Coronavirus outbreak takes a toll on fledgling economy
GROWTH METRICS GDP projection for FY21 has been revised closer to 5% from about 6% earlier
NEWDELHI: A fledgling recovery in Asia’s third largest economy is set to lose steam as travel curbs and closure of malls, theatres and educational institutes, among other steps aimed at containing the Covid-19 outbreak in India, have led to a significant drop in economic activity.
The pandemic has hit the economy at a time when growth has slowed to the lowest in a decade, investments are shrinking and a consumption recovery is sputtering. This has prompted economists to pare India’s growth projection for 2020-21 closer to 5% from about 6% earlier. Moody’s Investors Service said Covid-19 will likely depress global growth in 2020 below 2.5%, the recessionary threshold for the world economy.
A sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings of Indian companies and drive layoffs. That could spell trouble for the government’s existing spending programme as tax collections will remain subdued. The finance ministry on Saturday raised taxes on petrol and diesel by ₹3 each to shore up revenue, taking advantage of a sharp fall in crude oil prices.
In response to a query from Mint on Saturday, finance minister Nirmala Sitharaman said the government is in the process of making an assessment of the impact the Covid-19 outbreak may have on the economy. “We are trying to make an assessment by talking to the industry including the services sector and sections of society. I don’t think we have arrived at (a conclusion) as yet,” the minister said.
Losses of consumer and investor confidence are the most immediate signs of a contagion, analysts said. “Covid-19 has added a supply-side dimension to the demand problem that the Indian economy is already battling. That can have a very toxic impact on the economy. The real issue is how long it will last,” said Pronab Sen, a former chief statistician of India.
With precautionary steps progressively being taken on movement and congregation of people, demand for products such as consumer durables, automobiles and homes will also get affected, said Madan Sabnavis, chief economist at Care Ratings. “Lenders, especially banks, have to be more watchful as this could lead to a spike in non-payment of interest as business levels come down,” he said.
A further demand slowdown could trigger a vicious downward spiral at a time the economy was witnessing a nascent recovery in factory output in January and merchandise exports in February. Not only will it further delay an investment recovery, it will make it difficult for the government to stick to the fiscal deficit target of 3.5% of gross domestic product (GDP) in 2020-21. “If the recent virus outbreak leads to prolonged business disruptions and dysfunctional supply chains, it could have an adverse impact on revenue collections as goods and services tax (GST) is a transaction-based tax,” said MS Mani, a tax partner at Deloitte India.
The immediate victim of the curbs placed to contain the spread of Covid-19 has been the aviation sector with up to 75% drop in international bookings and 20% drop in domestic bookings, according to industry estimates. India’s largest domestic carrier Indigo last week said the threat of Covid-19 has begun to affect bookings which could impact its March quarter earnings. A decline in company earnings could mean lower corporate tax collections for the government at a time it has set an ambitious target of 11.5% growth in corporate tax receipts for 2020-21.
A lockdown in India’s major export destinations such as China and Europe is also impacting India’s export earnings. India will be the 10th most impacted economy due to supply chain disruptions in China, with chemicals, textiles and apparel, automotive industries at the forefront of the disruption, according to a preliminary estimate by UNCTAD on March 6. With the World Health Organisation declaring Europe to be the new epicentre of the Covid-19 outbreak, exports to the European Union, which is India’s largest exports destination, are bound to be affected.
During 2019, India’s exports to the EU stood at $55.7 billion, contracting by 2.9% from the preceding year. Among major items, I ndia e xports c hemicals, machines, garments, gems and jewellery, iron and steel and pharmaceutical items to the EU.
While the situation in China has stabilised substantially with reports of factories resuming work, it may take time to completely normalise the supply disruption.
While Iexports are getting impacted due to a lockdown in some of India’s leading trading partners like China, Italy and Germany, even in other countries, buyers are going very slow, said Sharad Kumar Sharaf, president, FIEO. “Job losses mainly in labour-intensive sectors such as gems and jewellery, handicrafts and carpets are already happening. One sector which is doing okay is garments. But overall, it’s depressing,” he added.