India’s economy prepares for the ‘new normal’

Tehelka
14-Apr-2020

The Covid-19 is the story of an uncertain ending. However, what is certain is that it has introduced new challenges to business environment which call for a measured, practical approach from political and business leaders. We also need to realize that Covid-19 is likely to lead to a new normal-to be aware and ready to help businesses and economies navigate into the post Covid-19 world. We also need to realize that in times of an outbreak of a new disease, research shows that consumers engage in “aversion behavior”.

As new financial year has commenced from April 1, 2020, the Novel Coronavirus has impacted more than eight hundred thousand people in more than 150 countries. It is widely believed that course of recovery in India will be smoother than that of many other advanced countries and the latest report of UNCTAD predicts that “major economies least exposed to recession would be China and India”.

KPMG, a multinational professional services network, has put together a paper that offers a foresight on the business landscape. Analysing the impact, the study throws some light on the overall situation of Indian economy amid the pandemic. It says that India’s growth could slip below three percent in the current fiscal if COVID-19 proliferates within India, lockdown extended, and the global economy slips into recession.

It said the three major contributors to GDP — private consumption, investment, and external trade — will all get affected due to the spread of the pandemic. However if the pandemic proliferates and there is global recession, then it would be a double whammy for the economy as it will have to bear the brunt of both domestic and global demand destruction, KPMG report said. “Prolonged lockdowns would exacerbate economic troubles. India’s growth may fall below 3 percent under this scenario,” it added.

Arun M Kumar, Chairman and CEO, KMMG in India in the report points out, “Covid-19 is unique in that, it is a supply, demand and market shock”. The report said steps taken to contain the virus spread such as the nationwide lockdown have brought economic activity to a near-standstill, with impact on both consumption and investment. “While Indian businesses, barring a few sectors, can possibly insulate themselves from the global supply chain disruptions caused by the outbreak due to relatively lower reliance on intermediate imports, their exports to COVID-19 infected nations could take a hit,” it said.

Sectoral impact

Abrupt stoppage of urban activity could lead to a steep fall in consumption of non-essential goods. Around 37 per cent of regular wage and salaried employees in urban India are in informal sector (non-agriculture) and they might face uncertain incomes. Besides assessing the coronavirus impact on the country’s micro, small and medium enterprises, the study noted that contractual wage labour will get impacted more leading to layoffs, unrest, and lowering of purchasing power. The major impact would be on sectors like:

◆ Apparel and textiles

◆ Auto and Auto components

◆ Aviation and Tourism

◆ Building and Construction

◆ Chemicals and Petrochemicals

◆ Consumer retail, internet

◆ Education and skilling

◆ Financial Services

◆ Food and Agriculture

◆ Metal and Mining

◆ MSMES

◆ Oil and Gas

◆ Pharmaceuticals

◆ Power

◆ Telecom

◆ Transport and logistics

The example of restaurants shows that 89 per cent dinners as on March 18 were down and the data suggests that this fall could be 100 per cent in coming weeks resulting in lay offs of staff. Then a strong dollar has hurt the borrowers as other currencies have weakened. Social distancing has meant cancellation of large gatherings thus leading to cut in consumption.

Analysing the impact, the study throws some light on the overall situation of Indian economy amid the pandemic:

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 get affected.

India’s growth may fall below 3 per cent if the virus spreads further in India and lockdown sees an extension, the report by KPMG India said. In case of a quick retraction of COVID-19 pandemic across the globe including India by April-end to mid-May, India’s GDP growth may be recorded in the range of 5.3 per cent to 5.7 per cent, KPMG India added. In a scenario where India controls the virus spread but there’s significant global recession, the growth may be in between 4 per cent to 4.5 per cent.

Even as a few sectors could insulate themselves from the global supply chain disruption owing to COVID-19 outbreak due to relatively lower reliance on intermediate imports, exports to infected nations could be hit, a report said. The lockdown is expected to have the most significant impact on the consumption sector.

“Abrupt stop of urban activity could lead to a steep fall in consumption of non-essential goods. The impact could be even more severe if domestic supply chain disruption caused by the 21-day lockdown were to affect the availability of essential commodities,” the report added. Supply chain restrictions and expected labour migration may be other impediments
for the recovery.

Among the major sectors textile and apparel production is likely to fall by 10 per cent to 12 per cent in the April-June quarter. The sourcing of auto components may get costlier owing to a disturbance in the supply chain across the globe, the report said. However, the Indian auto component industry may recover in the medium to long term as an alternative source of supply, it also said.

The Indian tourism and hospitality industry may see a potential loss of nearly 38 million, nearly 70 per cent of the total workforce. The housing sector may see weak demand with a significant reduction in the new launches.

The petrochemical prices are expected to remain low on account of muted crude oil prices and the cascading impact on petrochemicals combined with uncertain domestic and global demand. The retail financing industry, one of the key drivers for credit growth in the banking and NBFC sector, will be impacted for at least two quarters, KPMG India also said.

Since food and agriculture are the backbones of the nation and part of the government’s announced essential category, the impact is expected to be lower on both primary agricultural production and usage of agri-inputs such as seeds, pesticides, and fertilisers. However, the migratory labour movement holds significance in such a scenario.

It is a fact that India’s real GDP decelerated to its lowest in over six years in third quarter of 2019-20 and the outbreak of Covid-19 has posed fresh challenges.  The 21 days lockdown has meant economic activity coming to a stand still impacting consumption and investment-major contributors to GDP.

Beyond Covid-19

We are embracing the “New Normal”. The seven ways business landscape will shift would not only confined only to India but encompass the world be:

◆ Shift towards localization

◆ Digital gets a real pus

◆ ‘Cash is king’

◆ Move toward for variable cost models

◆ Building sensing and control tower capabilities

◆ Supply chain resilience is key

◆ Building agility

(Source)