The Economic Impact of Covid-19 on Different Sectors in India
The COVID-19 is defining the global health crisis and the greatest challenge to humanity the world has faced since World War II. The virus has spread rapidly and a number of cases are rising as the government is working day and night to slow its spread. Along with other nations, India implemented a nationwide, 21-day lockdown and it is in stage 3 of lockdown with a goal of flattening the curve.
Along with an unprecedented toll on human life, it is also affecting the economic life of countries. This global economic crisis will have a broader impact than any that we have seen since the Great Depression. The following analogy will help us to understand how today’s Global Health Crisis is deadlier than the 2008 Global Financial Crisis:
- Health and Economic Activity
Unlike the 2008 Global Financial Crisis, the pandemic has resulted in enormous human suffering affecting countries, not seen in decades, and has also impacted economic activity by jeopardizing financial stability.
- Demand and Supply Shocks
The Global Financial Crisis originated from the financial sector and further impacted the financial flow. This hit the demand side but did not cause disruptions in the supply side. On the other hand, to curb the spread of COVID-19 government implemented social distancing which affected the immediate disruptions in supply-side owing to factory shutdowns, Labour shortage, and drying of cash flows. This problem further escalated and affected demand for non-essential goods and services due to decreased discretionary spending, lower sentiment, and weaker global demand.
- Crisis in every country
The Global Financial Crisis originated in the US and impacted countries dependent on how well they were linked to the US and associated with the Global Financial System. But the pandemic has individually hit each country’s economy.
As India has entered into the 3rd phase of lockdown, the potential economic loss in India would vary by sector.
Recently we have observed the highest drop in quarter results are observed in a sector such as Aviation and lower in sectors such as Pharmaceuticals and IT-enabled Services.
India’s recent economic sluggishness is coupled with high Non-performing Asset (NPA) stress on the Financial ecosystem; hence it would be vulnerable to the impact of the pandemic. As shown in Fig. 2, companies’ sectors such as Energy, Hospitality, Electronics, and Auto Sectors are expected to be the worst hit.
Now, I will try to explain the economic impact of COVID-19 on the following sectors.
1. Banking/NBFC Sector
Banking and NBFC are among the worst hit in a current pandemic. As of April, the Nifty50 has declined 27.7% while the Nifty Bank index reduced by 40.1% over the past three months. In a report issued on April 15, Macquarie Research cut its earnings per share estimates for private banks by 35–40 percent and reduced its target prices for private banks by 45 percent and for public-sector banks by 47 percent. With economic growth poised to slow down, the International Monetary Fund (IMF) has cut India’s GDP growth estimate to 1.9 percent for 2020–21. The banking and financial sector is tied closely to the economy hence is it bound to get affected.
There could be a spike in bad loans. The slowdown leads to potential job losses, which causes stress in banks’ retail loan books. Hence, Banks and NBFC are conducting extensive in-house data analysis of moratorium seekers in the MSME segment. Recently, according to a survey conducted by Business Today, roughly loans worth over ₹35 lakh crore would be under some sort of direct stress because of the pandemic.
I think the banking sector’s biggest worry is on the loans and advances side while NBFCs are for the first time staring at a two-front war on both liabilities as well as assets. NBFCs will have to build liquidity buffers for non-salaries customers and also need to keep enough liquidity to meet prepayment obligations especially to commercial papers and debenture holders. A large number of MSME and corporate borrowers are availing moratorium as their revenues have slumped but they still have to pay fixed expenses. Hence, banks are pooling in resources to track the past behavior of moratorium seekers in stressed accounts with less than 90 days of default.
Banks and NBFC are on two extreme ends in terms of liquidity. Banks are flush with funds and do not have enough options to lend it profitably. Recently, SBI bank reduced its savings rate to historic 2.75% per annum. Banks are resetting their fixed deposit rates downwards. NBFCs are grasping for liquidity since they are depending mostly on wholesale funding from banks, commercial papers (CDs), and Non-convertible debentures. There is no moratorium offered by banks to NBFCs on ₹ 2 lakh crore loans. This is adding to their problems.
But the sector’s longer-term prospects remain bright. The penetration of financial products is low in India, which will provide ample runway for growth.
2. FMCG/Retail Sector
With supply chain, disruption, and production coming to a near standstill during pandemic FMCG companies are adversely affected. On 30th April, leading FMCG company of India, HUL reported a 7% decline in volumes for the March quarter and other companies are also facing a situation. The domestic market for consumer goods had started slowing down even before the outbreak and demand slump was more observed in rural areas than urban. The COVID-19 had implications on various levels but it primarily affects the supply side.
Recently, global market research firm Nielsen slashed its 2020 growth outlook for India’s FMCG sector from 9–10% to 5–6%. In the quarter ended 31st March, India’s FMCG sector grew 6.3% including e-commerce in value.
As the traditional supply chain ecosystem is nearly faltered in the era of deadly coronavirus pandemic due to lack of manpower, FMCG majors started to use digital routes to get their products to consumers. The last month has seen companies partnering with food delivery platforms, cab aggregators, and community management solution providers to reach consumers.
The third-party supply chain distributor ShopX claims a 46% rise in ordering by traditional grocery retailers from its platform. Cash and Carry retailers (Metro Cash & Carry) have started picking up stocks from factories of FMCG majors and delivering to Kirana retailers. These Cash & Carry are also encouraging stores to place orders from their app.
Some of the FMCG companies joined hands with logistics companies such as Delhivery, Shadowfax, and Lalamove to deliver products from factories to a depot to distributors. Hence, post COVID19 we will see a huge change in go-to-market strategies of companies. They will try to make their supply chain along with their distribution networks more resilient. Companies will look to conserve cash by working with third party suppliers.
Hence, FMCG will surely relook at its distribution infrastructure in the new normal post the lockdown.
3. Airline Sector
The airline sector has been one of the hardest hits by the global outspread of COVID-19. Indian airlines sought to bailout packages from the government as the job losses and closure could be potential problems of the sector. Aviation consultancy firm CAPA India said in a report, most of the Indian airlines have not structured their business models to withstand even regular shock.
Indian airlines are losing out ₹75–90 crore daily during the shutdown and all major carriers have started taking salary cuts for their employees to cut costs. It is estimated that during the April-June 2020 quarter, total losses will range in the amount of $3.3–3.6 billion by the Indian aviation sector, including airlines, airports, and ground handling industry (cargo).
Indian airports are likely to operate below 50% capacity till June due to travel restrictions implemented by the government to curb the spread of COVID19. Chances are even, post the lift off the nation-wide lockdown passenger growth will face a sharp contraction as people will be hesitant to travel.
Domestic traffic expected to decline from an estimated 140 million in FY2020 to around 80–90 million in FY2021. There is an estimated 30–50% decline in domestic and international traffic during FY21, as compared to the previous year. The current situation indicates that even if the operation resumes in the coming month, the travel appetite is expected to remain muted for much of the calendar year.
Figure 5, indicates global aviation activity during April has declined by 66.8% over the last month. India has grounded both domestic and international flights operation.
4. Pharma Sector
The Indian pharmaceutical industry is the world’s third-largest drug producer by volume and the Indian market manufactures 60% of vaccines globally and Made-in-India drugs supplied to the developed economies such as the US, EU, and Japan are known for their safety and quality. In recent years, India has seen increasing competition from China. China is importing active pharmaceutical ingredients (API) at a much lower cost than those in India leading to the killing of India’s domestic manufacturing capacity.
India’s 70% of imports are depending on china hence it became a threat to Indian healthcare manufacturing and global supply chain. Any shortage in supply of chain of APIs can result in significant shortages in the supply of essential drugs in India.
According to Edelweiss Securities, the COVID-19, the pandemic has caused severe supply-side disruptions in various sectors, hence it is estimated that earnings will be cut by 10–15%. have performed well. Pharma sector companies are seen to be withstood as some stocks are delivering healthy returns during this period. Experts say that the pharma sector has a crucial role in supporting the government and people and are doing a great job by managing medicine supplies as demand remains strong.
As per BSE Sensex, BSE Healthcare index has closed in the green in the last four consecutive sessions. BSE Healthcare has emerged as the top gainer among sectoral indices, jumping 29% since March 25, the day the three-week lockdown began.
HDFC Securities has a positive view on the sector; it forecasts 11% growth for its covered companies over the next two years. However Economic times identify some of the key risks for the sector such as extended lockdown can impact demand and manufacturing, Delay in US FDA plant resolution due to travel advisory, EM markets currency risks, and subdued demand and delay in key approvals.
If the pandemic passes and there is a cure or vaccine in a few quarters then we might see a better recovery in growth.
Right now the situation seems to be tough and we don't know when the easy road will be operational again as there is so much uncertainty but I think it
would only be from early next year that we could expect a return to the growth trajectory.
Till then, Stay Safe!
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