COVID-19 and its impact on Indian Economy

The world is now passing through a very critical period. A deadly virus is forcing us to spend sleepless nights. We are facing a serious threat to our lives. The World Health Organisation has named the disease as COVID-19 which has now been declared as a pandemic. The entire world is trying to combat a virus which is highly infectious with no straightforward and pinpointed treatment as of now. The stress on the healthcare system is unprecedented with large number of patients being required to be sent to hospital and many of them requiring intensive care treatment where beds, ventilators, doctors, paramedics and other healthcare infrastructure are proving to be insufficient.

Till the time an effective treatment or vaccine for the disease is in sight, medical experts have advised people to remain indoors as far as possible and maintain social distancing just to prevent the virus from entering into somebody’s body and make him sick because the virus can be spread through respiratory droplets and from human to human. It may be possible that a person can get COVID-19 by touching a surface or an object that has the virus on it and then touching his own mouth, nose, or the eyes.

Right now therefore, avoiding social contacts and remaining indoors seem to be the only solution in preventing the spread of the virus. Some countries were casual and complacent in following this simple principle and now facing the brunt of the disease. Taking a cue from this, Government of India has forced a lockdown of 21 days where most of the people are mainly required to be indoors so that the disease can’t spread like wildfire and at the same time required temporary and additional medical infrastructure can be put in place. Some of the State Governments had also put lockdowns in their respective states even before the announcement by the GOI.

Every such drastic decision can result in unpleasant situation and hardships. It can have far reaching economic impact also. The economic impact of a lockdown is very cruel on a section of people which consists mainly of daily wage earners, construction workers, casual employees, people engaged in unorganised sectors and the like. It also affects the employees in those industries which become a direct victim of the lockdown such as construction, tourism, hospitality, real estate, aviation, ride hailing, manufacturing and some of the professional services. Sectors like Banking, Insurance also take an indirect hit. There are job losses, pay cuts, halt on Government expenditure on infrastructure and terribly weak consumer demand. The stock market hits an extraordinarily low and investors’ wealth is wiped off in a jiffy.

When the virus first hit China, India saw a problem with the supply chain since India depends a lot on Chinese imports in sectors like electronics, mobile phones, capital goods, fertilizers, organic chemicals, iron and steel, medical equipments and raw materials. Automobiles and Pharma sectors were hard hit. However, with the subsequent drastic fall in demand, and a continuing slowdown in the economy, lot of companies temporarily shut their factories and with the present lockdown, manufacturing activities in most of the sectors came to a grinding halt. Since this will result in drop in revenue and profitability of the companies, workers in all probability will face salary cuts or retrenchments. Prime Minister’s call for no layoffs or salary cut notwithstanding, layoffs could be painfully inevitable in SMEs because small and medium businesses would be under severe stress and they probably can’t afford to pay salaries. Liquidity would also be a problem for those units. Moreover, since states which have substantial contribution to country’s GDP like Maharashtra, Tamilnadu, Gujarat, Karnataka are all hit by the new virus, the economic slowdown will aggravate.

The future is uncertain for the Indian economy as well as most of the big players of the world economy. There may be a situation in future where India could control the corona virus effect reasonably well. The hit on the GDP in that case will be comparatively less. In situations where both Indian economy and world major economies face a grim scenario, the Indian GDP may not even touch 3-4% while there could be contractions in other economies. However, if Indian economy can manage to come out relatively unscathed from the virus effect but the world major economies face recession or substantial slowdown, Indian market and economy would perform quite better.

Experts are of the opinion that the impact of job loss or pay cuts would be severe on sectors like hotel, tourism, aviation, retail, restaurant, real estates, automobiles and for ride hailing sectors like Ola and Uber. The hit on employees in unorganised sectors and SMEs would be the most severe. FMCG could have some insulation from this shock.

A recent study by Economic Times (published on ET of 19.03.2020) reveals quite a scary story. The probable impact as per their findings duly modified with presumptions based on current scenario is as follows:

It is therefore, imperative that to support financially the poor and the severely affected in such a time, the Government needs to announce a stimulus package which would first provide the necessary sustenance to those people who are hit hard by the lockdown and thereafter to the affected business units, industries, and the entire economy as a whole. A fight on the medical front should also be backed up by an equal, if not more, fight on the economic front. Otherwise the purpose of lockdown is lost. People, who would survive on the medical front because of lockdown or medical facilities, may die an unfortunate death on the economic front.

Towards this, there had been announcement of three pronged stimulus packages by the Government. In this first of such three packages, the Finance Ministry had announced relaxations on the compliance front where the due dates for filing of GST returns for the months of February to April has been extended to the last week of June. The due date for belated filing of Income Tax returns for financial year 2018-19 was also extended to 30^th June. In some cases, late fees and penalty have been waived and rate of interest was reduced. These measures have given some relief to the businesses particularly the SMEs. There have been relaxations in some issues related to corporate compliances as well as SEBI complainces. Although the compliances have not been waived off and those have been just postponed to a future date, but still this would bring a lot of relief as compliance burden of the same at this particular juncture would have practically killed the businesses.

Through the second package, the Government has tried to alleviate the difficulties of the poor and the needy. In this front, the Government has launched The Pradhan Mantri Garib Kalyan Yojana and tried to support the needy through free provision of additional foodstuffs, cooking gas, direct cash transfer to accounts, increased wages under MGNREGA, relief to construction workers, payment of first instalment of Rs. 2,000 to farmers and ex-gratia payments to poor senior citizens, widows and disabled during the next 3 months, total cost of which to the exchequer would be about 1,70,000 crore rupees. This may provide the underprivileged with at least the bare minimum basic necessities for the next three months. However, it is imperative to ensure that these aids reach the needy quite fast and without any bottlenecks or kickbacks. In addition, a medical insurance of Rs. 50 lakh for the frontline healthcare workers was also announced. PF rules were also tweaked a little bit to give some relief to the employees in the organised sector.

The third package was announced by the Reserve Bank of India where the Central Bank has announced a 3 month’s moratorium on payment of EMIs of loans and service of interest in cash credit accounts without effecting credit rating of a borrower and without affecting NPA norms. The repo and reverse repo rates as well as CRR were reduced to inject liquidity into the system. The moot question here is although the banks will have enough liquidity but would there be enough credit offtake beacuse the demand scenario will still remain bleak. Although the banks earn very insignificant amount holding liquidity which may not even cover their cost of deposits, still it remains to be seen whether banks will have an appetite to lend to the affected sectors like aviation, hospitality etc. which will take time to stand on their feet again. This issue also needs to be addressed whether the 3 month’s moratorium on loan payments would nullify or negate this particular additional liquidity?

Although the economic lockdown will have negligible impact on certain segments like the Government Employees as well as most of the employees in the organised sectors as there would be either no or insignificant job losses, their demands would also not be fulfilled in the near future as supply chains would remain stalled or significantly affected. Consequently, a combined force will drastically bring down the GDP. However, the government had formed a ministerial level committee with the Home Minister and Defence Minister at the top to mitigate the supply chain problems arising out of the lockdown. Continuous reviews and actions in this aspect would certainly alleviate the temporary hardships being faced by the citizens.

Therefore, the question remains whether the stimulus is enough or not – both quantitavely or qualitatively? Would it be able to help the economy absorb the shock of the lockdown? Compared to what the USA (2 trillion USD), Germany (610 billion USD), UK (424 billion USD), France (335 billion USD), Spain (218 bilion USD), China (78.8 billion USD) and Italy (27.3 billion USD), the spending by India (1,70,000 crore – 22.5 billion USD) may prima facie appear to be insufficient. However, such a comparison is not easy and straightforward because a lot of factors are to be taken into account. In addition, the important factor that needs to be considered is whether at this point in time the country is able to spend more than this or not. Against a revised budget estimate of Rs. 21,63,000 crore for 2019-20 towards Tax collections, the collection as on 31^st Dec 2019 was to the tune of Rs. 13,83,000 crore only with a clearly huge shortfall. In addition, a substantial amount would also have to be spent now to tackle the pandemic which is of utmost priority. On the top of it, huge additional spending would jeopardize the fiscal deficit discipline although at times of emergency, fiscal deficit should not be a matter of concern at all. It would also have to be seen how long this virus continues to affect India and going by the hygiene standard and herd mentality that we have, it the virus continues to affect us beyond 3 months and extends to 6-8 months, quite obviously these packages would be grossly insufficient and more money will have to be pumped into the economy. If need be, currency notes will have to be printed and circulated and concerns about higher fiscal deficit should be simply pushed to the backseat. The corporate sector and a section of large hearted people have also come forward at this time of distress to support the government initiatives in fighting this menace which should provide some financial comfort to the Government.

The pandemic has appeared from nowhere as a potential death knell to the World economy which is already under stress and India is no exception. There is no second opinion that this pandemic has hit the world very hard and would continue to do so in the foreseeable future. Whether India can emerge from the medical pandemic as well as the economic pandemic relatively unscathed remain to be seen. We will have to take care of the lives as well as the livelihoods of our citizens. As Indians, we hope, we shall overcome.  Together we can do this and we will.