Badri Narayanan Gopalakrishnan and Somya Mathur
The March 14 ICMR declaration, of India being in stage 2 of the coronavirus outbreak and a 30-day window to halt the beginning to community transmission, has led to an increase in economic anxiety all over the country. With the number of Covid-19 cases in India growing, people representing economic and business diaspora are number crunching to know the potential share of economic fallout from the contagion effects that has rippled all over the globe.
On March 12, the carnage was felt in the stock markets with the World Health Organization (WHO) declaring Covid-19 a pandemic. This eroded away Rs. 11.4 trillion of investors’ wealth. The domestic benchmark indices were hit by over 8 percent low with BSE Sensex nosediving 2,919 points and Nifty plunging by 898 points. On Friday, March 13, trading was halted for over 45 minutes due to the markets hitting the lower circuit.
The mayhem was created by blowing away of hot money of fretted Foreign Institutional Investors, which keep the stock market pumped up. The investors’ weak sentiments were aggravated by disrupted supply chains, the YES Bank saga and the RBI moratorium, the reducing oil prices and rupee depreciation, etc.
The tremors of the pandemic-shaken economy have been felt across multiple sectors.
The biggest hit is the aviation, tourism and hospitality industry with India in a quarantine state with international travel restrictions and visa suspensions. There has been a 20 percent reduction in domestic travel and about 75 percent reduction in the international travel bookings and reduced airfares, according to news reports. The most crippling blow would be to the tourism industry, which could be as high as 80-100 percent. The hotel occupancy rates have also come down from 70 percent to 20 percent. There has also been a decline of 30-35 percent in the restaurant business.
The sales of the poultry sector has also come down by 80 percent due to lack of demand which is hit by fears that the virus spreads through poultry consumption. The poultry industry is losing a business of approximately Rs 1,500-2000 crore daily, as also admitted by the Union Minister Giriraj Singh. The insurance sector has taken a hit as well — with 30-40 percent increasing inquiries on general health insurance and reduction in business travel insurance.
The disruption of global supply chains has impacted a number of industries in India. The automotive sector is one of them which was already glooming with recession over the past few months. The supplies of auto component parts have been disrupted. China accounts for 27 percent of India’s automotive part imports and it is two to three times higher in the case of the electric vehicle segment. The shipments via sea have been suspended, and hence the Indian OEMs are unable to produce beyond the inventory already lying with them or relying on shipment of auto components via air, though the air route is expensive.
The positive side is that it has also led companies to look within and source more parts locally, which has given a boost to the local auto components industry. As per the Fitch solutions, there will be contraction of automobile production by 8.3 percent in 2020 on account of Covid-19. On the demand side, there has been a curb for automobiles as customers are avoiding visiting showrooms and deferring vehicle purchases.
The consumer durables sector has also been adversely affected by supply disruptions from China and Europe as India imports 45 percent of completely built-in units from China, in addition to their components. Hence, their prices are likely to increase by 3-5 percent. Ninety-percent of mobile parts are imported from China and assembled in India. Hence the smartphone sales may fall by 10-15 percent in January-March quarter. The FMCG sector would be hit by weak demand in lieu of closure of malls and consumers deferring their purchases apart from the health and personal hygiene segment, which would be outshining.
The textiles and garment factories in China have halted their operations, which has adversely affected the export of fabric, yarn and other raw materials from India which will be reduced further by 50 percent. India gets 70 percent of the active pharma ingredients for their medicines from China and accounts for about 40 percent of the US generic drugs has halted exports for many of the drugs. With supply disruptions from China and interruptions in its supplies to US would force to increase the prices.
Considering all these sectoral losses and global supply chain disruptions as discussed in other studies by McKinsey and ADB, in our analysis using a global supply chain economic model, we estimate India’s ongoing GDP losses to be around $5-10 billion (0.15-0.35 percent of GDP). However, if we also account for potential reductions in investments, they could well be over $100 billion.
Originally published in moneycontrol.com