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  • May 25, 2020 - The Coronavirus Impact on the Indian Economy - 8 Points to Track

The Coronavirus Impact on the Indian Economy - 8 Points to Track

May 25, 2020

The world continues to fight its war against the coronavirus pandemic.

With the rising number of cases every day, losses to both human lives, and economy are substantial.

The Indian economy was already under the pressure before the pandemic broke. Matters have only got worse since.

In this article, we look at the worsening impact of Covid-19 on the Indian economy so far.

But there's also a silver lining. Read on...

  1. GDP Growth: From Peaking Out at 7.9% to Falling 4.7%! Is the Worst Yet to Come?

    The Indian economy was grappling with its own issues and COVID-19 has made matters worse.

    The industry was facing demand problems, due to which business houses were reluctant to undertake capex plans. Unemployment was at its peak and exports were consistently down for several months.

    India's GDP growth has been on a consistent decline after peaking out at 7.9% in Q4 of FY18 to 4.7% in Q3 of FY20.

    The numbers are expected to have fallen further in Q4FY20 due to Covid 19.

  2. Spiking Inflation Numbers

    After peaking at 7.6% in January, inflation eased to 6.6% in February. The Reserve Bank of India (RBI), which skipped providing estimates during the March 27 policy meeting, has forecast Consumer Price Index (CPI)-based inflation at 2.4% in Q4 of FY21, halving from 4.8% in Q1.

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  4. Unemployment Rate Shoots Up

    Since September 2016, the rate has climbed rather steeply from the 7.2% level of January 2020. The unemployment rate has been rising steadily since its low of 3.4% in July 2017.

    The scenario gets much worse in the lockdown.

    In March 2020, the labour participation rate fell to an all-time low, the unemployment rate shot up sharply, and the employment rate fell to its all-time low.

  5. Manufacturing and Services Sector Activity Collapse

    India's services and manufacturing activity suffered a shock collapse in April 2020 with the national lockdown.

    The manufacturing activity, an important part of any economy, suffers from total lack of clarity. The lockdown has put great stress on supply chains of essential commodities.

    The services sector, the engine of economic growth and jobs, underlined the pandemic's sweeping impact across India.

    The Nikkei/IHS Markit Services Purchasing Managers' Index plunged to an eye-popping 5.4 in April from March's 49.3, an unprecedented contraction since the survey first began over 14 years ago.

  6. Subsequent Sectoral Impact
    • Automobiles sector, which constitutes around 10% of the GDP was already under pressure since quite some time impacted by declining sales quarter-on-quarter.

      As per Society of Indian Automobiles Manufacturers (SIAM), sales hit a two-decade low in January 2019. With the lockdown and loss of income, discretionary consumption is likely to be hit for a couple of quarters. Hence, it may pose a big challenge for many auto companies.

      However, a lot of auto companies including Maruti Suzuki and Hero MotoCorp have resumed partial operations.

    • Banking and Financial sector was facing massive problems with the collapse of IL&FS, DHFL, and the Yes Bank fiasco before the pandemic hit. The biggest blow of this pandemic has been felt by the banking sector.
    • IT sector which plays a key role in the Indian economy may not remain immune to the crisis as they secure a major portion of their business from Europe and North American countries which are badly impacted by COVID -19.
    • Not surprisingly, tourism, construction, and hospitality are the worst hit, losing most of the business in the first quarter of FY21.
  7. Stock Market Crash

    Coronavirus has shaken stock markets worldwide. 2020 has already seen one of the worst market crashes in history.

    Will the 2020 Market Crash Be Worse than 2009?

    Naturally, there is an atmosphere of fear all round.

    Is it time to sell stocks now? Will the correction get worse?

    Well, the key is, if you can find good businesses that can survive the current crisis, you will do well in the long run.

  8. Various Measures Taken...

    The Government of India has announced a variety of measures to tackle the situation, from food security, extra funds for healthcare, to sector related incentives, and tax deadline extensions.

    On 12 May, Prime Minister Modi announced an overall economic package worth Rs 20 trillion, 10.2% of India's GDP, with emphasis on India becoming a self-reliant nation.

    At about 10.2%, it's among the biggest stimulus packages announced over the past few months by governments all around the world.

    This is evident in the chart below:

  9. The Silver Lining

    Interestingly, India can become an outsourcing hub. The global slowdown will mean that countries like the US, will be looking out for low-cost outsourcing destinations like India.

    Further, a lot of global buyers have already shifted to India to source ceramics, home appliances, fashion, and lifestyle goods.

    Meanwhile, as per the reports, around a thousand foreign manufacturers want to relocate their production to India, a country they see as an alternative to China.

    Here's an excerpt from one of the articles, co-head of Research Tanushree Banerjee wrote on Indian economic recovery:

      "It's also a fact that India's importance in the global supply chain has never looked better. PM Modi himself referred to that.

      Therefore, utilising the stimulus package to tighten India's presence in the global supply chain will be the fastest way to move up the Swoosh index. Any delay or disregard would cost India dearly.

      True that Apple, Samsung and several smartphone manufacturers are already considering an expansion of their Indian capacities.

      But the land, labour, liquidity, and legal reforms cannot remain on paper if the Make in India dreams are to be realised.

      I expect to gather more cues about India's prospects on the Swoosh index over coming months."

Watch this space as Tanushree tracks these Rebirth of India megatrends closely.

Meanwhile, we will wait and watch how the macro numbers unfold going forward.

Rini Mehta

Rini Mehta is a keen follower of the stock markets and economy. At Equitymaster, she covers daily stock market moves and broader market trends across Indian and global markets.

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Sep 30, 2020 09:37 AM