Covid Report Research Desk
Economic Impact of Coronavirus Pandemic
Overview
In 2020, the global economy got shivered with the onset of COVID-19 - a virus of the size of 0.12 microns. By May 23, 2021 there were more than 167 million confirmed infections and over 3.4 million fatalities worldwide, with over 26 million infections and 3, 03,720 mortalities in India. The year 2021 has started with both fear and hope since several parts of the world are locking down and bracing against new waves (2nd or 3rd wave) of infections and speedily communicable mutations. Simultaneously, the approval of several vaccines has spurred vaccination drives worldwide. Although vaccine producers struggle to tweak vaccines to keep pace with mutations and face supply shortage of raw materials, nearly 600 million doses of vaccines have already been administered (March 31, 2021). The output losses in this event outpaced what was being suffered during the global financial crisis (GFC) of 2008-09 where in the World trade declined by around 8.5 per cent.
However the year 2020 will also be memorable for unprecedented policy responses which, although was not coordinated, but turned out to be very well synchronised. A slew of conventional and unconventional measures was unleashed across the world, with monetary authorities slashing policy rates to zero and below in real terms - and even in nominal terms in some countries - while executing massive asset purchase programmes, payment deferral schemes, provision of public guarantees, emergency funding avenues and provision of ample liquidity to financial markets. The stimulus provided by fiscal authorities amounted to US$ 16 trillion2 (15.3 per cent of the world GDP). Of the total amount, US$ 10 trillion consisted of additional spending or foregone revenue, while US$ 6 trillion comprised liquidity support in the form of guarantees, loans, asset/debt purchases, and equity injections. This policy fight back led to a massive easing of financial conditions and imparted stability to the financial system, thereby containing downside risks to growth.
Impact on Financial Markets
After the pandemic shock in H1:2020, global financial markets quickly regained normalcy over the ensuing period, drawing support from liquidity flushed in by global central banks and unprecedented fiscal support by governments. Capital flows turned mobile as risk appetite returned and emerging markets as an asset class became the flavour of the season. The BSE Sensex rose 95 per cent from the lows of March 2020 (till May 24, 2021) and touched its fresh lifetime highs on the back of record foreign portfolio investment (FPI) inflows (2.8 lakh crores in 2020-21), better than expected corporate earnings, pick-up in economic activity and roll-out of vaccines in the country and abroad. Financial markets regained verve, equity valuations surged, bond yields eased and remained range-bound, and the Indian rupee traded with an appreciating bias as India became a preferred habitat for capital flows. The market capitalisation to GDP ratio crossed 100% in January 2021 for the first time in over a decade. On the external front, the sizeable contraction in imports relative to exports, under deep recessionary conditions, led to a current account surplus; along with robust net capital inflows, this led to a large build-up of foreign exchange reserves.
Impact on savings.
Preliminary estimates show an upsurge in household financial savings to 21.0 per cent of GDP in Q1:2020-21 versus 4.0 per cent in Q1:2019-20, owing to the COVID-19 led reduction in discretionary expenditure and the associated surge in precautionary saving despite stagnant/reduced income. The excess household financial savings, however, waned substantially and its rate dropped to 10.4 per cent of GDP in Q2:2020-21 as households switched from ‘essential only’ spending to discretionary spending with gradual reopening/unlocking of the economy. The drawdown on saving by the general government sector remained at an elevated level and led to excessive draft on households’ financial surplus.
During this second wave, discretionary spending is expected to be controlled but savings might get impacted due to rising job losses resulting into lower income and increasing healthcare costs.
Impact on GDP
For the year 2020, global output sank into its steepest contraction since the Great Depression at (-) 3.3 per cent, with advanced countries’ GDP down by 4.7 per cent and that of emerging and developing countries (EMDEs) by 2.2 per cent. World trade volume of goods and services shrank by 8.5 per cent. The Indian economy contracted 24.4 per cent y-o-y in Q1:2020-21, the deepest downturn amongst G20 countries. In Q2, however, the contraction started to ease, reflecting vigorous efforts to revive the economy, gradual relaxation of mobility restrictions, monetary and liquidity easing, and fiscal support. By Q3, India had pulled out of a technical recession. In its February 2021 estimates, the National Statistical Office (NSO) estimated that real GDP for the full year would have shrunk by 8.0 per cent only.
However, this second wave has triggered a raft of revisions to growth projections from different rating agencies and other financial institutions. S&P Global Ratings says gross domestic product growth for the current fiscal year may be 9.8%, down from its March estimate of 11%, if infections peak in May. One more month of rising cases may slow the expansion to 8.2%.
Corporate Performance
After the announcement of nationwide lockdown corporate sector witnessed a sudden and sharp contraction in demand and also clogged supply chains due to stalled movement of goods, both for inputs used in production processes as well as final products meant for wholesale and retail sale. Survival of businesses in this environment of collapsing sales, vanishing cash flows and sticky operating expenses emerged as a key challenge. Indian corporates, however, adjusted quickly to the altered business environment. As sales recovered in Q2:2020- 21, cost cutting continued as the preferred path to regain efficiency and return to profitability. As demand conditions in many segments normalised fully by the end of Q3:2020-21 to pre-COVID-19 levels, there was evidence of improvement in margins, on account of revenue recovery, cost saving and pass-through of increased costs to retail producer and retail prices. Therefore, profitability has improved further in Q3.
The impact of COVID-19 has been varied for firms of different size/nature of operations. Evidence from both advanced and emerging economies show that smaller sized firms are relatively more vulnerable to extended periods of lockdown since it’s easier for larger firms to cut costs compared to smaller firms during the lockdown.
One of the major reforms announced by the Indian Government was AatmaNirbhar Bharat ("economic self-reliance") in May 2020 which will boost the domestic manufacturing industry in order to reduce imports and increase exports in the coming time. The Government of India is aiming to attract companies that wish to move out of China or are looking for an alternative to China in different sectors.
The above measures have started giving results as suggested by GST collections number which has crossed 1.4 lakh crore mark in April 2021.
Unemployment
The unemployment rate shot up sharply to nearly 24 percent in April 2020 as millions of gig workers were rendered jobless due to the lockdown. The job losses were not restricted to gig workers only, many white-collar jobs were also lost, especially in sectors like aviation, tourism, travel and hospitality. While many companies had cut jobs, others opted for pay cuts. This was possibly a result of a decrease in demand.
However majority of states recorded an improvement in employment conditions in the post lockdown phase, supported by faster recovery in rural employment as several policy initiatives were being taken by the government to promote industrial production and generate employment opportunities. The CMIE data showed that the unemployment rate improved in March to 6.5 per cent. On a cumulative basis, the average of net subscribers added to Employees’ Provident Fund Organisation (EPFO) per month decreased marginally to 6.42 lakh in April-March 2021 from 6.55 lakh in the previous year. New subscribers to the National Pension Scheme (NPS) also decreased during the same period.
But the second wave of Covid-19 seems to have done more damage than earlier expected. Smaller businesses including micro, small and medium enterprises are laying off more employees as demand and sales have plummeted due to localised lockdowns. Job losses are likely to witness a jump in May after rising sharply in April and about 7million people are expected to lose jobs.
Housing Market
The housing market has been strongly affected on various fronts due to the pandemic. Several (property) registrations had come to a halt due to lockdowns. The demand-side has slumped owing to cash flow problems and reserve depletion among buyers. Given the impact of the second wave and forecast of a third wave, buyers will take a more cautious approach before committing capital for home purchases.
Outlook Ahead
The second wave of Covid-19 infections is spreading across the country and state after state is announcing restrictions even though a nationwide lockdown has been avoided. The outbreak is no longer concentrated in a few states or even in urban areas as was earlier thought. But the economic impact is not that extensive as during the first wave. The government is well equipped in terms of infrastructure and policy decisions as compared to last year. The finance ministry and central bank might come together to offer moratoriums, state-guaranteed loans and other liquidity-enhancing measures to make up for disappearing cash flows. Also the policy measures taken earlier have also made the economy more resilient as compared to last time.
The government has already announced policy measures to boost healthcare infrastructure in the form of tax incentives, allocation of more funds to setup medical infrastructure and easy availability of liquidity that too at lower rates to the businesses involved in specified healthcare segment. Priority has also been accorded to boost R&D and original design capabilities through the PLI scheme. These actions bode well for raising the export potential of domestic pharma companies. Simultaneously its working on several measures to pace up the vaccination drive (by allowing the launch of more vaccines) since vaccination and social distancing are the only way to fight back with the virus as per the experts. Priority has also been accorded to boost R&D and original design capabilities through the PLI scheme. These actions bode well for raising the export potential of domestic pharma companies.
All the above measures will help India to control the subsequent waves and provide us the ray of hope of a better and healthy future.
Keshav Kothari
Research Head
Dilzer Consultants Pvt Ltd