Srishti Tiku

The mood of the nation is somber in the midst of the coronavirus crisis. Streets lay empty and cities once bubbling with activity are now deserted. India is in the sixth week of a government imposed nation-wide lockdown and the entire country of 1.3 billion people is confined to their homes as the pandemic has brought lives to a halt.

As with other economies, the pandemic has brought a massive blow to the Indian economy as well, where growth had already been decelerating on account of contracted manufacturing activity, weakened investments and low consumption demand. Analysts predict that the countrywide lockdown could shave off 74% of real GDP (Rs 10 lakh crore) in the first half of 2020.

In addition, being a developing nation, the challenges confronting India are many-fold as compared to other economies. Mari Pangestu, Managing Director for Development Policy at World Bank, remarked: “Developing nations will face the crisis from a position of profound disadvantage: their health care systems are fragile, their access to critical medical supplies is tenuous, their economies are less resilient and heavily dependent on trade. They could soon come under the siege on all fronts- and a health, economic and social catastrophe here would be felt across the world. It would fan the spread of the virus and imperil prospects for a global economic recovery.” The World Bank estimates the Indian economy to decelerate to 5% in 2020 and it has also warned that this crisis could potentially wipe out the gains made in poverty alleviation in the region.

 The pandemic is likely to impact the country’s economy through multiple channels:

Multiple channels through which COVID-19 is likely to impact India’s Economy

When a crisis of such epic proportion strikes, no sector is immune to its effects. Almost all sectors of the Indian economy are likely to take a hit and few have already recorded significant impacts. Below we investigate how a few major sectors of the economy are bearing the brunt of this outbreak:

Agriculture Sector
Being the backbone of Indian economy, the agriculture sector employs nearly 60% of the workforce and contributes to 14% of national GDP. Being an essential commodity, even though agriculture produce is exempt from lockdown directives, there are other problems confronting the sector.

Being the backbone of Indian economy, the agriculture sector employs nearly 60% of the workforce and contributes to 14% of national GDP. Being an essential commodity, even though agriculture produce is exempt from lockdown directives, there are other problems confronting the sector.

The pandemic has put a strain on food supply chains, which is a complex web of interactions involving farmers, agricultural inputs, processing plants, shipping, retailers, and more. This is intertwined with logistic disruptions: for example- transportation problems create difficulty in moving goods and lack of storage facilities leads to storage problems. As an estimate, India needs about 250 lakh quintals of seeds for the kharif season, the preparation for which happens between March and May. Due to logistic troubles and unavailability of labour on account of the lockdown, it will be a mammoth task to keep up the full harvesting capacity. Further, as retail shops are shut and demand has fallen in wholesale markets, there is also a big demand crunch. Additionally, rumors related to potential transmission of the disease among animals have added significant uncertainty to global poultry markets. Prices of eggs & other poultry items have dropped significantly and there is an overall negative impact on the livestock industry. A prolonged crisis is eventually likely to hit consumers via price fluctuations and shortage of supply.

Tourism & Aviation Sector
Tourism sector is one of the hardest hit sectors given that most activities in this sector have come to a standstill due to the border closures, travel restrictions and lockdowns. A federation of tourism and hospitality organizations of India predicts that the losses could be to the tune of around rupees 5 lakh crore and this could further spell job cuts for 4-5 crore people, which is around 70% of the total workforce. Share of tourism sector in overall GDP was 5.06% in 2016-17. The crisis has impacted all segments of industry- inbound, outbound, domestic, international, leisure, adventure, corporate meetings, conference and exhibitions. In a study undertaken by Global Web Index, in some markets as many as 50% consumers have cancelled upcoming trips. The suspension of flights and trains has led to several airlines/organizations missing revenue targets thereby building a budget deficit. According to International Air Transport Association, airlines globally could lose passenger revenues of up to $113 billion due to the crisis.

Construction Sector
This sector contributes to about 8% of GDP and is among the top contributors to economic growth. It employs largest number of migrant workers in India with around 55 million daily-wage workers. It is projected to take a hit of more than $16 billion (₹ 1 lakh crore). Construction companies with high levels of debt and low cash reserves are likely to face a liquidity crisis. Entities in sub-scectors are feeling significant short-term stress and many projects have been stalled in order to conserve cash. There are also workers who are stranded at construction sites and at a lot of sites, labourers have been asked to stay back where they’re being provided with food twice a day and medical attention with aid from local organizations.

Manufacturing Sector
The Manufacturing sector is likely to take a hit of 2160 billion INR. This sector is dependent on China for wide array of industrial parts and components. One of the key concerns is to ensure continued supply. India has five key import items that are heavily dependent on China. These items are- electrical items, machinery & mechanical appliances, plastics, organic chemicals, and optical & surgical instruments. All these alone account for 18% of India’s total imports. Therefore, a fall in imports leading to supply chain disruptions could be another cause of slowdown in manufacturing activity. Major companies like L&T, Bharat Forge, Ultra Tech Cement etc. have temporarily suspended or significantly reduced operations in multiple facilities and factories across country.

Automobiles Sector
The shutdown in China has prohibited import of various components affecting both Indian auto manufacturers and auto component industry. The current levels of inventory, however, are said to be sufficient for the industry. In case of a longer shutdown or disruption in operations in China, it is expected that there will be an 8-10% contraction in Indian auto manufacturing sector in 2020. Also, for the fledgling EV industry, the impact of coronavirus is expected to be greater. China is dominant in the battery supply chain, as it accounts for around three-quarters of battery manufacturing capacity. This crisis will therefore severely impact the EV industry in India if the lockdown persists for a long time.

Service Sector
The service sector is known to be the lifeblood for economic growth and jobs and is expected to be one of the most impacted sectors. It contributes to around 55% of country’s Gross Domestic Product and employs around 28% of the country’s workforce. As new businesses and export demand have fallen sharply amidst the crisis, the sector hit a 25-month low where overall demand for services fell to 48.5 on PMI Index (Purchasing Manager’s Index) indicating a contraction of manufacturing & services sector.

Retail Sector
As retail players adopt necessary preventive measures to ensure safety of their employees and customers, shutting down of retail outlets has severely hurt business for all retailers. Indian retailers are facing demand and supply chain issues as transportation and movement of non-essential goods is restricted. High rental expenses amid subdued demand will further dampen profitability. While demand at retail outlets has fallen, online sales are expected to witness a significant surge due to the pandemic’s impact on consumer behavior and habit. The establishment of online platforms is expected to become indispensable for offline stores and online-offline service integration is likely to increase. Food and grocery retailers have witnessed a spurt in demand as consumers have started panic buying. It is estimated that 20-25% of industry players may need a capital infusion to stay afloat and that it would take 9-12 months for India’s retail industry to recover. The industry has more than 15 million retailers, including big and small, traditional and modern trade. It employs 40-50 million Indians directly.

Transport & Logistics
The lockdown has brought all public and private transport to a halt. As an estimate, daily movement of trucks has collapsed to less than 10% of normal levels according to AIMTC. This has also disrupted supply chains as public transport supports the movement of goods across regions. Further, the decline in road transport is also a major setback for fuel demand. Fuel sales in India’s biggest state-run retailers shrank by 33% in March.

MSME Sector
A large number of MSMEs are likely to incur business losses and also face severe cash flow disruption, which will further have an impact on the livelihood of all people working in this sector. In the MSME sector, businesses largely depend on recurring sales to meet fixed costs. With the lockdown, manufacturing units are shut, exports are blocked and supply of goods to markets is restricted thereby reducing sales. Also, a freeze in production in China affected Indian MSMEs in the automobiles, pharmaceuticals and apparels sector as they depend largely on Chinese components.As a result of payment delays, MSMEs are facing financial hardships and liquidity constraints, which lead to pressure on their working capital management. A Rs 10,000 crore fund has been proposed to Union Cabinet and suggested to raise money from capital market for the MSME sector.

The economic crisis arising due to the COVID pandemic is unlike any other the world has seen, primarily because health crisis is embedded at its very core. The world is spending money first to deal with treatment and prevention, followed by spending on salvaging economies. The dynamics that governed economic growth and development in the modern world are set to change, in a bigger, faster and larger manner than we can fathom.