How Covid-19 can shrink the economy and destabilize businesses

Source: Google

The emergence of Covid-19 as a major global pandemic has jolted an already tottering Indian shrink the economy and destabilize businesses. The country’s GDP has slumped to multi-year lows of 4.5 per cent in the last quarter. All rating agencies of global repute like Moody’s and S&P have glum tidings on the future of the country’s GDP.

And, the latest scare from Coronavirus threatens to scale back the nation’s GDP growth by 0.5 per cent.

India has already reported more than 500 positive cases with 10 casualties. Our healthcare infrastructure and testing facilities compare nowhere to Italy which has been brought to its knees by Covid-19.

If the contagion spreads deeper in India, the damage to the economy and core manufacturing could be colossal.

The Reserve Bank of India (RBI) could respond to this crisis of global proportion by slashing repo rates by 0.25-0.5 per cent.

The recent fiscal package announced by the government risks widening the fiscal deficit.

Hospitality, tourism and aviation are the key industries to suffer after Prime Minister Narendra Modi declared a complete nationwide lockdown till April 14.

Both India’s exports and imports will take a drubbing as global commodity prices tumble and the rupee depreciates vis-à-vis US dollar.

The banking sector plagued by ballooning NPAs (Non-Performing Assets) is likely to experience further pressure in these trying times.

Below, we give a lowdown on repercussions of Coronavirus pandemic on select industries:

Steel

Domestic steel demand is likely to get impacted during the current and the next quarter owing to the loss of manufacturing output on account of the expected shut-downs to contain the spread of the virus.

While the demand is likely to get impacted, steel production output is likely to remain constant as India has sufficient raw material security for steel production and most of the steel plants maintain inventory levels for the next two months.

Pharma

In the pharmaceuticals space, Indian bulk drug and formulations companies are heavily dependent on the import of key starting material (KSM) and Active Pharmaceutical Ingredient (API), particularly from China.

However, considering the holiday period of Chinese New Year, most of the Indian pharma players had by January 2020, stocked additional inventory (see graph below) for production up to Q4 of FY20.

Textiles

The outbreak of Covid-19 is expected to impact the segment of the Indian textile sector which is significantly dependent on exports.

In 2018-19, North America was the largest contributor to Indian Cotton Textile exports with a share of 24 per cent followed by SAARC at 17 per cent and EU at 14 per cent.

Several countries in the EU have reported a complete lockdown post-outbreak of Covid-19. Further, even in the USA as per the news reports retail sales have also fallen significantly.

The major impact would be felt by exporters of Ready Made Garments, Made-ups and home textiles.

Hotels & Hospitality

Perhaps the most visible and immediate impact of Covid-19 is seen in the hotel and tourism sector in all its geographical segments – inbound, outbound and domestic and almost all verticals – leisure, adventure, heritage, MICE, cruise and corporate.

Given various travel restrictions imposed by the Indian Government as well as Governments across the globe, forward bookings for various conferences and leisure travel bookings to foreign destinations have already been cancelled.

In India, most of the summer holiday bookings have been cancelled (about 40-50 per cent most of which was to states of Kerala, Rajasthan and Goa) impacting the domestic tourism.

The impact on the inbound and outbound passengers is expected to be most severe in the next couple of quarters.

COVID-19 has already impacted the Jan-March 2020 and as the lean season seeps in for both business and leisure segments from April, the hotel players will have some time to realign themselves (cost rationalization, process improvement measures) before the next peak season.