Things will never be the same again. Let’s be clear about it.
Covid-19 will change the way the world works; just like the Great Depression, dot-com bubble, and the 2008 financial crash did in the past. The question on everyone’s mind is, ‘Will things go back to normal?’
I’ve been pondering, like many have, what fundamental changes will take place in how people, businesses, and economies function. The next 12 months will be difficult. Many businesses will struggle, some may even die. But as with economic adversities of the past, new industries will emerge bringing with it renewed hope of recovery. Eventually, things will go back to normal. Just that we’ll have to change the definition of normal.
Where is the emergency exit?
Studying past trends of similar infections can help in drawing inferences as to what might help us going forward. What would it take to see this pandemic through?
Mass Vaccination
Herd Immunity
Social Distancing
There’s a high likelihood we’re 12 months away from a semblance of normalcy. The biggest worry is a mutating virus that brings wave upon wave of attacks, each deadlier than the other. During the course of time that Covid-19 lasts, businesses and the global economy will continue to be significantly impacted.
Life in the time of COVID:
It might be a mouthful but here’s a look at what’s to come in the immediate future. Liquidity is expected to remain tight as the cost of borrowing in real terms will jump upwards. This is despite central banks’ efforts to reduce interest rates. Banks and financial institutions will be under immense pressure as the fear of NPAs, insolvency and bankruptcies increase multifold. The government will focus on meeting hyper demand for essential goods while non-essential businesses will focus on recovering their receivables/outstanding money due from debtors. New strategic alliances or business partnerships will not emerge during this period.
I don’t want to sound like a pessimist – the road forward looks rough. While there are sectors and businesses that will benefit, the prognosis is rather grim. In my best guess, here are some of the sectors that will be adversely affected and others that will see an uptick.
Adversely affected Sectors:
Apparel & Textile will get hit adversely due to disruption in labour supply, raw material unavailability, working capital constraints and restricted demand due to limited movement of people and purchasing ability.
Auto sector (which includes automobiles and auto parts) will continue to face challenges on account of lack of demand, global recession and falling income levels.
Aviation & Tourism is one sector which has the highest probability of going under without direct government intervention. In the next 12 months, it’s highly unlikely people will travel for leisure apart from very essential travel.
Shipping and Non-Food Retail – Non food retail chains and global shipping businesses will find this 12 month period very challenging.
Building & Construction businesses are generally leveraged and hence will face the dual challenges of high-interest payments and lack of sales.
Comparing Debt to Equity Ratio of Sectors
SectorD/E RatioReal Estate0.86Information Technology0.11Consumer Staples (FMCG Food)0.49Financials (Investment Banking and Brokerage)0.083
Broadly, anything which involves personal interaction will face problems in the next 12 months – real estate or big-ticket items/luxury products.
Brief Chart & Statics (Sector Wise Explanation):
Recently an industry survey that is jointly conducted by industry body Ficci and tax consultancy Dhruva advisors and took responses from about 380 companies across the sectors. It is said that businesses are grappling with “tremendous uncertainty” about their future.
According to the survey, COVID-19 is having a ‘deep impact’ on Indian businesses, over the coming month’s jobs are at high risk because firms are looking for some reduction in manpower. Further, it is added that already COVID-19 crisis has caused an unprecedented collapse in economic activities over the last few weeks.
The present situation is having a “high to very high” level impact on their business according to almost 72 per cent respondents. Further, 70 per cent of the surveyed firms are expecting a degrowth sales in the financial year 2020-21.
Ficci said in a statement, “The survey clearly highlights that unless a substantive economic package is announced by the government immediately, we could see a permanent impairment of a large section of the industry, which may lose the opportunity to come back to life again.”
The survey found:
In respect to the approved expansion plans, around 61 per cent of the respondents expect to postpone such expansions for a period of up to 6 or 12 months, while 33 per cent expect it to for more than 12 months.
Surveyed firms of around 60 per cent have postponed their fund-raising plans for the next 6-12 months. Also, nearly 25 per cent of the firms have decided the same.
Surveyed firms around 43 per cent have reported that they do not predict an impact on exports. Further, 34 per cent said that exports would take a hit by more than 10 per cent.
According to Dun & Bradstreet, COVID-19 no doubt disrupted human lives and global supply chain but the pandemic is a severe demand shock which has offset the green shoots of recovery of the Indian economy that was visible towards the end of 2019 and early 2020. The revised Gross Domestic Product (GDP) estimates for India downwards by 0.2% points for the fiscal(Financial) year 2020 to 4.8% and by 0.5% for the fiscal year 2021 to 6 %. Further, it is stated that the extent of the actual impact will depend upon the severity and duration of the outbreak.
There are three major channels of impact for Indian businesses according to the report namely linkages, supply chain and macroeconomic factors. The data of the Dun & Bradstreet shows that at least 6,606 Indian entities have legal linkages with companies in countries with a large number of confirmed COVID-19 cases. And business activity in the foreign markets is slow which implies a negative impact on the topline of these companies. Sectors that would be much affected includes logistics, auto, tourism, metals, drugs, pharmaceuticals, electronic goods, MSMEs and retail among others.
Further, according to the World Bank’s assessment, India is expected to grow 1.5% to 2.8%. And IMF projected a GDP growth of 1.9% for India in 2020, because the global economy is affected by the COVID pandemic, the worst recession since the Great Depression in the 1930s. Also, we can’t ignore that the lockdown and pandemic hit several sectors including MSME, hospitality, civil aviation, agriculture and allied sector.
According to KPMG, the lockdown in India will have a sizeable impact on the economy mainly on consumption which is the biggest component of GDP. Reduction in the urban transaction can lead to a steep fall in the consumption of non-essential goods. It can be severe if disruption causes by the current lockdown and affect the availability of essential commodities. Due to weak domestic consumption and consumer sentiment, there can be a delay in investment which further add pressure on the growth.
We can’t ignore that post-COVID-19, some economies are expected to adopt de-risking strategies and shift their manufacturing bases from China. This can create opportunities for India.
According to KPMG, opportunities will largely depend on how quickly the economy recovers and the pace at which the supply chain issues are addressed.
KPMG India Chairman and CEO Arun M Kumar said: “Apart from providing robust safety nets for the vulnerable, a focus on ensuring job continuity and job creation will be imperative”. “And there is urgent need to mobilise resources to stimulate the economy for increased demand and employment”.
According to the KPMG report “It is expected that the course of economic recovery in India will be smoother and faster than that of many other advanced countries”.
In terms of trade, China is the world’s largest exporter and second-largest importer. It accounts for 13% of world exports and 11% of world imports. Up to a large extent, it will impact the Indian industry. In imports, the dependence of India on China is huge. Of the top 20 products (at the two-digit of HS Code) that India imports from the world, China accounts for a significant share in most of them.
India’s total electronic imports account for 45% of China. Around one-third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China? For automotive parts and fertilizers China’s share in India’s import is more than 25%. Around 65 to 70% of active pharmaceutical ingredients and around 90% of certain mobile phones come from China to India.
Therefore, we can say that due to the current outbreak of coronavirus in China, the import dependence on China will have a significant impact on the Indian industry.
We also can’t ignore that most of the Indian companies are located in the eastern part of China. In China, about 72% of companies in India are located in cities like Shanghai, Beijing, provinces of Guangdong, Jiangsu, and Shandong. In various sectors, these companies work including Industrial manufacturing, manufacturing services, IT and BPO, Logistics, Chemicals, Airlines, and tourism.
It has been seen that some sectors of India have been impacted by the outbreak of coronavirus in China including shipping, pharmaceuticals, automobiles, mobiles, electronics, textiles, etc. Also, a supply chain may affect some disruptions associates with industries and markets. Overall, the impact of coronavirus in the industry is moderate.
According to CLSA report, pharma, chemicals, and electronics businesses may face supply-chain issues and prices will go up by 10 percent. The report also says that India could also be a beneficiary of positive flows since it appears to be the least-impacted market. Some commodities like metals, upstream and downstream oil companies, could witness the impact of lower global demand impacting commodity prices.
Ficci survey showed 53% of Indian businesses have indicated a marked impact of COVID-19 on business operations. And 42% of the respondents said that up to three months could take for normalcy to return.
Let us have a look at the sector-wise impact on Indian industry (+China’s role)
Chemical Industry: Some chemical plants have been shut down in China. So there will be restrictions on shipments/logistics. It was found that 20% of the production has been impacted due to the disruption in raw material supply. China is a major supplier of Indigo that is required for denim. Business in India is likely to get affected so people securing their supplies. However, it is an opportunity. US and EU will try and diversify their markets. Some of the business can be diverted to India which can also be taken as an advantage.
Shipping Industry: Coronavirus outbreak has impacted the business of cargo movement service providers. As per the sources, per day per vessel has declined by more than 75-80% in dry bulk trade.
Auto Industry: Its impact on Indian companies will vary and depend upon the extent of the business with China. China’s business no doubt is affected. However, current levels of the inventory seem to be sufficient for the Indian industry. If the shutdown in China continues then it is expected to result in an 8-10% contraction of Indian auto manufacturing in 2020.
Pharmaceuticals Industry: Despite being one of the top formulations of drug exporters in the world, the pharma industry of India relies heavily on import as of bulk drugs. Due to the coronavirus outbreak, it will also be impacted.
Textiles Industry: Due to coronavirus outbreak, several garments/textile factories in China have halted operations that in turn affecting the exports of fabric, yarn and other raw materials from India.
Solar Power Sector: Indian developers may face some shortfall of raw materials needed in solar panels/cells and limited stocks from China.
Electronics Industry: The major supplier is China in electronics being a final product or raw material used in the electronic industry. India’s electronic industry may face supply disruptions, production, reduction impact on product prices due to heavy dependence on electronics component supply directly or indirectly and local manufacturing.
IT Industry: The New Year holidays in China has been extended due to coronavirus outbreak that adversely impacted the revenue and growth of Indian IT companies.
Tourism and Aviation: Due to the coronavirus outbreak, the inflow of tourists from China and from other East Asian regions to India will lose that will impact the tourism sector and revenue.
India vs Covid-19: Challenges & Solutions:
The discussion can be bifurcated into 2 parts – India’s economy, and its stock markets.
The recovery of the underlying economy will be slow, and it will take around 2 years for normalcy to come back across sectors. While the overall economy might take a hit because of the government lockdown, some sectors are set to see immense growth in the post-Covid era – FMCG, B2C specialised lenders, gold-dependent companies, food retail and pharmaceutical companies to name a few.
Stock markets have a mind of their own, formed by the collective emotions + intelligence of millions. They are often skewed and aren’t the best indicators of the underlying economy. Stock markets will have a strong recovery, not due to the fundamentals strength, but due to global liquidity which is available for almost free (as interest rates tend to near zero). Availability of debt capital will be scarce in India, whilst equity capital will be available in plenty over a period of time.
What can the Government do?
Like its counterparts across the globe, the Indian government has announced a slew of measures to prevent total collapse. However, it isn’t enough. This works to alleviate some of the pain, not counter it. My 2 cents (or one barrel of oil) on what the government ought to do:
Loosen its purse and spend money on infrastructure development – ‘Rebuild India, Rejuvenate India’
Public sector financial institutions need to be further capitalized and nudged by the RBI to lend out low-ticket loans below INR 1 Crore in the form of working capital to ensure that liquidity comes back into the system
Banking sector needs to be nudged to pass on rate cuts induced by RBI to the borrowers
Personal tax cuts & tax holidays for 6 – 12 months can be adopted to revive consumption, which will help spur economic growth
Conclusion:
This may be the time to reset. Never before has the world come to a standstill where one can pick apart the many moving pieces – like Tom Cruise in Minority Report. We have the opportunity to rethink everything. If we do things right, we may be able to fix challenges that face humankind – environmental damage, inequality etc.
More importantly, we must ensure something like this never happens again. History says that humankind has never learnt from history. Let’s hope that it’s a thing of the past.
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So, That’s all in Today’s Blog!
Hope you like this Blog. If any point is not understood, then you can ask me by Commenting.
so till then Keep Laughing, Keep Smiling & Keep Learning!!
Thank You very much to all of you………..Namaskaar!!!!!
