The impact of Coronavirus: An economic shock



With the increase in COVID-19 cases and the deaths worldwide, The  WHO declared the virus outbreak a pandemic in the second week of March 2020. So, due to any kind of pandemic the global markets crash sharply, thus this was no exception. Indian markets too succumbed to selling pressure and NIFTY declined 35% during the recent correction. 

The Coronavirus outbreak and the subsequent nationwide lockdown deeply impacted the Indian economy.  It hit the income of Indian retailers selling non-essential items such as cars, jewelry, clothes,  furniture, etc. The majority of the companies are expecting a significant decline in revenue in job losses. The most severely affected sectors were Aviation, Automotive, seafood, etc. 

Weak income growth and job losses are expected to impact demand and some products post lockdown. The Covid-19 pandemic crisis has triggered large erosion of demand globally resulting in a sharp decline in crude prices due to the absence of demand because of lockdown. India imports more than 80% of its crude oil requirements. A significant price change in crude oil price has a direct impact on India’s current account deficit hence if the oil prices continue to be in the lower range for a long period of time it will reduce India's import bill and in turn the Current Account Deficit.  Crude oil is used as a raw material by a lot of companies thus a big drop in the crude oil price may make some manufacturing companies see positive traction as fuel cost for production declines. Many pharma companies do benefit due to the huge demand for paracetamol and alike medicines. This pandemic has also made people realize the importance of life and medical insurance thus the related sectors can see some good order.

The finance minister has announced a Rs 1.76 lac crore relief package aiming at softening the effect of this disruption. It would largely benefit the unorganized sector workers, especially the daily wage earners, urban, and the rural poor. Over the past few years, the Indian stock market has witnessed many crashes, the biggest of them was in 2008-09, The Subprime Lending Crisis when the market dropped by 60% from its peak however from 2009 stock markets across the globe recovered. 

Currently, Coronavirus is impacting the global as well as the Indian economy and stock market which has led to massive portfolios getting washed out. Indian stock market fell by around 35% giving an opportunity for long term investors to invest in fundamentally sound companies at a discounted price.

As the coronavirus infection is spreading and risking the lives of people globally, it has also created deep economic distress. As some businesses struggle to stay afloat most companies will see their revenue and profits getting impacted amid the COVID-19 pandemic. But the impact will be different across sectors as the country eases lockdown in some parts. Even with a sufficient stimulus package if only partial uplighting of the lockdown is done, it will put 32 million jobs at stake in India as per a report by McKinsey & Company. It says that the cost of stabilizing and protecting households, companies, and lenders could exceed 130 billion dollars. In terms of sectors, the aviation sector is the hardest hit while Pharma and IT companies are in a better position but this aviation slump has a direct impact on Indian IT companies and could mean a 1 to 7 percent drop in the revenue in the coming quarters. As per experts, the hotel industry has also seen a major disruption after the aviation sector. Hotel industry revenue is likely to fall by 90,0000cr in 2020. Due to this impact, auto and advanced industries will be next in line with no near-term relief to the sector. For the first time ever India reported zero automotive sales in April and the sector is unlikely to have a respite anytime soon. It is important to know that Construction, real estate, and textile industry are majorly hit if we compare it to the same quarter of the previous year.  

Also, luxury housing may see a 20% reduction in prices while developers are likely to offer freebies to buyers investing in the mid-segment. The food and utility sector is not expected to see a fall in consumption by more than 10% if the current scenario plays out. 

The fall in the crude price also hints at weakened demand in the energy segments. Consumer and retail segments are also anticipated to be soft, chemical, and agricultural sectors can also see a drop in the quarterly output but pharmaceutical, IT, and telecommunications are relatively strong sectors. As the lockdown has shown some unprecedented challenges the Pharma sector is better placed to navigate the coronavirus outbreak. 

According to a report by McKinsey& Company, 25% of MSME and SME loans can turn bad. The corporate sector might see a 6% default rate in sectors like aviation, textiles, power, and construction showing a higher rate with around 3% default rate in the retail segment. With layoffs and pay cuts seen in the aviation and other segments, unemployment, liquidity, business risk can be the causes of concern once the pandemic is over. A large stabilization package can be considered to contain the problem of a magnitude like this. 

By-Alankrita Tiwari

 

 

 

 

 

 


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