The Corona Scare
Just four days before the Ides of March, the gravity of the novel coronavirus outbreak (Covid-19) has hit home hard. Within a day, the World Health Organization (WHO) declared Covid-19 a global pandemic. Soon after, India revoked all visas issued to nationals of any country till April 15. To top it all, US President Donald Trump barred arrivals from 26 European countries that are part of the Schengen passport-free zone for 30 days to the US. The world's ninth-largest economy, Italy, is already in lockdown as the impact of coronavirus spreads globally. As countries lock down over the spread of Covid-19, economists now fear it may drive the global economy into a recession. Especially, if crude price and production war between Saudi Arabia and Russia causes a sustained spell of lower prices across other energy and metals baskets, triggering a global recession.
The economic fallout of the global coronavirus pandemic could lead to $2.7 trillion in lost output across the world, according to a Bloomberg report. That could include recessions in the US, Euro area and Japan and the slowest growth on record in China. The Indian economy that was showing some tepid signs of growth after a prolonged slowdown could hit the brakes again. This is driven by extended closure of businesses leading to lower consumption of goods and services. As India prepares to impose social restrictions to prevent rapid spread of the virus, at least six states - Uttar Pradesh, Bihar, Karnataka, Maharashtra, Delhi and Kerala - have shut schools, colleges, multiplexes and banned public gatherings and congregation. The 13th edition of the popular Indian Premier League has been postponed to April 15. According to an Edelweiss report, the coronavirus outbreak is expected to sting multiplexes in the near term due to waning footfalls as virus-wary consumers shun high density areas. The impact on movie hall footfalls is expected to persist for a long period.
Questions are being raised about India meeting the target of 6-6.6 per cent GDP growth during FY2021. In all likelihood, the target may have to be revised downwards. Economists have pared India's growth to in the region of 5 per cent in FY2021 from the original 6-6.5 per cent. The OECD has lowered India's growth target in the next fiscal to 5.1 per cent from 6.2 per cent earlier; while UBS has also lowered it to 5.1 per cent from 5.6 per cent. Fitch has reduced it to 5.5 per cent from 5.9 per cent earlier. The India Intelligence report of Bloomberg has lowered India's quarterly GDP growth estimates for 4Q fiscal 2020 (January-March 2020) to barely 4.5 per cent from 5.4 per cent, 'based on the results of large-scale economic model' and their 'nowcasting models for India's GDP and rural economy'. "We have cut India's GDP growth projections for 2020-21 from 6 per cent to 5.7 per cent", says D.K. Joshi, Chief Economist, CRISIL. A report by ASK Wealth Advisors states that the Indian market reacted sharply compared with China. The sharp correction has taken valuations to May 2017 levels. Should it take beyond a couple of quarters to contain, the economic impact could be substantial. It states that nearly 40 per cent of the economy from the supply side and closer to 90 per cent from the demand side could be affected with a potential of a 100 bps slowdown in GDP growth.
Chief Economic Advisor Krishnamurthy Subramanian prefers not to read too much into the Covid-19 crisis. He says India is in a much better position compared to other countries when it comes to the health impact of the virus infection. Stating that tourism and related sectors are likely to be impacted, Subramanian prescribes continuous monitoring of the economic situation in key services sectors. "The government is seriously considering and looking at all aspects of this emerging situation and the government, together with the regulator (RBI), will definitely be responding when it is necessary. Other central banks have certainly responded and as inflation data is suggesting a moderation, there is certainly scope for the central bank to consider this," Subramanian said. -Also, planned receipts from the privatisation of oil marketing company Bharat Petroleum could be down according to oil industry estimates. Similarly, at a time when the International Air Transport Authority (IATA) has projected that the global airline industry will lose up to $113 billion in revenues this year, the prospects of selling off Air-India has become all the more bleak.
As if all that was not enough, the meltdown in global stock markets has seen investor wealth disappearing in days. Since February 12, the benchmark BSE Sensex has fallen almost 8,400 points from 41,645 to 33,249 on March 12. In the process, investors have lost Rs 34.9 lakh crore or over Rs 1 lakh crore per day.
In an Impact Note on Covid-19 fallout, CRISIL had earlier said that its effect on India would be a mixed bag. "We expect the impact of the outbreak to subside in China by April 2020. That is the base case. In the worst case, the epidemic might well extend through the first quarter of fiscal 2021, intensifying the severity of impact. If not contained quickly, the epidemic will have a knock-on effect in the world economy and disrupt global supply chains. China is the world's second-largest economy and a major trade partner for many countries, including India," it said.
During 2018/19, India imported $70.4 billion worth of goods from China, while exporting $16.8 billion. A trade disruption could hit many industries, including pharma and chemical inputs, electronic assembly, consumer durables and solar panels.
While the complete picture on manufacturing is yet to emerge, Covid-19's impact on the services sector - especially tourism, aviation and hospitality, is very clear. CRISIL foresees business reducing drastically for airlines, hotels, malls, multiplexes and restaurants. In the services sector, information technology would be affected because of physical restrictions. Says Subodh Rai, Senior Director, CRISIL: "Lower business volumes and occupancies, and sub-optimal efficiencies will impact the profitability of companies. While some affected companies may initiate cost-curtailment measures, these may not be enough given high fixed costs. That could impair credit profiles."
Big Hit to Travel & Tourism
The immediate impact of the global coronavirus outbreak within India is on the travel & tourism industry, airlines and hospitality. According to the World Tourism & Travel Council (WTTC), India is ranked third among 185 countries in terms of tourism and travel's contribution to GDP in 2018. The India Brand Equity Foundation (IBEF) states the sector's direct contribution to GDP is 7.1 per cent. That could get impacted as the government imposed curbs on international arrivals.
"Due to the coronavirus pandemic around the world, we have received close to 35 per cent cancellation queries from travellers planning their trip to foreign destinations," says Sabina Chopra, Co-founder, COO (corporate travel) and Head (industry relations), Yatra.com. Darshini Kansara, Deputy Manager, CARE Ratings, says that 30-50 per cent of the hotel bookings across categories in India during April and May, the peak holiday season, are cancelled or postponed despite lower airfares. "The Indian aviation industry could see international passenger traffic growth impacted because of suspension of flights to and from China, Hong Kong, Iran, Italy, Japan, Korea, Malaysia, Singapore and Thailand. This is negative for the Indian aviation industry, which is already reeling under significant passenger traffic slowdown, with international traffic growth for the April-December 2019 period, having declined 8.4 per cent," says Kinjal Shah, Vice President at ratings agency ICRA. As flights reduce, airports are seeing their cash flows dry up. Says Satyan Nair, Secretary General, Association of Private Airports Operators: "On one side, we need to pay the government a revenue share at the beginning of a quarter. On the other, our concessionaires are seeking a moratorium on the concession fee."
Domestic carriers have cancelled over 150 international flights. IndiGo said on Wednesday that it's witnessing 15-20 per cent decline in daily bookings over the past few days.
Analysts predict domestic carriers are closely monitoring developments, and will soon take a call on truncating their domestic flight schedules. "In metro routes like Delhi to Mumbai, IndiGo could curtail its frequency from about 16 now to 12-13, owing to weak demand. Reducing frequencies in non-metro routes could create hassle for passengers," says an analyst. As the world locks travel, people will travel less and spend less, hitting chances of future growth.
Auto, Durables, Pharma to Take the Brunt
While initial fears were about supply chains getting hit as Chinese factories stopped production, today the world is heading to a demand shock as fewer people are venturing out to make big purchases. As the Indian automobile industry is moving to a BSVI regime, the coronavirus spread has resulted in a 45 per cent drop in footfalls to showrooms, according to the Federation of Automobile Dealers Association. As an auto industry official states, the real worry is what the March numbers will be like.
"The disruption in availability of auto parts is likely to critically hamper production across all segments, says Rajan Wadhera, President, Society of Indian Automobile Manufacturers (SIAM). According to him, the Indian auto industry had maintained inventory in beginning of the year, but with the current lockdown in China, supply for BSVI vehicles is likely to get impacted. "Manufacturers are exploring alternatives to fulfil supply chain demands, but that would also take a substantial amount of time to reach stable production scale as these components would need regulatory testing," Wadhera said.
Gurpratap Boparai, MD, SKODA Auto Volkswagen, says: "China accounts for 27 per cent of domestic automotive component imports across OEMs. The recent shutdown has hampered the manufacturing cycle. We planned our component imports well in advance and so the immediate impact of the pandemic has been minimal." Skoda is looking towards 95 per cent localisation. Guenter Butschek, CEO and Managing Director, Tata Motors, says there is not a single company in the world that produces everything in one country. "It's the same with the automotive industry. You know we are rather weak as far as electronics are concerned. So, coronavirus might have an impact. We need to check to see what has been produced, what has been shipped, what is available for shipment, and then to do the math to see where we are against our production plan. This is currently an operational concern and we will discover it as our regular contacts get back to work. I hope it's not a threat but it is, at least at this point of time, uncertain," says Butschek.
Kamal Nandi, Business Head and Executive Vice President, Godrej Appliances, states: "The coronavirus attack had a negative impact on consumer durables due to dependence on imports from China - be it for finished goods or components. We have received reports that plants in China are operating at 50-60 per cent capacity, but production has begun now. Prices for consumer durables especially in categories like ACs, televisions and refrigerators, are being revised by industry players."
The United Nations Conference on Trade and Development (UNCTAD) estimates the coronavirus outbreak could result in a $50-billion decrease in global exports. While the European Union ($15.6 billion), US ($5.7 billion), Japan ($5.2 billion) and Korea ($3.8 billion) account for the bulk, the impact on India is estimated at a modest $348 million. That includes $129 million of losses due to supply chain disruptions in the chemical sector, textile and apparels ($64 million) and automotive ($34 million).
India's solar, pharmaceuticals, machinery, gems and jewellery industries are highly sensitive to global supply chain and transit disruptions. While most of the goods manufacturers managed with their two to three months inventory so far, the crisis in Indian industry may balloon if supply sources (mostly raw materials) and markets (mostly for finished goods like medicines, fisheries, textiles, polished diamonds) continue to be disrupted by anti-virus actions by countries and trade blocs.
According to the the Gems and Jewellery Export Promotion Council (GJEPC), exports have dropped 20 per cent to Rs 20,763 crore in February. This is a decline of 6.38 per cent to Rs 2,36,839.34 crore during April 2019 to February 2020, compared to Rs 2,52,973.24 crore during the same period. Sources said Hong Kong and Dubai - where finished jewellery and diamond deals are done - have come to a standstill following the corona scare. Already the 3,500 odd Surat diamond and jewellery industry representatives from India there have returned a month ago. All the key buyer-seller meets and expos in these sourcing centres have been cancelled. Surat, the largest diamond polishing and cutting centre, is still functional and is catering to the existing orders. "The impact will be known in the coming days and weeks and at present there is no clarity on how early these hubs come back to normalcy," said a member of GJEPC.
In pharmaceuticals, India imports $2.5 billion worth of active pharmaceutical ingredients from China. As things stand, most companies have reasonable supply of raw material. Krishna Prasad Chigurupati, CMD, Granules India, the Hyderabad-based producer of pain and anti-diabetes medication, says: "Our shipments through sea have been happening normally for the past three weeks now except for Ibuprofen API, which is sourced from near Wuhan."
In a bid to get the governments' help to minimise the collateral damage of Covid-19 prevention, the International Monetary Fund's Chief Economist Gita Gopinath suggested that "Central banks should be ready to provide ample liquidity to banks and non-bank finance companies, particularly to those lending to small- and medium-sized enterprises, which may be less prepared to withstand a sharp disruption". Governments could offer temporary and targeted credit guarantees for the near-term liquidity needs of these firms.For the time being, India's Central and state governments are busy tackling the virus. But they need to watch out for a spike in prices of imported raw materials due to supply constraints. Of course, all that comes after Covid-19 can be tamed. Hopefully, soon.
