Potential Impact of Covid- 19 on Indian Economy:

As India’s new financial year commences, the Novel Coronavirus (COVID-19) has infected more than eight hundred thousand people in more than 150 countries a scourge confronting all of humanity, impacting lifestyles, businesses, economies, and the assumption of common well- being that all of us have largely taken for granted.

Even before the onset of this pandemic, the global economy was confronting turbulence on account of disruptions in trade flows and attenuated growth. The situation has now been aggravated by the demand, supply and liquidity shocks that COVID-19 has inflicted. Once the pandemic is controlled, the shape and speed of the recovery in the US and China will be key factors determining the nature and traction of global economic recovery.

India is securing the population from health hazards and on providing relief, especially to the poor, we also need to think long-term - to secure the health of the economy, the viability of businesses, and the livelihoods of people. Apart from providing robust safety nets for the vulnerable, ensuring job continuity and job creation is key. And there is an urgent need to mobilise resources to stimulate the economy.

It is our expectation at this time that the course of economic recovery in India will be smoother and faster than that of many other advanced countries. Indeed, the UNCTAD in its latest report ‘The COVID-19 shock to Developing Countries’ has predicted that major economies least exposed to recession would be China and India.

India’s real GDP decelerated to its lowest in over six years in 3Q 2019-20, and the outbreak of the COVID-19 posed fresh challenges. Steps taken to contain its spread, such as nationwide restrictions for 21 days and a complete lockdown of states, have brought economic activity to a standstill and could impact both consumption and investment. While Indian businesses, barring a few sectors, can possibly insulate themselves from the global supply chain disruption caused by the outbreak due to relatively lower reliance on intermediate imports, their exports to COVID-19 infected nations could take a hit. In sum, the three major contributors to GDP -- private consumption, investment and external trade will getaffected.

Demand Side Impact:

The lock-down is likely to have a sizeable impact on the economy, most significantly on consumption, which is the biggest component.

• Stop of urban activity could lead to a steep fall in consumption of non-essential goods

• The impact would be even more severe if domestic supply chain disruption caused by the 21-day lockdown were to affect the availability of essential commodities

Informal Sector:

Around 37% of salaried employees in urban India are daily wage earners. They will be badly hit and this segment was still emerging from the back-to-back shocks of demonetization and GST. The shutdown could push them to the brink. Govt have offered Rs. 1.7 trillion package focused majorly on free food supplies and cash transfers.

Supply Side Impact:

While a disruption in output in China could impact some Indian industries, the economy could be relatively insulated given its low reliance on intermediate goods from China as well as the common practice in Indian firms of stockpiling inventory.

Headwinds are more likely on account of the demand - rather than supply shocks.

Blessing in Disguise:

• The price war between large global players, together with an increasing dismal outlook for the global economy, has led to a steep decline in oil prices

• Falling oil prices is a positive fallout for the Indian economy, as 80% of its oil requirement is met through imports

• The Indian Government has not passed on the fall in international crude prices to consumers but instead used this development to improve its fiscal position

• The Government earned over INR 2 trillion in terms of excise duty on oil products in 2018-19. As soon as prices dropped, excise duty of INR 3 per liter was imposed on petrol and diesel, which could create additional revenue to the tune of INR 390 billion

Lower Oil prices not enough to mitigate the impact on Indian Companies

Those companies using oil as their input, will benefit from fall but benefit will be limited because of lack of demand.

Other Impact:

• Because of lack of demand, huge unemployment will be created.

• Companies will delay their CAPEX plans.

• Cashflow problems created by the demand shock would impair Indian firms’ debt servicing ability

• Uncertain economic conditions pushed government bond yields higher

The severity of the impact is contingent on the level of indebtedness of individual firms and their working capital requirements. Clearly,for the first time in living memory, many industries/SMEs will be running on zero revenues for close to a month. There will be a permanent impact of this 21-day shutdown even into the longer-term numbers (that of funding the fixed costs when revenues are nil). SMEs, self employed, travel and tourism, restaurants, etc will have immediate and severe impact.

This crisis is a story with an uncertain ending. However, what is clear is COVID-19 has introduced new challenges to the business environment which call for a measured, practical and informed approach from political and business leaders. We also need to realise that COVID-19 is likely to lead to a new normal – being aware of and preparing for these shifts will help businesses and economies navigate in the post COVID-19 world