Covid-19 impact: ADB expects India’s economic growth to slow down

Covid-19 impact: ADB expects India’s economic growth to slow down

The world was as it is going through some really tough times. Slowing economies, rising crude prices, increasing trade tensions amid depreciating currencies, loss of work, work visas…

In the midst of all this, the coronavirus struck the nation. With cases now having risen to two million across the globe, matters are now getting out of the hand. The pandemic has had far-flung economic consequences: chain inefficiencies crashed global stock markets, paused industrial activity, dipped consumer demand; these are just a few of these problems. And when it comes to India, the country was as it is witnessing its longest term of GDP decline in almost thirty years! The nationwide lockdown has already wiped out around INR 8 lakh crores from the economy, and if it is extended further now, the troubles will only increase exponentially. As per the World Bank, the GDP growth rate of the country will fall to 1.5 percent to 2.8 percent in the ongoing financial year; which would then lead to the slowest GDP growth ever since 1991!

Domestic consumption, investments, and external trade are the three major contributors to the GDP of the country, and all three have been severely affected by the pandemic. Now, there is an urgent need to mobilize resources to stimulate the economy.

By now, it is quite evident that this is not just a crisis. It is fairly different from all past recessions. Or as KPMG described it, it is, in fact, a shakeup of the economic order of the world. Arun M Kumar, the Chairman, and CEO of KPMG, India; stated that the game-changing impact on our social behavior is perhaps one of the most striking aftereffects of the pandemic. Not just the government, but businesses and the society too need to be swift and innovative in looking for a response to cope up with this ‘evolving new normal’.

Where is India in all this chaos?

Falling domestic consumption:

The consumption of all non-essential items will go through a sharp fall in the quarter. These items include communication services, transport, and other consumer durables. These durables include TVs, ACs, etc; the money that is spent on recreation, in hotels and restaurants, travel, etc. and to an extent, even on education and skilling. As a result of this weak domestic consumption, firms will then have to delay their investment, which will only add pressure to the economic growth of the country. As a result of the crisis, the nation has also witnessed job losses and pay cuts across industries. Eventually, even big businesses will be adversely hit.

Essential items, however, like food, clothing, footwear, soaps, detergents, gas, electricity, healthcare, etc. will all be able to gain in the short term. In the mid to long term, however, the disruption of these domestic supply chains and the non-availability of these items will lead to inflation.

Impact on the informal economy and MSMEs

The informal economy, as well as daily wage earners, have been hit strongly by the pandemic. Soon after the lockdown, the migrant workers had no option but to flee from big cities to their native land, to at least be able to earn their bread and butter. Social distancing and ‘stay at home’, are of course elite concepts for them. Though the government did announce an INR 1.7 lakh crore relief package for migrant labor under its Pradhan Mantri Garib Kalyan Yojana, matters will become worse, now that the lockdown has been extended.

About 37 percent of salaried employees in urban India are all informal workers, who are engaged in non-agricultural sectors. These people have a lot of uncertainties, since stalling industrial and economic activities have led to a loss of jobs. This income shock to migrant workers has resulted in a reverse migration, and its complete effects are yet to be seen. MSMEs are also adversely impacted, because of the uncertainties of contractual labor. And while even the US and Europe are also battling with the impact of the virus, exports (which are a major chunk of earning for these MSMEs) will also be adversely hit. Even after the lockdown is lifted, there will be far-flung impacts, due to the global slowdown.

Sectoral impact on essential goods and services

A lot of the offerings of consumer retail and internet businesses fall under ‘essential items’, and these sectors are likely to be less affected. While e-commerce based activities will continue to increase, spending on durables and electronic items will go down. In the short term, the supply of agricultural commodities will remain normal, though its larger impacts are yet to be found out. Export opportunities to countries other than China are likely to open up, though governmental policies on transport and logistics will play a key role in determining their price. Before that, however, it is a must to re-align all workforce and labor and wipe out all supply chain inefficiencies.

Prices of self-hygiene products and key drugs, including sanitizers, gloves, disinfectants, masks, handwashes, etc. will probably see a sharp rise; till their production can meet the unusually high demand. Post the pandemic, consumer demand for health insurance will also increase.

 On the flip side, cash flows for private healthcare operators have fallen due to the closing down of health services, which has then led to salary cut-offs and layoffs. Prices of medical and pharma equipment, especially those which are imported from China, are expected to go up, which will naturally have positive effects on both homegrown innovation as well as med-tech startups supported by the government.

Telecommunication, which forms the backbone of the country’s internet economy, will also be hit in terms of new technology development. 5G auctions will have to wait as operators will have to shift focus to servicing the current demand surge and also try to improve the quality of service. Additionally, as non-discretionary spending is being postponed, the demand for new handsets is also expected to go down.

Sectoral impact on non-essential services

The apparel and textile industry is one of the worst-hit. This sector employs over 45 million people indirect jobs, and a large number of contract laborers additionally. With the lockdown, factories have been temporarily closed, and low wage earners are badly suffering. At the same time, the sector is fighting with a decline in yarn exports as well as cheaper imports. On the positive side, this might open up local sourcing opportunities for garment manufactures, which can lead to a fall in the prices when the markets open up.

The automotive sector is badly hit too. The sector was anyway going through one of its lowest phases in 2019. Manufacturing units have shut down, and consumers have postponed their vehicle purchase plans. The availability of contract labor is also an issue, which has brought the entire sector to a grinding halt. What is worse is that the auto sector of the country is dependant on China for around 25 percent of its automotive part imports.

Another big industry which is witnessing a sad bloodbath is that of travel and tourism. As per data, it is estimated that the aviation, hotel and travel sector will together incur a loss of around INR 85 million, because of the various restrictions that have been imposed. The sector is also facing the trouble of large scale cancellations, and a pause on all domestic operations. Both outbound and inbound travel will be on an all-time low this year, and the impact will be felt on both white and blue-collar jobs.

Supply-side impact

China is one of the largest sources of import for our country. Delay in imports from China, as well as additional custom duties, will lead to a shortage of raw material and intermediate goods for Indian companies. Top commodities that are imported include electrical parts, machinery, organic chemicals, plastics, fertilizers, etc. Naturally, firms that make use of these commodities will have to face problems concerning their research and development, operation, investments as well as product launches. Luckily, the overall impact of this haul in imports from China could be muted to some extent. This is because the economy at large is relatively insulated taking into consideration its low reliance on intermediate goods. Additionally, Indian firms anyway have a habit of stockpiling their inventory.

Can there still be light at the end of the tunnel?

As per the United Nations Conference on Trade and Development, India might be of the two major economies that are the least exposed to this global recession. They firmly believe that the recovery of our economy will be “smoother and quicker than that of many advanced countries”.

That being said, the business scenario in India will look very different post the lockdown. There will be a decent shift towards localization, with companies opting for liquidity and the development of cost models that can absorb a crisis better. With economies across the globe now trying to adopt de-risking strategies, they might want to shift their manufacturing bases outside China, which can create exciting opportunities for our country. This opportunity, however, of course, depends on how quickly the economy can recover, and how quickly all supply chain issues are addressed. But to sum it up, it is safe to state that we are all working on developing more permanent changes in the way we live and work.