Coronavirus disease (COVID-19) is an infectious disease first identified in December 2019 in Wuhan, Hubei, China on 17 November 2019, and has resulted in an ongoing pandemic. Since then it’s spread has resulted in global stock-price volatility, decreases in nominal interest rates, and likely contractions of real economic activities due to uncertainty about how it will affect the economy and for how long. For the current short-term trend, it has translated into extreme volatility in the financial markets and aligns with previous market studies showing economic uncertainty can increase volatility in financial market returns. (Dr. Manish Sharma, 2020) (Bowes, 2018)

Today’s hyper-globalized economies mean that even if India didn’t become the 3rd largest hotspot for confirmed coronavirus cases, it’d still be severely affected by other epidemic struck countries with which it has strong trade relationships with.

ANZ Research economists said ~14 % of India’s imports come from China, making it the nation’s biggest import partner. Indian imports electrical machinery, cell phones, heavy machinery, telecom and pharma ingredients, fertilizer, food, and textiles, etc. from China majorly due to cheap economies of scale. India imported $62.4 billion worth goods from China during April 19’ to February 20’ period. While China accounted for just 5.1 percent of India’s total exports in FY- 2019, on importing chemicals and fuels from India. (Fensom, 2020)

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According to Nikkei, as of February 2020 data, telecoms sector is the most financially at risk, with an estimated $30 billion worth of bad loans, followed by steel and infrastructure (~$15 billion each), energy ($12 billion), and textiles (around $10 billion). Nonperforming loans accounted for 8.9% of overall bank lending in India last year. The ratio has risen more than 5 percentage points in five years – the largest increase among the Group of 20 major economies, according to the International Monetary Fund. (Moyuru Baba, 2020)

As with similar global economies around the world, COVID-19 poses a grave uncertainty about India’s economy in both short and long term.

Data Analysis

History of major pandemics:

1918 saw the rise in cases of The Spanish Flu caused by the H1N1 influenza A virus, affecting around 500 million people around the globe and killing an estimated 20 million people more than the death toll of world war 1, after starting in small pockets in Europe, America and Asia. Prolonged quarantine measures and lack of business both domestic and internationally lead to an estimated global economic loss of at least 3 trillion USD. Accurate measures of economic losses and deaths is almost impossible to procure due to lack of accurate enough data entry. After a full year it eventually vanished as the infected either died or developed immunity.

1957 saw the rise in cases of The Asian Flu caused by the H2N2 influenza A virus, originated in Guizhou, China that killed more than a million people worldwide. This affected the global economy negatively by around 2%.

1968 saw the rise in cases of a similar pandemic, The Hongkong Flu caused by the H3N2 influenza A virus, originated in China that killed more than four million people worldwide. This affected the global GDP negatively by a loss of $14.8 billion USD.

2002 saw the rise in cases of SARS which again originated from Foshan-Guangdong, China with only 916 deaths via respiratory system breakdown but caused a massive drop to the global economy to the tune of $33 billion USD.

2009 saw the rise in cases of H1N1 Swine Flu originating from Mexico, which led to a 1.5% loss to the global economy and a loss of 284,00 human lives.

2013 saw the rise in cases of Ebola which originated from Guinea, West Africa resulted in a loss of $2.2 billion to the global economy and more than 11,00 deaths till 2015.

2020 has been ravaged by the current SARS-COV2 Covid-19 pandemic and is estimated to make major economies loose 2.4 to 3.5 % of their GDP i.e. at least a whopping $76.69 billion USD

Since the epicenter of this pandemic is China, how is it affecting China?

The major sources of trade of a country are its imports and exports. China is the 3rd largest partner contributing in the export ($17 billion, 5% total export) and import trade of India. Any undesirable influence on the Chinese industry will have drastic effects on the Indian economy.

China is the market leader in trade, exporting worth $2,216 billion followed by USA with $ 1,553 billion and Germany with $ 1,434 billion as of January, 2019. And yet with COVID-19, they managed to keep trade surplus for July at $62.33 billion, and a surplus of $46.42 billion in June with a 7.2% increase compared to last year.

China’s economy gradually emerging from a record contraction in the first quarter but sustaining this momentum is being questioned as rising coronavirus cases worldwide have severely affected demand. Chinese consumption has also subdued significantly amid job losses and very strict quarantine measures.

Recently China’s export performance has been boosted by record shipments of medical supplies and sustained demand for electronic products, has beaten much pessimistic estimates by global analysts. Even imports of industrial raw materials remained robust, with record imports of iron ore and copper, and a sharp jump in crude oil.

Exports are growing by double digits, and retail sales, which had been lagging for months, are back to pre-virus levels however, poorer households which form 60% of the economy are still struggling. Their current rebound is K-shaped, exacerbating widening income inequality, which was already a problem before the pandemic.

Government support around the world has been in the form of huge reforms to existing work structures and fiscal stimulus packages.

US launched four stimulus packages worth around $2.7 trillion USD that involves small business loans, unemployment insurances, nutrition assistance, healthcare funding, government investment and bailouts of corporates, basic income of $1200 USD for adults and $500 USD per child.

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Similar package has been Canada which has allocated as much as 3% of its GDP with a $82 billion from $500 in credit features and tax deferrals to every Canadian getting at least CA$ 2000 for about 4 to 6 months of unemployment.

India announced a $22 billion USD financial package that covers food for two-thirds of the population, increases basic income to farmers, senior citizens, self-help groups, women, medical insurance cover of Rs 5 million per healthcare worker covering more than 2 million people. Even injecting liquidity worth $85 billion USD into the economy collateral free loans for MSMEs, repo rate reduction by 75 basis points, extended government contracts, liquidity infusion for NBFCs, utilities firms etc.

For India, Pre COVID-19, GDP growth slowed to 4.7% in 2019, the lowest level since 2013. Unemployment reached a 45-year high. Industrial output from the 8 core sectors at 2019 end fell by 5.2%-the worst in 14 years. Private sector investment had been stagnant for several years and declining in recent times and consumption expenditure had also been falling, for the first time in several decades. Urban consumption demand indicators show sales of passenger vehicles and consumer durables growth contracted in February 2020. Overall, urban consumption has stagnated in the fourth quarter. Rural consumption indicators like motorcycle sales and consumer non- durable segment remained in contraction in February 2020, reflecting weak rural demand.

India’s core sector consisting of coal, crude oil, natural gas, refinery products, fertilizer, steel, cement, and electricity, output contracted 38.1% in the April, 2020. This core sector forms 40.27% of the index of industrial production. The core sector had expanded by 5.2% in the same period in 2019 while it shrank 9% in the March, 2020. This is the biggest ever fall in the core sector data ever recorded.

Core sectors saw refinery production decline by 24%, steel production declined by a massive 83% while electricity generation saw a decline of 22.8% from 2019 while crude oil production slipped 6.4%. Coal production showed a decline of 15.5%, cement production was a massive 86% fall from April, 2019.

Goldman Sachs Group Inc. expected gross domestic product to contract 5% in the fiscal year through March 2021, which would be India’s deepest recession ever; while ICRA expected it to be a steeper 9.5%. Chief India economist at Barclays estimated growth declining to 2.5 per cent in 2020, and 3.5 per cent in FY20-21 eventually leading to a loss in excess of $120 billion from global and domestic trade revenues. (Bajoria, 2020). Bank of America Securities estimated India’s GDP to contract 4-7.5% if COVID-19 vaccine is delayed as of July 13, 2020. (Securities, 2020) as of April 2020.

India’s real GDP depleted to its bottom in over six years during the fourth quarter of FY 2019-20. All these estimates were defeated when the official report recorded that India’s GDP shrank 23.9% year-on-year in the second quarter of 2020, much worse than the final market forecasts of an 18.3% drop. This is the biggest recorded economic contraction in India’s history.

To create a snapshot of the contribution of different sectors of the GDP, the most important and the fastest growing sector of Indian economy are services. Trade, hotels, transport and communication. Financing, insurance, real estate and business services and community, social and personal services account for more than 60 percent of GDP. Agriculture, forestry and fishing constitute around 12 percent of the output, but employs more than 50 percent of the labor force. Manufacturing accounts for 15 percent of GDP, construction for another 8 percent and mining, quarrying, electricity, gas and water supply for the remaining 5 percent.

Construction (-50.3%), hotels and transportation (-47%) and manufacturing (-39.3%) recorded the biggest plunges. Positively, farm sector grew 3.4%. On the expenditure side, private spending shrank 26.7%, inventories fell 20.8%, exports plunged 19.8% and imports dropped a whopping 40.4%. Only government consumption jumped 16.4% as it implemented country-wide relief measures via food and medical supply to help curb the impact of the pandemic.

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2020 Indian stock market saw one of the most highly volatile markets ever even beating the 2001 and 2008 financial crises. In 20-23 March of 2020 Sensex fell more than 4000 points and Nifty 500 fell around 1000 points. Compare that with current September 2020 market we see the market has undergone a U-shaped recovery wherein the US market plunge, fear of coronavirus, staggered opening of lockdowns in India and economic packages by government have been priced in by the market. Nifty 500 has risen from 6,243 on March 23 to 9326 as of September 30, 2020. As can be seen in figure 7, the 50-day moving average as almost crossed over the 200-day moving average forming a ‘golden cross’ technical indicator signifying a possible rally in the short term unless some significantly negative news comes to light.

Impact of Government policies and economic packages is being seen in the recovery of stock markets to some extent lately and improvement in demand-supply situation. Better corporate profit reporting, improved performance of MSME & strategic sectors, good agriculture out due to normal monsoon and rural migration would support strengthening of the economy indicated by higher agricultural and consumer staples spending since March compared to February.

The US market in mid-march 2020 noted the worst trading in the past 124 years. The Indian market also saw a 20% cut in benchmark indices making the Indian equity market enter the territory of Bear market. BSE Sensex witnessed a sharp fall in the stock market on March 23, 2020 due to the Coronavirus fear across the global market. The Sensex had fallen 3500 points to approx. 26, 000. On the other hand, the NSE Nifty fell 11 percent. The Indian market opened on a positive note with promising signals from the foreign markets only to fall flat with the foreign investors continuously withdrawing money from the Indian markets.

Benchmark BSE Sensex Index would revisit this year’s low of 25,638.90 hit on March 24, 2020. While the index has recovered nearly 20% since hitting a record low – a day before the nationwide lockdown started on March 25 – it is still down around 26% so far this year. That is despite $266 billion of economic stimulus announced by the government and the aggressive liquidity measures and interest rate cuts by the Reserve Bank of India.

Resurgence in covid-19 waves in several countries, constantly rising cases globally, Russia-Saudi Arabia price war that plunged prices to a 17 year low in March, reduced fuel requirements due to quarantine affected travel and business has been a blessing in disguise for countries like India who import oil. India itself imports 82% of its oil needs and aims to bring that down to 67% by 2022. Current ideas for this are by replacing it with local exploration, renewable energy and indigenous ethanol fuel

Indian travel and tourism sector contributed nearly 6.8% of GDP i.e. $194 billion, in 2019 down from 9.2% at $240 billion in 2018. This sector employs 8.1% of the total employment in the country and has suffered the hardest due to Covid-19

Disruptions in tourism sector will render many people in unemployed since tourism sector also has linkages to other sectors like agriculture, transport, handloom, and FMCG to name a few. The food and hospitality sector are under severe pressure from high fixed costs and minimal footfalls after months of zero business when the lockdown started in March, 2020. FAITH, federation of associations of tourism and hospitality industry has estimated a loss of Rs 10 lakh crore for the industry due to COVID-19 in just 2020. This will also impact inflow of foreign tourists, which means a drastic fall in foreign exchange earnings which was approximately Rs 2,10, 981 crores in the first three quarters of FY 2019.

Conclusion

A mid-2020 United Nations Department of Economic and Social Affairs report expects COVID-19 to slash global economic output by a whopping $8.5 trillion over next two years wiping out nearly all gains of the previous four years. The global economy is projected to contract sharply by 3.2 – 5 % this year. This will push more than 34 million people into extreme poverty in 2020 with 56% of this increase occurring in African countries erasing all the progress made in the last 4 years. An additional 130 million people may join to the ranks of people living in extreme poverty by 2030, dealing a huge blow to global efforts for eradicating extreme poverty and hunger. This pandemic, is disproportionately hurting low-skilled, low-wage jobs, while leaving higher-skilled jobs less affected. This will further widen income inequality within and between countries.

Especially in India where about 69% of the 138-crore population is poor and living at less than a horrendous, just $2 daily. An increase of even 1% in this metric means millions more Indian’s now loose access to basic healthcare, education and food and mortality rates especially infant mortality rates skyrocket

Most developing economies weighed down with high levels of public debt are finding it very hard to implement sufficiently large economic packages and other much needed stimulus measures. Debt sustainability of developing economies is rapidly being undermined by the falling exports, particularly those that are heavily dependent on commodities, tourism revenues or remittances. In the immediate term, it is paramount to ensure the increased availability and rapid deployment of international funds to address liquidity shortages. In addition to these short-term measures, many developing countries will need comprehensive debt restructuring to have the fiscal space to stimulate growth and recovery.

Some sectoral recommendations beyond tax benefits include:

1. Telecom: Upgrade existing infrastructure to implement new technologies like 5G and Augmented Reality to help healthcare professionals and service sector as a whole. Reduce TRAI fees short-term and improve regulations long-term.
2. Auto: Deferred payment system for dynamic interest loans both on consumer and manufacturing end.
3. Consumer Retail: Laxing import and manufacturing of rules for essential goods. Cover up this loss by imposing higher tax on luxury retail goods for the short term.
4. Aviation and Tourism: Significantly reduce Air Turbine Fuel (ATF) costs by reforming existing tax laws and upgrade MRO-ANS facilities to make them safer and more efficient.
5. Power & Transport: Deferred billing, using this time of low traffic for upgradation and digitization using latest technology to reduce cost on a countrywide scale.
6. Agriculture: New food bills have already been passed to connect farmers and consumers directly by removing the necessity of using APMC middlemen , ensure corporations do not misuse and hoard food due to removal of corporate produce storage cap and improve the digital infrastructure to connect 17 Crore farmers big and small to buyers and ensure they get the correct prices for the produce even with the removal of minimum support price.

From massive losses to individual sectors especially Media, Realty, Hospitality, Service sectors and Manufacturing have been hit the hardest in the current market slump to an excellent recovery in stock market recovery, we see a complete market recovery has a long way to go since Mutual Fund industry, Foreign Investment and domestic or international trade are yet to reach pre-covid-19 levels.

Strategic fiscal packages to support small business, farmers, frontline workers like police, border forces and healthcare professionals need to be continually supported. Such packages also need to be provided to big corporates such that they can support the large amounts of people they employ since as we know unemployment levels are currently at a 13-year high. Opportunities for lucrative foreign investments also need to be made to jumpstart the declining trend of FDI in India and accelerate growth in large scale industrialization, infrastructure and digitization of India.

The current time should be utilized to the maximum to upgrade our infrastructure, introduce new technologies to improve current pipelines of all existing industries and ensure the poor and marginal citizens who are disproportionately affected in this pandemic to the point of dying due to poverty or not receiving required medical support due to overflowing hospitals, receive sufficient support during and after this pandemic.

This is an excerpt from my published paper that snapshots a broad market view of stocks, mutual funds, FDI and the general economy of India during the current Covid-19 pandemic using secondary data. Full paper can be found on my LinkedIn page.

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