Impact of COVID 19 on Indian Economy and the way forward

There is a high likelihood, we are months away from a semblance of normalcy owing to the mutating virus, that has been bringing wave upon wave of attacks, each deadlier than the other. Using the World Bank’s headline projections about India, of 3.2% contraction in 2020-21 and 3.1% growth in 2021-22, it becomes easier for us to calculate the projected growth for different sectors of the economy. This comes to a 7.2% contraction in 2020-21 and 1.4% growth in 2021-22. Since the big jolt given by pandemic Covid19 in March 2020, India has been facing a huge decline in government revenues and growth of the income.

Actually, the economic impact of COVID-19 is highly disturbing. No one has been spared of its ill effects. Economies of about 100 plus countries have been destroyed out of which some of them have asked for monetary help from IMF. ADB etc. Businesses across the world namely hospitality, entertainment, aviation etc. have seen a major negative impact. Various sports events such as IPL and Olympics have been postponed. Schools and colleges have been closed. The virus has also disrupted the functioning of various online giants.  Countries such as USA, UK, Italy, SpainBrazil and India are suffering the most.

There is a big shift in the world economic market and the share market has witnessed crashes day by day. Factories, Restaurants, Pubs, Markets, Flights, Super Markets, Malls, Universities and Colleges etc. have been shut down for 2 quarters. Fear of corona virus is so heavy on the heads that People prefer to go out to buy the daily essentials The Organization for Economic Co-operation and Development (OECD)reveals that they have cut their expectation for global growth to 2.4% from 2.9%, and warns that it could fall as low as 1.5%.

India’s total electronic imports is equal to 45% that of China. Around one-third of machinery and almost two-fifths of organic chemicals that India purchases come from China. For automotive parts and fertilizers China’s share in India’s import is more than 25%. Around 65 to 70% of active pharmaceutical ingredients and around 90% of certain mobile phones come from China to India.

Covid-19 has disrupted global supply chains and this is generating spill over effects throughout different levels of supplier networks. Global trade in 2020 has been falling in every region of the world thus affecting not only strong exporters (no output for their local companies), but also those that are importers (lack of raw materials). The World Trade Organization (WTO) expects global trade to fall up to 32% this year due to the coronavirus pandemic.

In this backdrop, how fragile is India’s unorganized sector, has been sufficiently proven when on 27 May 2020, lakhs of daily wagers, migrant workers and people of small means, on being deprived of food and shelter, were constrained to move back to their native places. Undoubtedly, this has been the biggest recession after Second World war.

The outbreak of the virus has unprecedented implications on different sectors of indian economy. Severe economic burden and grave consequences have to be borne by the Indian industries in this backdrop of declining economic situation due to coronavirus. Hence, it is highly pertinent here to gauge the impact of this pandemic on different sectors of indian economy.The COVID-19 pandemic pushed our economy into a Great Lockdown, which helped contain the virus and save lives, but triggered the worst recession since the Great Depression of 1930. It faces an uphill task in its battle to recover from the COVID-19 setback. The construction had a share of 8% in GVA in 2018-19. But its employment share, according to the 2018-19 Periodic Labour Force Survey (PLFS), was 12%. Financial services, real estate and professional services, on the other hand, had a GVA share of 22% in 2018-19. The employment share of this sector was only 3.4%. This means that construction is a more labour-intensive sector than finance.So, for an equal value of loss in output, job losses in construction would be far higher than in the financial sector. Bailing out the construction sector can save a lot of jobs, mostly of the poor.

As far as thetourism and hospitality sector is concerned, we find that the tourism constitutes 10% (US$ 275 billion)to India’s GDP. This is no small amount and the havoc caused to it by Covid 19, has been alarming.Governments across the world have sealed international borders. There is a suspension of all international and domestic flights. Together this has brought an unprecedented phase in the history of hospitality industry.  They have experienced exponential growth in cancellations of about 90%bookins in March 2020 while new reservations are almost zero thus causing a huge loss of Rs. 620 crores. According to The Indian Association of tour operators, the hotel, aviation and travel sector together may incur a loss of around 8,500 crores due to the restrictions imposed by the Indian government on the movement of flights.

Agriculture accounts for 16.5% to GDP and 43% to employment. COVID-19 is disrupting some activities in agriculture and supply chains. Preliminary reports show that the non-availability of migrant labor is interrupting some harvesting activities, particularly in northwest India where wheat and pulses are being harvested. There are disruptions in supply chains because of transportation problems and other issues. Prices have declined for wheat, vegetables, and other crops, yet consumers are often paying more. The closure of hotels, restaurants, sweet shops and tea shops during the lockdown is already depressing milk sales. Meanwhile, poultry farmers have been badly hit due to misinformation, particularly on social media, that chicken are the carriers of COVID-19.As  per the survey conducted by Azim Premji University, approximately 37% of the farmers could not harvest their crops, 37% were forced to go for distress selling and 15% failed to sell their produce. The silver lining even in these times has been the faster recovery of the agriculture sector when compared to others. Further, CRISIL projects agricultural growth at 2.5% for 2020-21.

MSME contributes about 30-35% to our GDP, while engaging more than 6 lakh micro, small and medium units, out of which 49% are located in rural and 51% in urban areas. All India Manufacturers Organization survey (AIMO survey June 2020) shows since March, 2020, around 35% of MSMEs and 43% of self-employed have been under closure resulting into 12 crore unemployed masses. The worst-hit have been consumer goods, readymade garments and logistic companies. The Service sector enterprises are still in a better position, treading atleast, slowly though. Similarly, the Online/Internet businesses and start-ups share approx.. 950 billion US$ in our GDP. The nationwide lockdown has tremendously affected the operations of the E-commerce industry especially at a time when there is a huge demand for home delivery of goods.

Looking at the Defense and Security of our country, it has been observed that  COVID-19 impacted the supply chains and production/manufacturing facilities of defense companies. As they have to depend on different components on different sources located in affected countries,this has led to a drastic decrease in demand for defense equipment. The current scenario is not even good for business development as we know that many high-value procurement programmes were finalised during defense shows which are now cancelled. Military exercises, which expose foreign equipment and their capabilities to the prospective buyer also affected business development as many countries like the USA, UK have cancelled travel plans, deployments and exercise for troops. Even the assembled equipment which are ready for dispatch are also held up due to the lockdown of airspace. Due to non-despatchment on time their sale valuesare substantially reducing which in turn is about to affect the balance sheet of the manufacturing companies. The pandemic has taught a lesson to defense industry that they need to explore the different aspects of risk planning and shift themselves toward technological platforms or start using an unmanned system.

If we look at the vulnerabilities of health care system, this pandemic has made impossible for the pregnant women to visit obstetrician for prenatal checkups and instead of this, are opting for telemedicine. Many hospitals are mainly focusing only on COVID-19 patients and due to this, they are ignoring other patients suffering from some other major problems like cancer. If this continues, the death rate from corona will be lower than the death rate from other diseases. This deadly pandemic has taught a lesson that temples, statues and museums are not a necessary requirement but the hospital with world-class infrastructure are. Even there can be seen an adverse impact on the profitability of medical device manufacturers who import consumables, disposables and capital equipment from other countries.

Coming further to Infrastructure, construction and real estate, as a result of halt in construction activities and reduction in demand, over 40% reduction in new unit sales has been found in major 7 metros of India.

The last credit cycle forIndian banking sector had seen sharp surge in bad loans. Indian banks are at the end of a prolonged NPAs clean-up cycle. The hidden stock of bad loans buried deep in the balance sheets, accumulated over the years of easy money era, prompted the RBI to initiate an Asset Quality Review (AQR) in 2015. By now, that process is almost over with banks having disclosed most of the problematic large corporate accounts. Many large cases of corporate loan defaults have been pushed to the Insolvency and Bankruptcy Code (IBC) court for quicker resolution but with the economic activities reduced to nil, it is highly unlikely that there will be buyers for stressed assets.Among the loan categories, fresh loans given to companies including those given to small and medium enterprises (SMEs) face risk if the cash flows of companies remain under pressure, thus impacting their loan repayment ability. Banks remain highly risk averse and the consensus among industry leaders is that most companies in consumer-oriented sectors at the moment are now operating with less than 70 percent of their capacity. In fact, the banking sector’s health depends on how soon the economy recovers.

Solution to the above multi-dimensional problems?

The central Govt. seeing all eyes pinned upon it’s multifarious stimulus package,  announced a special economic package of Rs 20 lakh crore (equivalent to 10% of India’s GDP) with the aim of making the country independent against the tough competition in the global supply chain and to help in empowering the poor, labourers, migrants, adversely affected by COVID.

Policy Highlights

• Increase in borrowing limits:   The borrowing limits of state governments have been increased from 3% to 5% of Gross State Domestic Product (GSDP) for the year 2020-21. This is estimated to give states extra resources of Rs 4.28 lakh crore.
• Privatisation of Public Sector Enterprises: A new PSE policy has been announced with plans to privatisePSEs, except the ones functioning in certain strategic sectors which will be notified by the government.  In strategic sectors, at least one PSE will remain, but private sector will also be allowed.  To minimise wasteful administrative costs, number of enterprises in strategic sectors will ordinarily be only one to four; others will be privatised/ merged/ brought under holding companies.

Financial Highlights

• Collateral free loans for businesses: All businesses (including MSMEs) will be provided with collateral free automatic loans of up to three lakh crore rupees. MSMEs can borrow up to 20% of their entire outstanding credit as on February 29, 2020 from banks and Non-Banking Financial Companies (NBFCs).  Borrowers with up to Rs 25 crore outstanding and Rs 100 crore turnover will be eligible for such loans and can avail the scheme till October 31, 2020.  Interest on the loan will be capped and 100% credit guarantee on principal and interest will be given to banks and NBFCs.Corpus for MSMEs: A fund of funds with a corpus of Rs 10,000 crore has been set up for MSMEs.  This will provide equity funding for MSMEs with growth potential and viability.  Rs 50,000 crore is expected to be leveraged through this fund structure.
• Subordinate debt for MSMEs: This scheme aims to support  stressed MSMEs which have Non-Performing Assets (NPAs).  Under it, promoters of MSMEs will be given debt from banks, which will be infused into the MSMEs as equity.  The government will facilitate Rs 20,000 crore of subordinate debt to MSMEs.  For this purpose, it will provide Rs 4,000 crore to the Credit Guarantee Fund Trust for Micro and Small Enterprises, which will provide partial credit guarantee support to banks providing credit under the scheme. A special insolvency resolution framework for MSMEs under the Insolvency and Bankruptcy Code, 2016 will be notified.
• Schemes for NBFCs: A Special Liquidity Scheme was announced under which Rs 30,000 crore of investment will be made by the government in both primary and secondary market transactions in investment grade debt paper of Non-Banking Financial Companies/Housing Finance Companies/Micro Finance Institutions.  The central government will provide 100% guarantee for these securities.  The existing Partial Credit Guarantee Scheme (PCGS) will be extended to partially safeguard NBFCs against borrowings of such entities (such as primary issuance of bonds or commercial papers (liability side of balance sheets)).  The first 20% of loss will be borne by the central government.  The PCGS scheme will facilitate liquidity worth Rs 45,000 crores for NBFCs.
• Employee Provident Fund (EPF): Under the PM GaribKalyanYojana, in addition to providing almost free ration to the downtrodden classes,  paid 12% of employer and 12% of employee contribution into the EPF accounts of eligible establishments for the months of March, April and May.  This will be continued for three more months (June, July and August).  This is estimated to provide liquidity relief of Rs 2,500 crore to businesses and workers.

• Street vendors: A special scheme has been launched to facilitate easy access to credit for street vendors.  Under which, with a view to generate liquidity of Rs 5,000 crore, bank credit has been provided to each vendor for an initial working capital of up to Rs 10,000. The package is beautifully presented as under:- info

Key Measures Taken by Reserve Bank of India:-

The overall financial package that has been announced also includes the liquidity generated by measures announced by RBI as under:-

• Cash Reserve Ratio (CRR) was reduced which resulted in liquidity support of Rs 1,37,000 crore.
• Banks’ limits for borrowing under the marginal standing facility (MSF) were increased. This allowed banks to avail additional Rs. 1,37,000 crore of liquidity at reduced MSF rate.
• Total Rs 1,50,050 crore of Targeted Long Term Repo Operations (TLTRO) has been provided for investment in investment grade bonds, commercial paper, non-convertible debentures including those of NBFCs and MFIs.
• Special Liquidity Facility (SLF) of Rs 50,000 crore was announced for mutual funds to provide liquidity support.
• Special refinance facilities worth Rs 50,000 crore were announced for NABARD, SIDBI and NHB at policy repo rate.
• A moratorium of three months has been provided on payment of installments and interest on working capital facilities for all types of loans.

To sum up, considering the heterogeneity of problem every sector or industries are facing, the Indian economy will take time to adjust to new normal. Moreover, measures taken to move the economy forward would take time to unfold fully. Their impact can be witnessed after a certain period of time when the actual implementation of measures and policy reforms has been performed. We definitely have to keep moving forward but also need to be patient as any steps taken in a haste might not give us the expected result due to uncertainty prevailing in the economy. Therefore, currently while  focusing on sustaining through this crisis, the need of the hour is that all our policy makers and stakeholders make concerted and honest efforts towards reviving the economy.