INTRODUCTION:
THE ECONOMIC IMPACT
It was mid-January when we
started to hear stories about a virus in China which had locked down the entire
Wuhan city, the epicentre of the virus. Its effect had also spread to other
Asian countries and by 30th January, 20201 India reported
its first Covid-19 case. After two and a half months of the first reported
case, India is now in the second phase of lockdown. India took early calls to
go for a complete lockdown and implemented strict guidelines due to the
experience of other countries, the rate of transmission of the virus from one
person to another and also the strain which this virus could cause on the
healthcare system of the country.
Observers state that the lockdown
slowed the growth rate of the virus by 6th April to a rate of
doubling every six days, from a rate of doubling every three days earlier. The
metric called R-Naught or R-Zero, estimates that the infection rates in India
have fallen to 1.55 on 11th April from 1.83 on 6th April,
further indicating that lockdowns could be helping2.
This article seeks to explore the
consequences and impact of the current health crisis on the overall Indian
economy and the Indian financial markets.
Looking back to the situation
till a couple of years ago, India was going through its own economic slowdown:
(i) The primary reasons were the ‘shocks’ of demonetisation in 2016 and
the introduction of the Goods and Services Tax (GST) in 2017.
(ii) India recorded the lowest quarterly GDP growth rate in the last
decade of 4.7% in Q3FY203 and the growth outlook (pre-Covid-19) for
FY21 was upwards of 5%.
(iii) The economy had started to show some signs of recovery when the
index of industrial production (IIP) grew by 2% on a y-o-y basis in January,
2020. The manufacturing index also improved by 1.5%.
(iv) To boost the economy, the Finance Minister reduced the base
corporate tax rate to 22% (effectively ~ 25%) for companies which do not seek
to take certain exemption benefits. This led to earnings recovery for many
companies and a boost to the stock markets as well.
What impact will the current
crisis have on the GDP growth rate?3
(a) It has been estimated by various rating agencies that the advanced
economies will contract by 0.5% to 3% in 2020 as against a global growth of
1.7% in 2019.
(b) China is estimated to grow ~ 3% in 2020, while India’s growth
forecast for FY21 has been revised downwards and is estimated to be between
1.8% and 2.5% from more than 5% estimated before the lockdown was announced.
(c) Having said that, even a 2% growth rate is still good news for
India. Due to the low base rate, the expected GDP growth in FY22 is expected to
be upwards of 7%.
With what is now happening across
the world (post the Covid-19 outbreak), including India, a slowdown in each and
every economy is imminent. The extent of impact in different geographies will
vary based on the severity of the virus, the stimulus packages by the
governments to revive the economy and how fast a nation is able to commence its
economic activities.
MEASURES
TAKEN SO FAR BY THE GOVERNMENT OF INDIA
Though India has been very slow
in announcing economic packages for industry, there have been three major
announcements – two by the RBI (monetary policy) and one by the Finance
Ministry (fiscal policy).
(1) On 26th March, Finance Minister Nirmala Sitharaman
announced a Rs. 1.7 lakh-crore fiscal package for the poor, including cash
transfers, free food grains and free cooking gas.
(2) On 27th March, the RBI announced a 75-basis points cut in
the policy rate and a 100-bps cut in the cash reserve ratio for banks to inject
liquidity in the system and provide moratoriums for loan repayments for three
months (March to May, 2020).
(3) On 17th April, RBI freed up more capital for banks to
lend, announced a fresh Rs. 50,000-crore targeted long-term repo operation to
address the liquidity stress of NBFCs and microfinance institutions and hinted
at the possibility of further rate cuts going forward. RBI also announced a Rs.
50,000-crore special finance facility to NABARD, SIDBI and NHB for onward
lending to NBFCs in the space. The RBI Governor also announced that India would
do ‘whatever it takes’.
To sum up, the government has
first prioritised the containment of the virus and providing relief to the
poorest sections of society. In the days to come, it will dole out sector- and
industry-specific packages as well.
IMPACT ON VARIOUS INDUSTRIES
It
goes without saying that the lockdowns will certainly have an impact on each
and every industry in varying degrees.
|
S.No.
|
Industry
|
Impact
|
Likely nature of effect
|
|
1
|
Auto and auto components
|
High
|
- Weak PV and CV demand due to
liquidity shortage with NBFCs, economic uncertainties, weaker consumer
purchasing power, likely NPAs in the sector
- Stuck with inventories of
unsold BS-IV vehicles with the original deadline of selling them before 31st March, 2020
|
|
2
|
Aviation and tourism
|
High
|
- Uncertainty over travel
restrictions which can extend or remain restricted for a longer period of
time, borders might remain closed
- Loss of jobs and pay cuts
- 102 of 137 airports managed
by AAI have recorded losses to the tune of Rs. 1.6 billion
- Estimated to render more than 50% of tourism industry workforce
jobless in hospitality industry4
|
|
3
|
Agriculture
|
Low
|
- Since agriculture is the
backbone of the country and part of government-announced essential category,
the impact is likely to be low on both primary agricultural production and
usage of agri-inputs like seeds, pesticides and fertilisers
- Agro-chemicals: Companies
that depend on exports for finished goods sale and imports of raw ingredients
will be impacted
- Food exports: Major
destinations like the U.S., Europe expected to grapple with Covid-19 for the next few months and Indian export-based companies will be impacted
due to low consumer demand and port hurdles
- The economic packages likely
to be announced will provide relief to farmers and the allied sectors and,
hence, the overall impact on agriculture will be low
|
|
4
|
Chemicals and petrochemicals
|
Medium
|
- Weakening in crude oil
prices and cascading impact on petrochemicals, coupled with uncertain
domestic and global demand; petrochemicals prices are likely to remain low
- Uncertain demand outlook and weak prices are
expected to lead to weak market sentiments and delayed investments in the sector
|
|
5
|
Consumer, retail & internet business
|
Low to medium
|
Essential commodities:
- Growth seen for essential
commodities players, with possible margin improvements, unless there is price
control by government
- There will be increased
pressure on supply chain for deliveries of products amidst the lockdown
Non-essential commodities:
- Markets likely to crash due to low discretionary
demand. Overdependence on imports could pose a threat
- Industries facing severe challenges: Apparel, durables, restaurants and other on-premise services like gyms / salons, etc.
|
|
6
|
Banking and NBFC’s
|
Medium to high
|
- Banking sector to be under
pressure due to reduced off-take of loans in expected recessionary market
conditions and cautious lending
- Possibility of increased delinquencies post the
moratorium period, and may also result in depressed NIMs in a low interest
rate regime
- Drop in transaction fee-based income due to lower cross-border
trade
- Affordable housing, two-wheeler financing,
micro-finance and gold loans exposures to be adversely impacted
|
|
7
|
Insurance
|
Low
|
- Fresh demand for health insurance and life
insurance witnessed a surge in the current scenario
- Renewals may get delayed due
to shortage of money in the hands of policyholders
- Usage of AI / ML / technology can assist in
reduction of operating costs, increasing customer satisfaction and policy
management
|
|
8
|
MSMEs
|
High
|
- Many MSMEs to face closure of business if the
lockdown continues for more than eight weeks due to heavy leverage costs and
no production output for more than eight weeks
- More than 114 million people
are likely to get affected, with a dent in their contribution to GDP (~ 30-35% of GDP)
|
|
9
|
Transport and logistics
|
Medium to high
|
- Crude price reduction is
likely to positively impact the transportation costs in the short term
- Freight traffic volume is expected to slow down
- Post-monsoon, the demand is
anticipated to spike on account of accrued consumer savings as well as onset of festive season
- Lower utilisation of ports
infra, road and rail infra, storage infra due to reduced cargo traffic in short to medium term
|
|
10
|
Healthcare and pharmaceuticals
|
Low to medium
|
- Generic drugs are most impacted – reliance is high on imports (~
70%) from China
- Non-availability of labour,
transport of ingredients and supply side issues could impact production volume
- High exports demand for
certain products over the short term – as developed countries(U.S., EU, etc.) look to stockpile medicines
- Probable price controls of essential drugs
- Online pharmacies – medicine
delivery has been affected due to non-availability of delivery staff
|
|
11
|
Construction and real estate
|
High
|
- The housing sector is
expected to see muted demand with significant reduction in new launches
- The existing demand for
commercial real estate may either get curtailed or postponed till H2 of the current year
- One of the largest employment generators in the
country, it will have a multiplier effect on around 250 allied industries
- There is a likelihood of the
government providing relief to the sector in terms of relaxation for project
delays in residential housing sector, easing financial stress by extending
loan repayment, etc.
|
|
12
|
Overall imports and exports
|
High
|
- India’s merchandise exports
slumped by a record 34.6% in March, 2020 while imports declined 28.7% as
countries sealed their borders to combat the Covid-19 outbreak5
- Business Process
Outsourcing, one of the India’s largest exports, will be severely affected as
lockdown measures, both in origin and destination countries, have forced
offices to close. It will be further accelerated with the cost-cutting
measures by the destination countries
- However, it is likely that India’s balance of
payments position may improve. Weak domestic demand, low oil prices and
Covid-19-related disruptions are expected to narrow the current account deficit
to 0.2% in FY21 and to keep it low in the following years
|
Source: KPMG report, news articles
Some general and overarching
impacts on the overall economy could be:
(i) Unemployment – The unemployment in
India has shot up from 7% to 23% in the last two weeks of March, 20206
(ii) Poverty – As per the estimates of the Indian Labour
Organisation, more than 400 million people in India are at the risk of sinking
back below the poverty line.
While the current lockdown will
be ending on 3rd May and some relaxations have been offered post 20th
April, if the number of infections surges, there could be further lockdowns.
This could further affect the businesses and the economy and we should be
prepared for the same.
THE IMPACT ON THE FINANCIAL MARKET
Let us now look at how the Indian
financial markets have been impacted in the past during various crises – from
the Harshad Mehta and Ketan Parekh scams to the Global Financial Crisis (GFC)
and the recent China-US trade wars. Table 2 (next page) denotes the time
required for the market (Nifty) to bottom out from its peak and then the time
taken to reach back to its peak:
|
Peak
|
Trough (Bottom)
|
Peak to Trough
|
Recovery Month and Value
|
Months to
Recovery
|
|
Month
|
Value
|
Month
|
Value
|
Months
|
Extent (%)
|
Month
|
Value
|
|
Mar-92
|
1262
|
Apr-93
|
622
|
13
|
-50.7
|
Feb-94
|
1,349
|
23M
|
|
Feb-94
|
1349
|
Nov-96
|
830
|
33
|
-38.5
|
Aug-99
|
1,412
|
66M
|
|
July-97
|
1222
|
Nov-98
|
818
|
16
|
-33.1
|
July-99
|
1,310
|
24M
|
|
Feb-00
|
1655
|
Sept-01
|
914
|
19
|
-44.8
|
Dec-03
|
1,880
|
46M
|
|
Dec-03
|
1880
|
May-04
|
1,484
|
5
|
-21.1
|
Nov-04
|
1,959
|
11M
|
|
Dec-07
|
6139
|
Nov-08
|
2,755
|
11
|
-55.1
|
Dec-10
|
6,135
|
36M
|
|
Dec-10
|
6135
|
Dec-11
|
4,624
|
12
|
-24.6
|
Oct-13
|
6,299
|
34M
|
|
Feb-15
|
8902
|
Feb-16
|
6,987
|
12
|
-21.5
|
Mar-17
|
9,174
|
25M
|
|
Aug-18
|
11681
|
Aug-19
|
10,793
|
6
|
-7.6
|
Apr-19
|
11,748
|
8M
|
|
Jan-20
|
12362
|
23-Mar-20
|
7,610
|
2
|
-38.4
|
??
|
??
|
??
|
Source: Nifty historical data
The Indian equities reached the
trough (bottom) on 23rd March, 2020. The current down-turn is still underway
and has shown the trough as on 23rd March, 2020.
What has happened to the Indian
financial markets since the start of the crisis?7
- The valuations have corrected significantly
on a trailing PE basis – from a high of 29.9 a few months back to ~ 16-17 now.
During the GFC, the Nifty PE had touched a low of ~ 11-12 trailing PE.
- The long-term EPS growth has been 13%
year-on-year and in the quarter ended December, 2019 the EPS growth was ~ 15%.
This was mainly due to the tax cuts which led to recovery in Q3 FY20.
- The long-term average of Nifty Earnings has
been ~ 12.5% while in the last five years the average has fallen to ~ 3-4%.
There was a marginal recovery in the last financial year but now the recovery
has been deferred to FY22.
- The benchmark indices – Nifty50 and the
Sensex – have fallen ~ 25% year-to-date (YTD), 2020.
- Within the large-cap, mid-cap and small-cap
space, the fall has been as under:
• small
cap has fallen ~ 33%
• followed
by mid-cap at ~ 26% and
• large
cap at ~ 19% on a YTD, 2020 basis.
- Nifty Bank has fallen the most during this
crisis, plunging almost 50% and certain NBFCs falling more than 50% as well.
The markets recovered somewhat in the first two weeks of April, 2020 and today
the Nifty Bank is sitting at a 40% discount to its peak valuation.
- While Nifty Bank has fallen significantly,
Nifty Pharma has been the biggest beneficiary and is the only index with a
positive YTD return of ~ 16%. The rest of the indices (sectors) have seen
negative returns, the least negative being Nifty FMCG at ~ (-)5%.
- In the credit scenario the investment grade
ratings have fallen from 40% earlier to ~ 30% now. The downgrades are much higher
in value – ~ Rs. 1,990 billion worth papers have been downgraded.
- On the global front, the US Dow Jones has
fallen by ~ 20% on YTD, 2020 basis, while most of the European markets have
fallen upwards of 20% on YTD, 2020 basis. The China market has been the most
resilient and has fallen only ~ 8% on YTD, 2020 basis.
Before the Covid-19 crisis, the
banking and financial services were facing massive problems with the collapse
of IL&FS and DHFL and the Yes Bank fiasco. In the current market scenario,
- NPAs are likely to increase as the private
banks, NBFCs and even micro-finance institutions have aggressively built their
retail loan book and there will likely be massive layoffs
- Further, these loans are majorly unsecured
and there can be a slew of defaults, especially on the MFI side, and can also
bring the mid and smaller NBFCs to the brink of collapse
- Some of the new-age digital financial
startups which simply opened the liquidity tap to trap the young earners with
huge interest rates, may be forced to shut shop
- However, the liquidity and moratoriums
provided by RBI will come to the rescue
- More clarity in this regard will emerge only
after three to six months when the economic activity resumes
- Meanwhile, credit off-take can be low for
the next couple of quarters as companies rework on their capex plans due to
weak demand and the uncertain global environment.
ANY
SILVER LINING IN THE MIDST OF THIS CRISIS?
While all of the above sounds
quite alarming, there are many positives in India’s current state of affairs:
- Forex reserves: India has forex reserves to
the tune of USD 476.5 billion as on 10th April, 2020 and in a
worst-case scenario this will take care of 11.8 months of India’s import bills8.
- Crude prices: The crude prices have fallen
to record lows, lower than $10 per barrel as on 20th April, 2020. If India can
import and store additional crude at this level, it will save huge import bills
once normalcy kicks in and crude prices rise. Since 80% of India’s oil
requirement is met through imports, a fall in crude oil prices can save USD 45
billion on crude oil imports9.
- MSCI Index re-jig: Indian stocks are
expected to see an inflow of more than USD 7 billion on account of a likely
increase in their weight on the MSCI Index. FIIs have been net sellers and they
have sold more than Rs. 30,000 crores in the last four weeks. Therefore, a
re-jig of the MSCI index will bring in fresh FII inflows10.
- Low inflation: The food inflation is on a
declining trajectory and has eased ~ 160 basis points from its peak in January,
2020. The CPI inflation as on 19th March, 2020 was 5.9% and the RBI is
confident of bringing it below 4% by the second half of 2020.
- Normal monsoons: The Indian Meteorological
Department has forecast a normal monsoon in 2020. This will benefit agriculture
which is the backbone of the Indian economy.
- Shift from China to other geographies: Many
countries are envisaging a shift of dependency from China and also to shift
their manufacturing bases from China to either their home country or to find a
suitable alternative. Japan has announced packages for its companies bringing
back manufacturing home. India can benefit a lot if some of this shift happens
from China to India. It will significantly improve FDI flows into India.
FOOD FOR THOUGHT
The way the economy will recover
or fall will depend on how the pandemic plays out. No doubt a vaccine is the
need of the hour, but that will take a minimum of nine months to a year to
develop and then to be distributed to every human being on the planet. While
there may be some medicinal cure which could be developed, there will be
uncertainties in the interim. During these times, the following possibilities
could emerge:
- Will there be de-globalisation? Will
countries close borders – partially or completely?
- Will India gain a lot of market share with
a shift in manufacturing base to India?
- Will there be a V-shaped, U-shaped,
W-shaped or L-shaped recovery of the Indian and global financial markets?
- Will there be disruption in existing
industries – Will Information Technology be the new king? Will the pharma
sector be the best performer index in the market?
We are fighting with an ‘unknown
unknown’ phenomenon and only over time will we be able to get the answers to
the above questions.
I would like
to conclude with a quote from Joel Osteen – ‘Quit worrying about how
everything is going to turn out. Live one day at a time’. This, too, shall
pass and we will emerge as a stronger and better economy in the end.
Disclaimer: The views, thoughts and opinions expressed
in this article belong solely to the author; the data has been gathered from
various secondary sources which the reader needs to independently verify before
relying on it. The information contained herein is not intended to be a source
of advice or credit analysis with respect to the material presented, and does
not constitute investment advice
________________________________________________________
1 Ministry of Health, https://www.mohfw.gov.in/, News Articles
2 https://theprint.in/science/r0-data-shows-indias-coronavirus-infection-rate-has-slowed-gives-lockdown-a-thumbs-up/399734/
3 IMF estimates,
Various rating agencies
4 https://economictimes.indiatimes.com/news/economy/indicators/indias-tourism-sector-may-lose-rs-5-lakh-cr-4-5-cr-jobs-could-be-cut-due-to-covid-19/articleshow/74968781.cms?from=mdr
5 https://www.livemint.com/news/india/india-s-trade-deficit-narrows-to-9-8-bn-in-march-exports-dip-34-6-11586955282193.html
6 CMIE
database,
https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=2020-04-07%2008:26:04&msec=770
7 Newspaper Articles, Nifty50 Returns
9 https://www.energylivenews.com/2020/03/24/india-to-save-45bn-on-crude-oil-imports-next-financial-year/
10 https://www.bloombergquint.com/markets/morgan-stanley-sees-71-
billion-inflows-into-india-on-msci-rejig
