COVID 19 and its Impact on Global as well as Indian Economy

Coronavirus News Live Updates (April 2, 2020, 9.37 GMT): Total confirmed cases in India crosses 2032 mark, and the Death Toll is 58. Total Active cases are 1826 and recovered cases are 148. According to reports, the death toll from the coronavirus pandemic has soared past 47,518 while the number of confirmed cases topped 940,733 globally.

ICMR has highlighted that the control of epidemic would be difficult in “pessimist" scenarios in metropolitan cities such as Delhi, Mumbai, Kolkata, Bengaluru, Chennai, Hyderabad and Kochi, if people who have a travel history to infected countries or contact with the infect don’t isolate themselves.

PM Narendra Modi has announced a complete lockdown of 21 days on 24th March 2000 in India, which has a population of 1.3 billion. One day after the authorities halted all domestic flights, Narendra Modi, India’s prime minister, declared a 21-day lockdown. While the number of reported cases in India was about 500, the prime minister pledged to spend about $2 billion on medical supplies, isolation rooms, ventilators and training for medical professionals.

IMPACT OF COVID-19 ON GLOBAL AS WELL AS INDIAN ECONOMY

“From an economic perspective, the key issue is not just the number of cases of COVID-19, but the level of disruption to economies from containment measures,” Ben May, head of global macro research at Oxford Economics, said in a report this week.

“Widespread lockdowns such as those imposed by China have been enacted in some virus hotspots,” he said, adding that such measures — if taken disproportionately — could induce panic and weaken the global economy even more.

Fears of the coronavirus impact on the global economy have rocked markets worldwide, plunging stock prices and bond yields.

• Several Industries have been adversely impacted due to Spread of COVID-19.
• Large no. of Supply Chains are affected due to COVID-19
• Global Economy is grinding to a Halt

How does the Pandemic Affects the Global Economy?

Things are moving fast with the COVID-19 novel coronavirus. On March 12 WHO declared that the virus is now a pandemic and President Trump announced 30 day ban on all travel from EU to the US.

If the virus spread continues the Analysts fear that the Global Economy may slip into recession. If the Economy slips into recession it will slip for two consecutive quarters i.e. six months period.

As on date no one is sure about the longevity and length of the virus.

International Monetary Fund (IMF) has estimated the Global GDP to slip to 1.6% in 2020 from 2.09% in 2019. The outbreak could cost the Global economy upto $2 trillion this year. Recession in some countries will bring Global Economic Growth to touch below 2.5%.

In order to deal with COVID 19 and outbreak OPEC has proposed to curb oil output.The price of Oil has fallen by about a quarter. Demand for fuel is also expected to decline.

Rabobank which is a Multinational Banking and Financial services Co. has said “ Global Recession is Certain”.

Hugo Erken Head of International Economics, Raphie Hayat Senior Economist and Kan Ji have submitted the study report/article on the impact of COVID-19 on the Indian Economy, In Bloomberg Quint on March 13,2020 in an article “CORONAVIRUS: The Economic Impact of COVID-19 on India.”

(https://www.bloombergquint.com/opinion/coronavirus-the-economic-impact-of-covid-19-on-india?utm_source=wru&utm_medium=bookmarks)

In the study Hugo & team conducted a scenario analysis to be able to gauge the global impact of COVID-19. They have made assumptions for two scenarios:

In the first scenario which was the baseline scenario, there will be heavy output losses in China and certain other countries – South Korea and Italy- where the virus has spread substantially, but the downturn in economic activity will remain limited in countries where the virus is not yet spread.

The second scenario is a risk scenario in which the global spread of the infection sharply increases, with countries where the outbreak is currently limited facing a corona epidemic as well – thus a full grown pandemic.

They have used the two economic models viz. Macro-econometric global trade model and a Productivity model specifically developed for the Chinese economy by RaboResearch to calculate the impact.

While making calculations they had made the following assumptions:
First: Temporary Drop in the number of hours worked per worker to capture the effect of the lockdown in Hubei/Wuhan and Italy.

Second: That People will work overtime in the second half of calendar year 2020 to deal with the backlog of orders.

Third: Expect adverse effects on private consumption as the virus outbreak will negatively affect consumer behaviour in many countries. Purchases will be postponed or even cancelled. Hence they have sharply reduced private consumption in countries facing COVID-19.

Fourth: Cross-border trade will become cumbersome and more expensive. Higher costs will have the same effect as temporary non-tariff trade barriers. Temporary relative decline in exports to China will be there.

Final assumption made was on exchange rates, investment premiums – to capture adverse investors sentiment and financial market volatility – and mitigating government policies, especially in China.

In the Pandemic scenario they have observed that there will be permanent damage to Chinese Economy in terms of adverse productivity effects.

OBSERVATIONS OF THE STUDY:

Baseline Scenario Expectation:

Substantial slowdown of global economic growth due to COVID-19. The global growth in Current Year 2020 will arrive at 1.6 % which is substantially lower than the OECD forecast of 2.4 % and the Bloomberg consensus at the start of March of 2.7 %. Pre-Corona forecast for Global forecast was 2.9 %.

China as the epicentre is expected to face the most detrimental economic impact slowing down to 2.4% in CY2020 which is much lower than pre-corona forecast.

For India they have projected growth of 5.3 % in CY 2020 with COVID-19 shaving off 0.4 % points compared to pre-corona situation of 5.7% because India has limited ties with Chinese economy.

Hence the shock wave that China is sending across Globe is affecting India to a lesser extent than many other countries in Asia. Vietnam is the largest exporter to China with 13.6% as against India at 0.6%. Similarly Chinese Tourism of Thailand is 5.9% as against India’s 0.2%.

In India the global virus outbreak had the largest economic impact on the rupee which has depreciated substantially at the back of global risk-off sentiments and anxiety among investors. The study reveals that the currencies of emerging markets and the prices of raw materials to continue to be highly volatile in the coming period.

Risk Scenario Impact:

India is susceptible to a rapid spread of the virus due to high population density combined with less no. of health care services compared to western countries. The average no. of hospital and beds and doctors per 1000 Indians is 0.7 and 0.8 respectively compared to 5.6 and 3.6 in EU. Depending on the containment measures being taken by Indian Government in the situation of struggling Indian economy the expansion of virus will remain to be seen. Globally the spread of infection will sharply increase, including India.

The study shows that the global economy would slow down to 0.7 % in CY 2020 and the Indian economy would grow by 3.6 % which would make 2020 even worse than from an economic perspective.

The study also reveals that India could Benefit in the Medium Term. International firms have found out the hard way just how vulnerable their globally integrated supply chains are. The disruption of international trade may prompt international businesses to diversify their production across several countries including India. India might even benefit in the medium term, because firms want to rely less on China as their only manufacturing hub and shift (part of) their production to other countries, such as India. This is the reason why the study expects a relatively profound rebound of economic growth in 2021 and beyond.

How is this affecting the Economy?

World economy will go into recession with likely exception of India, China: United Nations. UN's trade body, however, did not give a detailed explanation as to why and how India and China will be the exceptions as the world faces a recession and loss in global income that will impact developing countries. Further, given the deteriorating global conditions, fiscal and foreign exchange constraints are bound to tighten further over the course of the  year.
The world economy will go into recession this year with a predicted loss of trillions of dollars of global income due to the coronavirus pandemic, spelling serious trouble for developing countries with the likely exception of India and China, according to a latest UN trade report.
According to the new analysis from United Nations Conference on Trade and Development (UNCTAD), the UN trade and development body titled 'The COVID-19 Shock to Developing Countries: Towards a 'whatever it takes' programme for the two-thirds of the world's population being left behind', commodity-rich exporting countries will face a USD 2 trillion to USD 3 trillion drop in investments from overseas in the next two years.
The UNCTAD said that in recent days, advanced economies and China have put together massive government packages which, according to the Group of 20 leading economies (G20), will extend a USD 5 trillion lifeline to their economies.
It added that while the full details of these stimulus packages are yet to be unpacked, an initial assessment by the UNCTAD estimates that they will translate to a USD 1 trillion to USD 2 trillion injection of demand into the major G20 economies and a two percentage point turnaround in global output.
The UNCTAD estimates a USD 2 trillion to USD 3 trillion financing gap facing developing countries over the next two years.
The report, however, did not give a detailed explanation as to why and how India and China will be the exceptions as the world faces a recession and loss in global income that will impact developing countries.

The report shows that in two months since the virus began spreading beyond China, developing countries have taken an enormous hit in terms of capital outflows, growing bond spreads, currency depreciations and lost export earnings, including from falling commodity prices and declining tourist revenues.

With the people engaged at the desk with outer world and avoid work fitness and entertainment will result in lesser economic activity.

Businesses are now facing the challenge of disrupted supply of components to make their products. They have to take into account the huge no. of quarantine work force & factory that ar being shut.

Indian economy is "remarkably unscathed", while major economies across the globe is grappling with "severe fallout" due to the surge of coronavirus cases, according to Chinese state-run media.

How does this impact the Indian Markets?

India’s economy has already been suffering from a slow down in the recent past. Moody’s has downgraded India’s growth to 5.3% in 2020 due to downside risks of Covid-19, the slowest in 11 years. According to an economist, ‘The supply side contagion effect’ will impact manufacturing, agriculture and the pharmaceutical industry. Coronavirus has brought various segments to stand still.

The HDFC Bank's Treasury report claims the lockdown's initial impact on manufacturing activity is expected to be somewhat lower as 1/3 of net value added in manufacturing comes from the production of essential items such as food, beverages, petroleum and coke, pharma and medicinal products. It added the drag on manufacturing growth may linger on beyond the first half of the next fiscal year. Lockdown will shave off 74 per cent of the real GDP (Gross Domestic Product) or Rs 10 lakh crore in the first half of 2020.

What could be the magnitude of the impact of a complete social and economic shutdown may not be easy to estimate, but it is likely to be far more severe than either the 2016 demonetisation or the 2017 GST rollout.

At the moment, it is a supply-side problem. Both production and distribution of non-essentials have come to a halt. This affects at least 55% of the economy for three weeks or about Rs 2 lakh crore. It may even be larger due to previous partial lockdowns by various state governments. In the interim, between now and full production resuming, a large number of people would have been unemployed and not earned any income. As a result, in the second round, demand-side will become a serious constraint.

The impact of lockdown will be felt through several channels, weakening of domestic demand, disruption in supply chain and disruption in financial market. All of this would result in declining production and retrenchment of employees.

Sectors like tourism, aviation, hospitality and trade will face the first set of challenges; other sectors too will face the cyclic effect. The following Sectors will be affected due to COVID-19: -

- Chemical Industry
-Shipping Industry
-Auto Industry
-Pharmaceutical Industry
-Textile Industry
-Solar Power Sector
-Electronics Industry
-IT Industry
-Tourism and Aviation

When Chinese supply will shut down Indian Pharmaceuticals, automobile and Mobile Industries immediately will face jolts. India depends on China for supply of components for the products that these sectors make.

The service sector will be most impacted due to lockdown as consumption of non-essentials takes a hit but lockdown's initial impact on manufacturing activity is expected to be somewhat lower. However, once the lockdown is lifted, the service sector activity may bounce back rather quickly. The nationwide lockdown has caused severe crunch in labour, causing supply-chain disruptions.

Pesticides sector will also be affected.

The gems and jewellery exports are expected to witness a sharp decline in March as well as in the first quarter of the next fiscal due to disruptions caused by the Coronavirus outbreak, according to a report. Indian Gems and Jewellery makers are expecting a loss of about $1 billion.

Even the software industry is making slow progress.

There has been an impact on the sports and entertainment industry as well
-International Olympic Games committee decided to postpone the 2020 Olympics Summer   Games to July 23rd 2021.
-Indian Premier League(IPL) has been postponed.
-Euro 2020 soccer tournament postponed until 2021 due to coronavirus pandemic.
-National Collegiate Athletic Association (NCAA) — the main U.S. sanctioning body for college athletics announced that all remaining championship events for the 2019–20 academic year would be cancelled entirely.
-British Universities and Colleges Sport, the UK organisation for university sport, announced that all fixtures from 17 March to 1 April would not take place

Entertainment Mass Media has also taken a Hit. Cinema Halls throughout the country have been closed. Release of new Indian Movies have been stopped.

Industry body CII said that more than half of the tourism and hospitality industry can go sick

About 136 million workers in India, or over half the total workers employed in non-agricultural sectors, have no contracts and remain the most vulnerable in the aftermath of the corona outbreak and may lose their job.

Demand for Medical Supplies, Soaps, Hand Sanitisers to be stepped at home. Amid serious concerns over shortage of personal protection equipment’s for health workers, the government has put ramped up domestic manufacturing of PPEs and medical equipment’s including ventilators to meet the increasing demands.

If the current situation persists Digital Shopping & Payments may increase more.

Online learning platforms too, are likely to get a boost with schools / Colleges shutting down temporarily.

As many as 34 lakh transactions took place through Post Office Savings Bank and 6.5 lakh transactions through India Post Payments Bank, during the lockdown period as on March 31. Online medicine company netmeds.com and e-commerce company Amazon have also approached India Post for delivery of medicine and essential commodities in metros and some other locations. The Department of Posts is also moving ventilators, COVID-19 Test Kits and other medical equipments as per requests of various organisations from selected locations to destinations across the country by using cargo airlines and its own mail motor network.

According to Dun & Bradstreet's latest Economy Forecast, the probability of countries entering into recession and companies going bankrupt has increased and India is not likely to "remain decoupled" from the global meltdown. India's GDP growth is expected to moderate further from our earlier estimate of 5 per cent for FY20, it said.

On the price scenario, slowdown in demand and production activities, a sharp fall in the global price of crude oil, and price decreases in other major commodities such as energy, base metals and fertilizers among others are expected to exert downward pressure on inflation.

Phillip Capital expects income losses of varied degree for individuals, corporate and government, and sees need for stimulus for the economy.
SCENARIO-1
In case the situation worsens in India and globally, there would be further selling in domestic stocks, and India’s GDP growth may drop to 3.5-4 per cent levels even as the global economy slips into recession, it said.
SCENARIO-2
In a rosy situation, the virus will be contained in India, and the shutdown would not extend beyond April 15.
In such a case, “we would be gradual buyers in equities. Indian economic impact will be limited and FY21 GDP target will be 4.5-5 per cent. But the March quarter impact will be severe,” Phillip Capital said.
SCENARIO-3
In the third scenario, the virus will be contained in India, but the crisis would worsen globally. In such a case, Indian equities will outperform, and India’s GDP would grow at 4-4.5 per cent amid a global recession.
SCENARIO-4
Lastly, if the situation is contained in India and globally, Indian markets may outperform. “We will be aggressive buyers in such a scenario at current levels. There would be manageable economic impact on India and the global economic slowdown will last 3-5 months,” Phillip Capital said.

Steps Taken by the Government and Further what should be done in addition to it:

The Modi government -- as part of its initial package for poor people, women, and employees -- has announced a stimulus of Rs 1.7 lakh crore or 0.8 per cent of the GDP. This package includes health insurance for health workers, food for the poor and direct benefit transfers.The RBI, in its 7th bi-monthly monetary policy announcement, cut repo rate by 75 basis points (bps) along with 90 bps reduction in the reverse repo rate to offset the impact of coronavirus pandemic on the economy. SBI and other Bank's have commenced transmission of the RBI's rate reduction to its customers.

Even though India may not slip into a recession, unlike the Eurozone, the US, or Asia-Pacific that have stronger trade ties to China, analysts believe the impact on India’s GDP growth will be significant.

A Bold Step is required to be taken by the Central Government which include:

Improve the resources by putting Fiscal Prudence on the back burner, Government should borrow from RBI and if necessary print more money. Disinvestments should be stepped up to bring in more resources.

Provide wage subsidies, Rentals /Lease rents should either be waived off or no action to betaken in case of default. Bank Guarantee and Letter of Credits should not be encashed for non-performance or should be extended with a suitable moratorium.

Debt of Stressed but viable companies such as Airlines, Hospitality,Tourism and Service sectors can be brought by Government and converted into Equity.

Clear Private and Power Dues by the State and Central Governments.

GST reliefs to be given or extension to be granted.

For full details of COVID-19 including Timeline please read my blog: COVID 19 – All you wanted to know about Corona Virus and its Impact on Global as well as Indian Economy