the economy to a standstill. The sluggish economic growth in the previous year, especially in a developing country like India, is leading to extremely volatile market conditions. Challenges are impacting all the three major contributors to GDP- private consumption, investment and external trade. With rising unemployment, interest rates, and fiscal deficit, the economy in India has seen better days.
SECTORAL IMPACT
Agriculture
Survival of Indian economy is majorly dependent on agriculture, and a good harvest depends on quality seeds delivered to farmers by the seed sector, both public and private. As we are in the midst the COVID-19 crisis, it is imperative that good seeds and other farm inputs reach farmers in time for the kharif season.
India needs about 250 lakh quintals of seeds for the kharif season. The preparation of seeds happens between March and May.
Raw materials and spare parts
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.
Pharmaceuticals
The toll on the pharmaceutical industry is of significant concern for India, 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. As COVID-19 is rapidly making its way through India, medication is going to be the number one consumer demand, and because there aren’t nearly enough APIs to manufacture drugs, the subsequent traders and the market are witnessing skyrocketing prices. The prices of vitamins and penicillin alone already see a 50% surge.
Tourism
India is big on cultural and historical tourism, attracting domestic and foreign nationals throughout the year. It does not come as a surprise that a large number of confirmed COVID-19 cases in India include foreign tourists. 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 thousands of crores. Experts believe the tourism industry is likely to take a massive hit, and it could end up crippling the industry for the foreseeable future.
Aviation
After the Government of India indefinitely suspended tourist visas, airlines are said to be working under pressure. Nearly 600 international flights to and from India were cancelled for varying periods. Around 90 domestic flights have been cancelled, leading to a sharp drop in airline fares, even on popular local routes.
Apparel & Textile
The second-highest employment generator after agriculture, the sector employs around 45 million workers directly and another 60 million indirectly across the country.
In urban centres across the country, apparel retailers and garment factories employ millions of semi-skilled and unskilled workers. Without export orders and a restarting of the economy, many will be either forced to shut shop entirely or inflict stringent cost-cutting measures, including layoffs. For those employed here, the option to work from home is largely impractical. In some of the most backward districts of the country, the handloom sector – which employs a significant and often forgotten labour force – will also be forced to drastically reduce output, or cut wages to compensate for the decline in retail sales across the country. Add to that the fact that the sector is driven by consumer sentiment and discretionary spending, both of which are at an all-time low.
Automobile
COVID-19 will impact all stakeholders in the value chain who will experience both short and medium term impact. This could range from shortage of raw material, shifting of production to other countries, liquidity crunch to delays in availability of models, deferred launches and shrinkage in consumer demand.
Deloitte India recently issued a report on the impact of COVID-19 on India’s consumer business segments. According to the report, the sector has inventories sufficient for short-term support, but lack of single, critical components can hurt OEMs. The analysis report takes various approaches to possible outcomes of this pandemic from the point of view of an optimist and pessimist.
The report begins by stating that the pandemic is expected to lead the country towards a major slowdown. Major financial institutions have lowered growth estimates for India by 0.5-1.5 percent. For example, Moody’s FY20 projection for growth in India was 6.6% but has now been slashed to 5.43%. This will have a negative impact on markets and would likely put downward pressure of 23.1% on the Indian automotive market.
Real Estate/ Building and construction
The real estate sector is one of the largest employment generators in the country and has a multiplier effect on around 250 allied industries. The sector is expected to contribute to around 13 percent to the country’s GDP by 2025. However, the year 2019 has been a mixed bag for the Indian real estate industry, having attracted investments worth- USD 5 billion. Around 66 percent of these investments were in commercial real estate market owing to healthy demand from private equity investors for stable rent yielding assets.
On the other hand, the residential real estate sector has witnessed poor demand and lower absorption in the past few years owing to the economic slowdown, the NBFC crisis, cynical buyer sentiment and developer defaults. This has led to higher unsold inventory across the major cities in India.
CONCLUSION
The impact of COVID-19 on customers is profound and the full impact on the economy is still unknown. While B2C and B2B organizations scramble to meet immediate and emergency needs, the pandemic has activated a new wave of commerce innovation. Above all, except for essential services like electricity, gas, water supply and part of 3B, C and D relating to broadcasting, financial services (banking) and, public administration, defence, etc, all other sectors have been completely shut. The impact on agriculture, which is seasonal in nature, cannot be ascertained exactly.
To assess the impact of lockdown, we not only need to take the 21-day shutdown period but the extra additional days of the operating cycle before a material or service can be back to operations. While each sector has its own dynamics and different cycles, I have assumed at least one week for the organisation considering various factors of production- men, materials, capital to migrate to the production capacity. So effective loss is assessed at 28 days (21 lockdown +7 pre-operative period).
Good points covered. COVID-19 will be having deep impact not only on economy but also on thought process of policy makers.
COVID-19 has also raised many questions on economic model adopted so far. Reverse Migration of labour has question on their acceptability in cities.
Drastic reduction in Pollution and air quality index has proved that today pollution is creation of human being …and generation will suffer.