While almost all the industries have been impacted because of this pandemic, the ones which have been hit harder than the others are the Airlines & Tourism, Hospitality, Automobile, and Power, says Abhishek Kumar, as he studies

There are certain events which remain etched in one’s memory for a lifetime, for its impact is not limited to a particular geography and neither is it restricted to a particular aspect of social living, but encompasses almost every aspect of human life. The outbreak of coronavirus which has now taken the form of a pandemic affecting more than 180 countries across the globe is one such event. Starting from a small cluster in the capital of China’s Hubei province, it has now affected almost everyone in one way or the other and has brought the world to a screeching halt.

Now as the governments across the world have resorted to the only proven public health measure, that is, social distancing to contain the spread of the virus, the second thing which has most severely been impacted is the economy and its growth with public health bearing most of the brunt.

While it seems plausible on the part of the government and the policy maker to take such a stringent action, doing so has severed the flow of goods and people and disrupted the economic activities at almost every level — right from farming to mining to industries to services. And with this, the economic deceleration is spreading as fast as the coronavirus itself.

The Immediate Impact

For any economic activity there has to be a supply side and a corresponding demand side and absence of either of the party stops the activity. With people staying at home, there has been a substantial dip in the supply side of the economic chain. First, because of a decrease in the labour participation on account of social distancing and lockdown, the productivity has declined as there are no workers running the factories and mills, no farmers tilling their land and no carriers to take goods from their source (factories and farms) to destination (consumers). This particular problem of lack of carriers has already resulted in wastage of many essential goods though the government is trying its best to keep the production of essential commodities and its supply chain intact.

Secondly, because of this slowdown in the economic activities the financial institutions are facing liquidity issues and a credit crunch is being felt everywhere. The banks are not looking anymore to increase their asset size and their focus has primarily shifted in keeping the balance sheet intact as many of them are still recovering from the bad debt crisis. Also, the scars of the 2008-09 financial recession are vivid in their memories. To help in this regard and to see that there is no additional impact of coronavirus on India’s lenders due to a potential slowdown, the Reserve Bank of India (RBI) has introduced measures to pump more rupee liquidity into the banking system through its ‘Long Term Repo Operations’ and reduction of 25 basis point in its reverse repo rate. Additionally, the central bank has relaxed the asset classification norms which will help banks not to classify some of the (non-NPA) stressed borrowers as defaulters and has eased the liquidity coverage ratio for commercial banks from 100 percent to 80 percent (to be restored by April 1, 2021). All these measures will provide the much-needed liquidity and will keep the credit flowing.

While there is a clear visibility of restrictions on the supply side, the demand side too has started to contract, and this is further hampering the economy which might lead to a vicious cycle of further decrease in supply until the government intervenes and take necessary steps to keep the demand flowing. Usually, demand in any economy is driven primarily by private final consumption, private investments and government expenditure. According to the Economic Survey 2020, private final consumption contributed to around 60 percent of India’s GDP. With people cutting down their consumption to their basic essential needs and forgoing their discretionary expenses, the private consumption has dampened. The private investments too have witnessed a slowdown primarily because of lower credit flow and secondly because of future uncertainty. Government expenditure, however, is expected to provide some relief and add to the GDP growth. The stimulus package of $24 billion (Rs 1.7 lakh crore) in the form of Pradhan Mantri Garib Kalyan Yojna to provide relief to people is likely to mitigate some impact and help the poor and daily wage earners sustain during these difficult times.

Another issue which is more relevant to the Indian economy is its huge informal sector which accounts for roughly 94 per cent of the total employment in the country and contributes about 45 per cent of the output. Further, this informal sector employs mostly contract workers or daily wage earners and migrant labourers who are from low-income households and they are the people who are the most impacted because of the lockdown.

The International Monetary Fund (IMF) has come up with a report and has projected a gross domestic product (GDP) growth of 1.9 per cent for India in FY 2020-21. With this subdued forecast, India might witness its worst growth rate since its economic liberalization of 1991. Still, India is among the only two major economies expected to register a positive growth rate in FY 2020-21; the other being China, as the global growth rate in FY 2020-21 is expected to fall to negative 3 per cent.

Impact on Key Sectors

While almost all the industries have been impacted because of this pandemic, the ones which have been hit hard are the Airlines and Tourism, Hospitality, Automobile, and Power. Aviation and Tourism is probably the worst affected sector as all the passenger traffic- inbound, outbound and domestic has been grounded during the lockdown. As per International Air Transport Association (IATA), airlines globally can lose in passenger revenue of up to $113 billion due to this crisis. Further, the industry is already low on cash reserves, and cancellation, rescheduling and lower traffic may lead to job losses and pay cuts. According to IATA report, more than 20 lakh jobs are at risk in India’s aviation space and dependent sectors because of the coronavirus pandemic.

The hospitality sector which includes hotels, restaurants and foods and beverages have also seen a substantial downfall in its footfalls. Occupancy across hotels in key cities have declined rapidly by a staggering 45 percentage points compared to last year which has never been seen before. Additionally, many restaurants which already run on a very thin margin will be forced to layoff its staffs or close its operations.

Automobile sector’s slowdown is also clearly visible. With China accounting for more than 27 percent of imports of India’s automotive part and closure of their factories, there has been a delay in the production and delivery of vehicles. Almost all the major manufactures witnessed a drop in its March sales which is the peak period of inventory clearance for the industry. Maruti Suzuki India’s domestic passenger vehicle sales fell 47 per cent and Hyundai witnessed a drop of 40 per cent. Further, the requirement to comply with the BSIV emission norms which was to be implemented from April 1 have decreased the sales further as new BSIV vehicles were few and most of the companies are pushing the production of new BSIV compliant vehicles to a later date.

Also, as most of the factories are closed during this lockdown and with fewer vehicles plying on the road, the consumption of electricity and petrol/diesel has come down substantially. While the electricity consumption contracted by 26.6 per cent for April 1-10 2020 over last year, consumption of petrol fell by 16.4 per cent and diesel by 24.2 per cent in March 2020 on a year-on-year basis.

The stock market too has reacted to this pandemic and BSE Sensex fell from the level of 41,000 in mid-February 2020 to 29,000 by the end of March 2020. A decrease of over 30 per cent in such a short period of time has resulted not only in the loss of investors wealth but also in their trust in the capital market.

The Way Forward

The COVID-19 became a pandemic primarily because it is novel and till date no proven cure for this disease has been found out. So, it’s clear that once a cure or a vaccine, which will help people build immunity against the virus, is found, the need of social distancing will gradually phase out letting loose the neck of the global economy which it has presently gripped. Till such a cure is found, social distancing, full-scale testing and rigorous quarantine is the only solution to restrict the spread of the virus.

And while the medical practitioners are doing their best to control its spread and finding a possible cure, the government need to keep the economic activities to such a sustainable level from which it can be rebound easily once the pandemic is over. While a stimulus package was already announced in March, the extension of this lockdown for another three weeks would require another such package.

To ease the load of households and businesses struggling to make their regular payments, the central bank has advised all the lenders to provide a moratorium of three months on mortgage and other loan payment for residential and commercial borrowers. However, borrowers need to be educated of such measures so that they can benefit from it in case they are facing any liquidity issue.

Another focus point of the government should be to take care of the small and medium enterprises (SMEs) which may not have the adequate liquidity to survive the crisis.

Many of them are going to shut their shops and many might ask their banks to restructure their loans. With the limited fiscal resources that we have, we cannot help all the ailing SMEs but turning a blind eye to their ailment will only worsen the situation. Accordingly, the government and the central bank need to find some innovative solution. For instance, providing ‘bridge loans’ to such SMEs at zero interest for the duration of this crisis with an extended repayment period might provide them some support in sustaining their operations.

The entire idea of lockdown rests on two assumptions. First that it will help in checking the spread of the virus so that public health is not jeopardised. Second is that it can be enforced only for a limited period of time and extending it beyond certain duration may not be feasible as doing so will bring down the economy to such a level that people may start dying of malnutrition and hunger. While it is said that social distancing has helped contain the spread of the virus to a certain extent (as per Dr V K Paul, a government health expert and member of NITI Aayog, from doubling every three days, the number of active cases is now doubling every eight days and instead of 23,000 active cases in India as of April 23, the number could have been around 1,00,000 had lockdown not been implemented); the trick is to find the duration for which the government can afford to keep the people and economy in the lockdown stage. It is because during this lockdown there wouldn’t be much economic activity and the government would need to provide for all the marginal section of the society. Doing so for an elongated period of time would, however, blow a dent to the government’s fiscal deficit which is already high. And increasing it further would make the government’s debt burden unsustainable, leaving it with very little space to intervene in future when necessary.

The policy makers appear to be aware of this trade-off and in the second stage of the lockdown it has listed a set of economic activities which could be carried out in a restrained manner with all precautions in place so that essential goods and services keep on flowing. Another approach which the government can take is to identify the areas which are least affected because of the virus and start economic activities there at a much larger scale. For instance, Sikkim which is the only Indian state without any recorded Covid-19 positive case as of April 14 may resume its economic activity in full scale with the necessary precautions in place. Also, identifying and allowing only healthy workers to join back the work would be a critical step in this direction. If the government follows such steps, then it should ensure that all the poor and contract workers including daily wage earners who are not able to join workforce because of their health conditions are provided with essential foods and amenities so that they can survive in this period of crisis.

A Substantial Shift

There is no denying the fact that the world will not be the same once this pandemic end. The way we live, the way the businesses and trades are done, the way Universities carry on their lectures and the way corporates conduct their HR practices is all going to witness a substantial change. Technology and its usage will become more of a norm of life. Students will get used to online classes of their favourite professors and video conferencing will get more sophisticated with adoption of virtual reality in almost all offices. And while not every job can be done from home, the resistance to work from home is likely to see a substantial fall as the corporates would get used to and become efficient in getting the same productivity from their employees which they had when they used to work from their office desk. This may initially increase the technology cost but in the long run may prove cost effective as the corporates would be able to cut down their rental expense and employees would be able to save their commute time and cost. This in turn would help in easing the traffic congestion and probably might help people breath fresh air again. Going to movie theatres and restaurants will not be the same again. With a splurge in the subscription based streaming services already in place, movie producers will release their movies directly on these platforms. The millennials are likely to learn the forgotten art of cooking delicious food at home and this will come as a sigh of relief to their mothers and grandmothers. Whatever the future holds for us, much has to be done in this hour of crisis and only a collective effort of everyone would help in bringing an end to this crisis. Once the situation is brought under control with a little nudge from India’s hot and humid climate which is likely to knock on our doors in a month or so, what we need to do is to reignite hope and rebuild India.

The writer is the author of Index Investing: A Low Cost, Low Risk Strategy to Investment Success, published by SAGE Publications India