While it is too early to assess the impact of COVID-19 pandemic on the Indian economy, there is little doubt that it is going to be significant. Some early indications are already available.
Standard Chartered Bank pared its growth estimate for India for FY 2020-21 from 5.6 per cent to 5 per cent due to the hit from the global and local spread of virus. “We see a larger loss of economic activity in FY21, as the virus has now spread widely outside China, and the experience of other countries indicates a high possibility of a further spread in India,” wrote Anubhuti Sahay, head of South Asia research at Standard Chartered Bank.
Rahul Bajoria, the chief India economist at Barclays, said the biggest growth risk would be from preventive measures such as mass quarantine or movement restrictions and the related pullback in consumer spending, investment, and services activity.
“Together, these could shave almost 200 basis points from headline GDP, with investment potentially taking the biggest hit. We remain vigilant of non-linear impacts from a wider outbreak,” Bajoria wrote while adding that several factors such as lower oil prices along with fiscal and monetary support could help act as a buffer for the Indian economy.
Noted economist Swaminathan Aiyar wrote in The Economic Times: “In the best-case scenario, the virus may last one quarter. The world and India will suffer a short, serious but not catastrophic recession. In the worst-case scenario, the virus will spread havoc for a year (in which case) the economic disruption will be enormous, possibly as bad as in 2008”.
Hit on travel & tourism industry:
Travel and tourism industry accounted for 9.2 percent of India’s GDP in 2018, according to a report by industry body FICCI released in April 2019. The tourism sector generated 26.7 million jobs in 2018, the report added.
India on March 11 suspended all visas, except a few categories such as diplomatic and employment, till April 15 in a bid to contain the spread of virus. The visa ban risked taking tourism and business activity to an “all time low”. This has come in the midst of a tourist season which ends by May.
India’s tourism industry caters to about 10 million foreign tourists a year. Average hotel occupancy in India in 2019 was around two thirds. But hotel occupancy rates in tourist destinations in India have plummeted in the last few weeks. Sooraj Nair, director of the five-star Crowne Plaza hotel in Kochi in Kerala said occupancy at his hotel had dropped to 20%, as per a report published by Businessworld magazine.
“Foreign tourist arrivals are down by about 67 percent annually in the January-March quarter, while domestic tourists are fewer by about 40 percent,” Pronab Sarkar, president of the Indian Association of Tour Operators told BloombergQuint. With the tourist visa ban by India, foreign tourist arrivals will be virtually nil in the next one month.
The pandemic has grounded India’s aviation sector. Credit rating agency ICRA said that domestic air traffic growth will be affected because of “averseness and precautionary deferment of non-essential travel by local passengers. Cancellation of major global/domestic events is also likely to have an adverse impact on overall passenger traffic”.
“Domestic demand has significantly softened in the last week, down by 30% on the previous week,” said Rakshit Desai, managing director at FCM Travel Solutions, a corporate travel services company. Until the last week (prior to the tourist visa ban by India), Indian and foreign carriers had cancelled close to 600 flights to and from India.
Airlines have started to warn of lower traffic. In a stock exchange filing, InterGlobe Aviation Ltd, the parent company of India’s largest airline IndiGo, said traffic numbers have started to fall. “Over the past few days, however, week-on-week, we have seen a 15-20 percent decline in our daily bookings,” the airline said, warning of a material impact to the company’s earnings.
The Aviation sector in India currently contributes $72 billion to the nation’s GDP. A likely hit of 30% in domestic traffic and 50% in international traffic, even for a few months, could potentially impact India’s GDP by about $5 to 10 billion. This translates into a 20 to 40 basis point cut to India’s GDP.
Hit on India’s exports:
Indian exporters are expecting the impact to come around in a lead time of three months. They anticipate a hit of around $1 billion due to disruption in trade because of closed borders and order cancellations. The coronavirus pandemic is expected to hit India’s labour intensive export sectors like gems and jewellery, lifestyle goods and handicrafts the most, as the global demand for such luxury and lifestyle goods is expected to decline significantly.
An official of the Engineering Export Promotion Council told The Economic Times that demand is low for products such as steel and ferro-alloys as Italy is a major market. Italy has been severely hit by the pandemic.
India’s dairy, meat and cereal exports could also see a slump over the new few months, due to the outbreak. China is the world’s largest milk powder importer. India is the world’s largest exporter of skimmed milk powder (SMP). In FY 2018-19, India’s dairy exports were worth about Rs 2,700 crore.
Other than dairy, India’s meat exports could also see a decline. India is the largest beef exporter in the world with 13.48 lakh tonnes of buffalo meat exports in FY 2017-18. International prices of ovine and bovine meat fell in February due to reduced imports by China, as per a report of Food and Agriculture Organization (FAO). “Maize prices retreated too, influenced by expectations of weaker demand from the feed sector due to overall deteriorating economic prospects,” FAO report said. India exported 10.51 lakh MT of maize in 2018-19, worth about Rs 1,800 crore.
India exported about $19 billion of drugs last year and accounted for one-fifth of the world’s exports of generics by volume, according to the India Brand Equity Foundation. Indian government ordered the pharmaceutical industry to stop exporting 26 drugs and drug ingredients, most of them antibiotics.
The drugs facing export restrictions are antibiotics like tinidazole, metronidazole, chloramphenicol, erythromycin salts, neomycin, clindamycin salts and ornidazole, painkiller acetaminophen and antiviral drug acyclovir.
“It’s not a ban on export. It’s a restriction,” said a representative of the industry body. Indian pharmaceutical companies are also reeling under the pressure of declining API stocks. India’s pharmaceutical sector is heavily dependent on China, which accounts for 80 percent of raw material, or Active Pharmaceutical Ingredients (API), for manufacturing drugs.
Tea exports are also likely to be adversely affected. “Iran is a critical market for us (tea exporters). There is concern about demand for new season tea from the Persian Gulf nation due to coronavirus outbreak. There might be a decline in demand in the short term. China — the epicentre of COVID-19 — is also a major importer of Indian black tea. Imports of the beverage from the neighbouring country are also expected to be impacted,” Indian Tea Exporters’ Association Chairman Anshuman Kanoria told PTI.
Hit on retail and entertainment industry:
With COVID-19 positive cases being reported from metro cities like Mumbai, Hyderabad, Bangalore, Agra, Noida and Delhi, retailers, multiplex owners, mall developers and eatery owners are bearing the brunt of the cronavirus outbreak. The Delhi government has recently ordered to close down all cinema halls in the capital till March 31. The Maharashtra state government on March 13 ordered closure of cinema theaters, gymnasiums, swimming pools and public parks in cities of Mumbai, Thane, Navi Mumbai, Nagpur, Pune and Pimpri-Chinchwad till March 30.
After Karnataka reported the country’s first fatality due to coronavirus, the state government ordered the shutting down of malls, cinema halls, pubs, schools and colleges, summer camps and exhibitions across the state for one week starting from 14 March.
Other states too have ordered the shutdown of cinema theaters, malls and educational institutions. Due to the closure of cinema halls and multiplexes in major cities, movie producers in India have deferred the release of movies such as Akshay Kumar’s Sooryavanshi. As per some reports, restaurants have reported a decline of 30 to 35% in business in the past few days. Though it is difficult to put a figure, the retail and entertainment sector in major cities will be hit hard in March.
Hit on services sector:
Investment Bank JP Morgan expects much of the economic hit in India to flow via weaker exports and the impact on the services sector.
Discretionary, non-government services in India constitute about 33 percent of GDP and are growing at 8 per cent. If one assumes that growth rate for this halves, it could shave off 130 basis points from full-year GDP growth in FY ’21, it is estimated.
Indian information technology (IT) services companies are likely to see a hit in revenues for the March quarter and for FY’21 due to the far-reaching impact from the coronavirus pandemic globally. “We expect a 5 percent hit on overall IT sector revenues for the March quarter due to impact on projects,” said Shriram Subramanian, founder of InGovern Research.
The rapid spread of the virus has led to fears that have hit travel, hospitality and consumer retail sectors globally. Mindtree gets over 16 percent of its revenue from these verticals and Mphasis sees about 14 percent revenue from clients in travel, hospitality and logistics.
Apart from global factors, at a company level, IT players will also have to deal with several changes in project execution schedules given the travel bans as well as work-from-home options for employees. The travel bans will slow down deal conversions, as per experts, and could also hit IT companies’ ability to deliver services on-site.
IT services and BPO industry contributed 7.7% to India’s GDP in FY’17. A five percent hit on overall IT sector revenues will translate into a hit of about 40 basis points to India’s GDP.
Capital outflows:
Coronavirus fears have sent shock waves across global financial markets. The outbreak of novel coronavirus is choking fund flows into Indian capital markets from foreign funds domiciled in Japan, Germany, South Korea and China. These four countries put together are home to over 1,500 funds which constitute 10 to 15 per cent of the foreign portfolio investment volumes in India.
As per the NSDL data, Foreign Portfolio Investors (FPIs) have withdrawn huge amounts from India, Rs 24,776 crore from equity markets and Rs 14,050 crore from debt markets in a short span of 13 days from 1 to 13 of March 2020.
Some estimates have pegged a saving of $7 to 8 billion for India for every $5 a barrel fall in crude oil prices. Brent crude oil prices fell by over $14 a barrel on 9 March (the worst fall since the 1991 Gulf war), potentially saving India some $20 billion in the import bill.
A fall in crude oil prices may cut India’s current account deficit (trade deficit), which stood at $133 billion in the first 10 months of this financial year. But the capital outflows from India may exceed the potential saving in the current account deficit. INR to USD exchange rate is already quoting near the psychological barrier of Rs 75 per US Dollar. If the barrage of capital outflows from India continues, Rupee may come under increasing pressure in the days to come.
Indian economy, on a downward spiral, cannot find a bottom till the pandemic is contained globally.
Contact FICCI
