[Reproduced from article published in April '20]
COVID-19 is an unprecedented global crisis and the nature and extent of its financial impact needs to be estimated without any historical data to help. Accuracy of data analytics and statistical tools used for making such estimates is largely dependent on estimates of duration of the pandemic. Since the estimates of its national infection trajectory range from three months to one year (by which time effective vaccines should be ready), economic impact estimates are likely to vary over a fairly wide range also. This note considers the financial impact of COVID-19 on Indian economy from the point of view of continuity and sustainability of Indian businesses and global opportunities, if any, which might open up.
Impact on Indian economy -While immediate negative impact on the Indian economy will be there, our view at is that it will not be protracted and long drawn. Since controlling spread of the virus is the only priority of the government, and rightly so, the lockdown period is likely to continue till India is able to decisively make the coronavirus case curve to slope downwards. Assuming a best case timeline of June end, by when the pandemic has played out its growth phase in India and is on its way down, the Indian economy should bottom out in Q3 itself. There are two main reasons for this opinion. Firstly, in our view, COVID-19 will not cause a depression in the economy. There will be a dip in overall spending, but it may not be very deep. It is more likely that there will be a sectorial shift in spending – funds allocation will shift from luxury spending to necessities and comforts. It will take at least another two quarters to revert to status quo ante. However, overall, the Indian consumption story is likely to remain intact and this will cushion the country against a deep or prolonged recession. This is because, although in absolute terms COVID-19 mortality numbers are alarming, as a percentage of total population these are unlikely to be drastically high. Hence, post COVID-19 a large portion of Indian population will either have avoided getting infected or overcome the infection. This huge consumer base will be waiting for things to settle down after which it might restart spending with a vengeance.
As already stated, consumption patterns are likely to change - some sectors will take a bigger hit than others such as travel, hospitality, out of home entertainment etc, and it is these businesses that need to have their continuity plans in place so that they can weather the storm and are up and ready when things return to normal. This involves not just prudent cost cutting but finding innovative revenue streams to keep their businesses running. Several sectors have begun doing this already – hotels providing self-quarantine facilities to patrons with all necessary comforts is a case in point. Repositioning luxuries as comforts or even necessities will be the need of the hour. The dip in spending in these sectors will be somewhat offset by substantially increased spending in other sectors such as healthcare (preventive healthcare as apart from curative treatment) and sanitation. Increased health awareness opens up a big opportunity as eating, cleansing, commuting, dressing habits of people are likely to undergo a fundamental change in India, somewhat like bottled drinking water and water purifiers which were not in vogue till just a couple of decades ago.
For this scenario to play out, i.e. the economy to quickly get back on track, it is imperative that even as the government focusses on controlling the spread of the pandemic and treatment of those afflicted by it, separate work groups be set up to provide support to businesses in terms of cash flows and continuity of supply chain, other than providing sector-specific relief to the sectors worst-hit.
Global opportunity -The second aspect is whether or not this crisis can be an opportunity for India. Insensitive though it sounds, disruptions and upheavals such as COVID-19, like big wars do provide an opportunity to individuals, sectors and countries. India taking advantage of this and increasing its share in world trade will depend largely on how well India manages the pandemic internally and how unscathed it emerges from it. It will be a bit optimistic to believe that China will easily let go its dominance of world trade unless new facts come to light which change the equation. This being said, some amount to reallocation of trade can happen. However, the old rules of the game will remain – efficiency, cost and quality – which will determine how much of world trade India can garner for itself. There are no emotions and subjective preferences in world trade and the west, once it does manage to overcome the pandemic, will revert to the same rules of doing business. As a country what India will need is scaled up, more efficient production facilities backed by government support and appropriate diplomatic efforts to ensure trade agreements and barriers do not cause hurdles.
Post COVID-19 the world will exist, but its order might change. India needs to start preparing now if it wants to be a front runner in the new world order.
Disclaimer:
The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views, position or policy of any other institution, agency organisation or educational body.
About the Author:
Sandip is a blogger and a qualified Chartered and Management accountant with over three decades of experience in controls design, process re-engineering, taxation, assurance and financial planning.
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