Coronavirus and its economic impact

World is now under the dark clouds of coronavirus and has slowed down drastically. The virus has made a global shift in each and everyone’s life. Since it started in late November 2019 in Wuhan China it has spread across all corners of the world halting its economic as well as social activity. Some of the countries have faced the crisis in decades after the world war II and some are entering that phase. Countries like Italy, Spain, United states, UK are few of the worst affected countries with highest death cases. Some of these countries made a complete lockdown and some were in partial lockdown, but the economic impact is disastrous for each country. When it comes to India, which implemented a complete lockdown for more than a month for flattening the curve. Currently, we are struggling for containing but the economic cost of it is more painful for country like India where the millions of people live on daily wages. Let us evaluate the economic impact of the coronavirus on India and explore if we have any opportunity to this disguise.

• Drawdown in GDP forecasts

GDP is one of the main and crucial parameters for gauging economic growth and health of the country. When we analyse this parameter in times of corona crisis, we see drastic changes made in the forecasts and drastic drawdowns in it. Prior to corona crisis we were already going through demand slowdown and substantial fall in auto sales. Further, the GDP forecasts for the entire FY21 were already on the lower side in the range of 5.8% to 6.5% by major overlooking organizations like IMF, World Bank, credit rating agencies. However, post coronavirus world has gripped with major recession and is struggling to cope up with fall in demand. Hence, the new forecasts have come down drastically after the coronavirus outbreak. The global GDP growth forecasts are on a negative side and on the same line other major economies too have shown negative growth rates for the FY21. Similarly, India’s GDP forecasts by major organizations have came down to the range of 1% to 2.5% for FY21. The revised estimates for the FY21 show a severe and drastic decline in the GDP for upcoming year.

• Forex reserves

The foreign exchange reserves play crucial for keeping the export & import business up float over longer period of time. The more the foreign exchange reserves the number of days to server the imports are more. In the past few months our forex currency assets haver shore up very well to all time high of $487 million in March 1^st week. However, post the complete lockdown and falling equity market period the foreign investors had pulled out money very quickly in matter of 15-20 days and the total reserves again fell down to $469 million in the last week of March. However, the reserves at the end of central bank have improved in the month of April and till first week of may the reserves are back to the levels of $481 million. Foreign inflows and outflows are highly volatile and increase or decrease in very short span of time.

Exchange rate implications

Exchange rate too saw a drastic impact of coronavirus outbreak in India. As the coronavirus cases started rising since march and the nation went into complete lockdown the exchange rate too got impacted heavily. The Rupee started depreciating in start of march and touched at the all time of RS.76.6 per $1 in march and since then the rupee has been in the volatile territory again came down from the all-time high levels in start of April. However, as the cases rose continuously and the lockdown got extended and foreign investors took out the money continuously the Rupee touched the all time high again at Rs.76.5 levels.

• Exports

Exports are backbone of many economies and some of them totally on exports. When the world got gripped into the hands of coronavirus and the global trade came to standstill the exports became the first casualty of it. Globalisation has integrated whole world to a new level and sudden halt in global trade has impacted all the countries. Right from semiconductors to oil, from wheat to meat each and everything has been halted. India’s exports too saw a significant drawdown in key industries like engineering goods, petroleum products, gems & jewellery, chemicals, electronics, etc. These products are major contributors to the exports by value and have altogether taken down the exports by 1.5% in the period of April to February. Pharmaceutical products were high in demand hence remained positive in this particular period. Rest all key industries saw a negative number for the period.

• Imports

Since the exports were not allowed to any country imports too were halted. India’s import bill is largely contributed by oil and gold, then followed by electronic goods, machinery, coal, chemicals, metals, etc. Oil, gold and electronic goods make the half of the import bill for India and in the period of April to February the oil and gold imports fell down by 7.9% and 8.9% yoy respectively. The substantial supply glut of oil in the international markets and the lowest demand for oil took the prices to multi year lows. Similarly, the physical gold imports were too impacted as country bought less physical gold this year.

• Interest rates

Slowdown, credit crunch in the economy were some of the key concern economy was struggling with before the coronavirus. RBI, the apex body of monetary policy in the economy was the first to address the issues by keeping the interest rates lower. Further, when the coronavirus impacted the whole economy the central bank acted more swiftly and reduced the rates further to 4.4%. In addition, to infuse more liquidity into the economy it made more open market operations and pumped money in the economy. Also, the bank allowed 3 months of moratorium on EMIs to ease the pain of borrowers in crisis times like this.

• Non- food credit

The non-food credit growth stood at 6.06% and year to date non-food credit in the industry has degrown by 1% in the period of march 27 to April 24 period. The total credit given to industries and individuals is tiding on the lower side in times of covid -19 crisis. The lending to the priority sector remained tepid while the personal loans taken by the individuals were on higher side. On the other hand, the deposits in the bank rose amid yes bank crisis where people preferred to safeguard their money to bigger and safer banks.

• Inflation

Inflation is also showing some loosening as the demand has dried up. The consumer price index and the food inflation both are on lower side as major agriculture and other laborers are facing the brunt of it hence giving up the demand for normal food products. The CPI came down to 5.91 in March vs 6.58 in February and the retail inflation too has come down in march to 8.76 in March vs 10.81 in February. The impact of lockdown can be seen on the prices of food is clearly seen. Going forward the lowering inflation provides necessary room for additional liquidity measures, which needs to be taken to support the prices.

• Industrial production

The industrial production in the country came to an absolute halt in the first time in the history making it the worst hit segments in the economy. Prior to the lockdown period industries were struggling with various issues like credit crunch, loss of demand, lower turnovers due to the slowdown in economy. The IIP stood at 133.3 in the month of February 2020 which is higher over the previous year by 4.5%. However, the lockdown exercised in the month of march 2020 the IIP is expected to be on the lower side due to complete stop in the production activity across the country. Going forward, as the industrial production will remain on a lower side as the economy will be opening slowly and gradually with limited workforce impeding a lower capacity utilisation level all together.

• Equity Markets

Equity markets in the country too showed a devastating impact of lockdown taking the cues from economic indicators and the global markets too. The Indian markets slipped more than 40% after the coronavirus started gripping India. The NSE nifty was trading at the high of 12500 in the month of Jan 2020 and remained in the range till mid of February. However, when the other countries started closing their economies and the markets took the cue of impact of coronavirus the global markets also started falling. The markets fell from 12500 levels to 7500 in March 2020 a decline of 40% in matter of month. Crores of investor value lost in such a short period of time. Going forward as the economy opens up and industrial production starts to kick in the markets will start firming up.

• Unbalancing fiscal math

Government’s fiscal math is on a tumbling side with a widening fiscal deficit before the lockdown period and loss of revenue on many fronts has increased the worries for the government. In crisis period like this which is compared to the great depression of 1929 the government is forced to keep the show going with whatever fiscal measures it has to take. For that they need more welfare schemes which will include direct cash transfers to down trodden sections of the society. They also need to support small and medium industries with tax holidays, subsidies, etc. to overcome from this situation. All these measures will take more out of the government kitty and give much less impacting its fiscal balancing measures. The current fiscal deficit projected for FY21 at 3.4% looks to be hitting immediately in first few quarters itself. The government might go on divesting spree and some borrowing to keep the welfare schemes running till the economy comes back to normal.

Blessing in Disguise for India?

Above parameters show the short term an immediate impact the lockdown and corona virus has on Indian economy. However, this coronavirus has given an opportunity for India also in times like this and can it be taken into consideration, Let’s check out.

When we speak of India which is worlds 4^th largest economy and also one of the largest market due to its favourable economic dividend for many developed countries to market their products. It is also looked as best investment destination in south east Asia and has benefitted the most in situation like this when China has gone through a slowdown period. But this time India too suffers from the perils of corona virus as key capital goods of many intermediary products are imported from China, thus making India also one of the affected nations. Although we don’t have large number of cases enough to stop our economic activity, but shortage of raw materials might impact the productions of key sectors like, Auto & ancillary industry, automobile sectors and pharmaceutical companies who source API’s from China, Electrical equipment manufacturers, etc.

India’s dependence on capital goods from china has increased significantly in previous few years, weather it may be in the form of electrical components for white goods, auto components for automobile industry or pharmaceutical ingredients which form major part of finished good. This dependency is expected to hinder the supply chain in India for those industries. Apart from that big automobile companies have huge market in china and earn significant revenue from China. They might see demand slowdown for cars. All these shortcomings and hinderances are expected to impact in short term to Indian economy. But If we see the larger picture of the crisis, it might prove to be a blessing in disguise.

Oil prices have corrected significantly in past few months which will be major boost to our economy to contain deficit as oil counts for large part of import bill. India in the past has marched ahead on strong economic growth during 2013-14 period when the oil prices were rock bottom. Secondly, global economy needs a stimulus at this point of time to avoid recession come closer. Many of the global central banks have not started easing the monetary policy starting with federal reserve who had cut interest rates by 25 bps two days ago. The expansionary move by federal reserve translates into more Foreign investment into Indian markets which was missing in 2019 due to slowdown fears. Thirdly, India is also looked as substitute to china for many goods and services, this gives opportunity to Indian manufacturers to fill the gap created by Chinese slowdown due to epidemic. Chinese companies have started investing in India by localising manufacturing and reaping the economies of scale. Two of the major automobile manufacturers in China SAIC and Great Wall Motors are investing close to Rs.7000 crore in India and setting up plants here.  India has more opportunity to grasp the market and fill the gap created by china in the due course with competitive environment. Further Indian government is ready to give land equal to the country of Luxemburg to the business coming out of china and are looking for favourable environment for the business. Such measures will help India to come out the crisis faster by creating more employment and filling the gap of aggregate demand in the Economy.

Conclusion

As said earlier, global economy looks to face slowdown due to supply chain shocks faced on account of corona outbreak. The Global GDP growth might take hit for next two quarters, growth may kickstart soon thereafter. In terms of India key factors like low oil prices and lower interest rates across globe puts Indian economy in favourable condition for growth and investment.  It provides an opportunity to make the most out this favourable condition and reap the benefit out it.