Covid Impact, Part III - To Economy & Trade

The previous blog gave an idea on the depth of the impact created by covid-19 on jobs and incomes of people. This blog traverses its impact on the macro economic aspects of Indian economy and trade as a whole. 

Sectors with lifeline(s) cut-off

With several countries announcing lockdown, air travel was the first sector to get impacted by covid-19. Airlines, tourism and hospitality industry took the deepest cut, with some of them facing a threat of bankruptcy in these tragic times.

The next wave of sectors that are directly hit by the lockdown are in the manufacturing cluster - capital goods, cement, food products, metals, plastics, rubber & electronics. Not to mention the automobile and auto ancillary sectors which were already reeling under severe stress due to a multi-year downturn in the auto industry.

Services sector comprising banking, transport, logistics, retail, real estate, education, entertainment and sports is under lockdown. For the first time in the nation's history 13,500+ trains are off the rail tracks. Buses are off roads, flights are off the skies and ships are off the ports. Every incoming cargo is quarantined for 14 days before offloading.

Have a heart to look into Trade?

While domestic consumption and demand is at an all time low, a wide range of export oriented sectors from diamond/gem cutting to floriculture, meat/fish, handicrafts and dairy are staring at months of lockdown and restrictions placed by their trading partners.

For instance, textiles, a key export sector for India, has come to a standstill as apparel shipments to EU (European Union), India's largest trading partner is withheld at the seas. Payments up to Rs.5000 crores are stuck, which may in turn trigger a default / invoking of guarantees & collateral.

Meanwhile, many sectors that need input material from China are also caught in a deadlock as they may not be able to commence production even if local curfew is lifted.

Impact to Economy

India's GDP is estimated to take a hit of Rs.40k crores per day of lockdown. Due to low economic activity, tax collection is estimated to be at 20 year lows. Oil prices have slumped to $22 per barrel, but due to lockdown, consumption is down 90%. So, government cannot reap the benefit of petrol-diesel cess to bridge the loss of tax revenue.

Every $1 drop in oil price would improve India's oil import bill by Rs.10.7k crores. Now that oil has fallen by $35-$40, this is a significant saving for India's trade deficit. But trade itself is down due to global standstill in moving goods across borders. Net effect, India's GDP growth rate is estimated to fall from the present 5.2% to "2% to -0.5%" for fiscal year 2020-21.

The long road to Relief, Recovery & Restoration

While the government has announced a Rs1.7Tn relief package last week and another $4.88Tn fiscal stimulus package this week, further directions are awaited from RBI on strengthening the vulnerable banking and financial sector, which would take the ultimate hit from every sector due to the lockdown.

The US Fed reserve has already approved a $2Tn stimulus package to tackle the economic fallout of covid-19. More countries are expected to rollout similar packages once they get a breather from their virus war rooms. But this time, policy makers world over must ensure that money gets spent on people, employment & income, rather than boosting asset prices as was done in 2009 financial crisis & stimulus.

Recovery & restoration of jobs, economic activities and recall of workforce back to the employment levels of Jan'2020 is certainly a long and uphill task. For this, governments, MNCs, corporates, armed forces, NGOs and people have to come together & work in unison!