Besides the impact on human lives and global supply chain, the pandemic is a severe demand shock which has offset the green shoots of recovery of the Indian economy that were visible towards the end of 2019 and early 2020.The International Monetary Fund (IMF) has projected the Indian economy to grow at 1.9% in 2020-21. Nearly 162 countries are steadily going into lockdown, and businesses across the globe are operating in fear of an impending collapse of global financial markets. This situation, clubbed with 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.
The high impact sectors in terms of risk on account of Covid-19 are aviation, hotels, restaurants, retail, shipping, ports and port services.The medium impact sectors are automobiles, building materials, residential real estates while the low impact sectors include education, dairy products, fertilizers, FMCG and healthcare among others.
Bulk drugs and drug intermediates accounted for $1.5bn or 3% of India’s imports from China.As per Trade Promotion Council of India, the country imports around 85 percent of its total requirement of active pharmaceutical ingredients (APIs) from China. These active pharmaceutical ingredients are essential to a large number of pharmaceutical manufacturing companies in the country. Dependencies on China have impacted manufacturing operations in India. However, demand for essential medicines and safety equipment has gone up. Government has restricted the export of certain medicines and pharma products and is monitoring the overall inventory on regular basis.
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.
Nearly 55% of electronics imported by India originate from China. These imports have already slid down to 40% in light of the coronavirus outbreak and subsequent lockdown. As a countermeasure, India is considering the promotion of indigenous production in a bid to reduce dependency on a single market. Additionally, China is India’s thirdlargest export partner for export of raw materials like organic chemicals, mineral fuels, cotton, etc.; and lockdown of the countries is likely to lead to a substantial trade deficit for India.
India is hugeon 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 are expected to face losses worth thousands of crores. The World Travel and Tourism Council (WTTC) estimates the crisis to cost the tourism sector at least USD 22 billion, the travel sector shrinking by upto 25% in 2020, resulting in a loss of 50 million jobs.Experts believe the tourism industry is likely to take a massive hit, and it could end up crippling the industry for the foreseeable future.
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. Private airport operators have requested the Government to grant permission to impose a nominal passenger facilitation charge on airfares to cover the increased operating cost.
Impact of COVID-19 on FMCG Sector
After the lockdown announcement, demand for essential FMCG products spiked up owing to hoarding and panic buying by consumers. Grocery items, milk, and hygiene products have seen a surge in demand while supply chain constraints have limited the manufacturing capacities.
Impact of COVID-19 on MSMEs
Micro, small and medium enterprises (MSME) exporters have been impacted more by the current lockdown on account of Covid-19 pandemic as the sector accounts for over 45 per cent in the country’s total outbound shipments. They will also face issues in calling back their workers as several of them have migrated to their villages and towns. However, incentives will help exporters to resume work immediately after things start getting normal, otherwise they will not be able to restore their global suppliers.
Opportunity in a crisis
Like India, several international economies are becoming cognizant of the risk they have faced by being overly dependent on one market. Making the current situation a learning opportunity, it is believed that this is the time Indiacan work on capturing potentially 40% of their competitor’s market share by looking at indigenous production of goods, furthering the country’s Make in India campaign.
Recovery from the current situation demands companies to think and act across the five horizons as below
India is at a crucial juncture in its fight against COVID-19. The country has responded with urgency and determination as reflected in the Prime Minister’s bold and decisive leadership.The government has also aggressively stepped up the response measures – find, isolate, test, treat and trace. WHO is supporting the government’s endeavor to further strengthen and intensify surveillanceand build capacity of the health system.
About the Author
Author is Neeraj Bhagat, FCA helping foreign companies in setting up of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi.