By CMA Amit Apte
The outbreak of COVID-19 pandemic is having a profound impact on all nations of the world. What started in China as a trickle has now cascaded as a full blown crisis across the world. It is the most serious health challenge in our lives and will have a deep impact on the way we perceive our world and our everyday lives henceforth.While the pandemic will affect the economy of all nations, for the purpose of this article we will focus on how India can salvage the situation and even use it to its advantage.
But first, let’s take a look at the countrywide GDP in 2019:
While the total GDP of the world is $91.98 trillion, it is significant to note that the nominal GDP of the top 10 economies adds up to about 66% of the world's economy, while the top 20 economies contribute almost 79%. The balance 173 countries together constitute only about 21%.
Fallout of the Pandemic
The lock out has seen 1/3rd of the global population is in some form of lockdown. This is bound to have serious ramifications on the Global economic prospects. The top 20 countries are the ones that are going to be the most affected. Mass unemployment and mass bankruptcies will be a common feature. In India alone it is estimated that about 10 crore unorganised sector workers have been rendered jobless. These are typically workers from the construction / infrastructure industry, road side restaurants and staff of small shops. A survey conducted by FICCI saw one of the "sharpest moderation" in the confidence level of India Inc since the global financial crisis of 2008-09. The Overall Business Confidence Index is 42.9 vs 59.0 reported earlier. The index value was 37.8 in the second quarter of 2008-09 during the global financial crisis.
There is also going to be high repatriation of NRIs back to India. It is expected that about 1.25 Crore Indians are resident out of India. The most number of NRIs are in the Middle East, followed by Nepal, UK, Singapore, Malaysia, USA, Canada, Australia and New Zealand (Source:https://mea.gov.in/). The NRI contribution to the Indian economy has been significant. For the year 2018, the World Bank estimated NRI remittances to India to be the highest in the world, standing at USD 79 billion. This inflow of foreign currency aids the Indian economy by strengthening the national savings, capital accumulation, investment, etc. On the micro-scale, the remittance received by the family members in India is used to meet their basic needs and open up more business opportunities for India. If these NRIs are repatriated, it will affect the Indian economy adversely.
Once the threat of the Corona virus somewhat subsides, all the countries will try to get their economy back on track. Of course, the world will be altogether a different place then. Economies of the world, including that of India, will be shaped by new habits and regulations. It is expected that there will be acceleration in digital economy, and there will be tighter travel and hygiene restrictions. Post lockdown in India, there will be an unprecedented change in how we eat, work, shop, exercise, manage our health, socialize, and spend our free time. There will be shifts in consumer behaviour and this will present newer opportunities and challenges for businesses. Consumers will prioritise expenses and will change their spending habits. Of course, each industry will be impacted differently because of changed consumer behaviour, closed borders, closed economies and protectionism across the globe. Since health and safety will be the first priority, India will need to brace up for another round of lockdown. As of April 2020, it looks like the lockdown in some parts of India will be increased beyond the stipulated May 3. Businesses in India need to brace for possibility of regular lockdowns later on as well.
As a fall out of the change in habits the following businesses providing remote coaching, re-skilling and training, online meeting facilities, local and rural tourism, insurance, automobile industry and pharmaceuticals & health care are expected to be booming in near future. Similarly lawyers will witness a spurt in demand and the small ‘kirana’ shops will be back in business. At the same time, businesses such as real estate, office space leasing & co-working space companies, hospitability, travel &airlines;, restaurant & pubs, non-food retail and micro finance & NBFCs; will be the laggards.
As per the IMF website the economic outlook is bleak as well since the virus has bought almost everything to a standstill. We are learning only gradually how to treat the novel virus, make containment most effective, and restart our economies. We have also learned that the calamity is truly global - pandemics don’t respect borders, neither do the economic shocks they cause. The IMF in fact expects global economic activity to decline on a scale we have not seen since the Great Depression (USA). This year 170 countries will see income per capita go down—only months ago the IMF was projecting 160 economies to register positive per capita income growth. While the GDP growth projections for the entire world has gone down from +2.9 in 2019 to -3.0 in 2020, the IMF believes that India will achieve a positive growth rate of 1.9 even in 2020. This is more than the predicted GDP growth of China, which stands at 1.2 for 2020.
India possesses unique advantages as a nation. Majority of the Indians live in villages and India’s rural economy is not affected by the pandemic. Agriculture, which is still the mainstay of India, is relatively unaffected, and as per the predictions of IMD, the monsoon rainfall is forecast to be 100% in the current year. India has a demographically young population, a strong domestic consumption and her reserves stand at around US$ 475 billion – which covers over 11 months India’s imports. The icing on the cake is that the prices of crude oil are at lowest ever, lowering the fuel bill, which constitutes a huge chunk of India’s imports. Of course, the lockdown has bought its own set of woes to India. There has been a massive increase in unplanned expenses and a drop in government revenue as industries have shut down and taxes on goods sold has gone down drastically. In addition, India will have to give stimulus packages and bail out industries worst affected by the virus. It will definitely increase India’s fiscal deficit from 3.8% of GDP to as high as 6%. Government will have to take several measures for the deficit financing including printing of currency and as a result, inflation will increase.
Reboot – Government Initiatives
Of course, it will be not an easy task for India to get back on track. So far, the Indian government has taken all the right steps to suppress the spread of the pandemic. A few of these measures include timely implementation of lock down, which has successfully suppressed the curve so far. The government has also provided cash and food support to the needy under PM Gareeb Kalyan Yojana – a Rs. 1.70 lakh Crores package.
Now the government will have to concentrate on encouraging capital inflow into India. Focus on Make in India a pet project of our honourable Prime Minister will have to be given a much needed impetus so as to make India contract manufacturer of the world. The government will also have to come up with a Booster stimulus package for the MSME sector in the form of incentives and financial support. Restarting the economic activities in low infection regions with adequate precautions should be now given the priority. The right mix of Monitory stimulus by RBI & Fiscal stimulus by Government should see India sail thru.
Reboot – Business Initiatives
For India to mitigate the negative impact caused by the lockdown, apart from the government, the Industry also will have to formulate the correct strategy. This includes:
Emotional Backlash against China
Without going into the rights or wrongs of the issue, we must capitalise on the negative sentiment that has been generated against China. Japan has paved the way by allocating $ 2.2 billion in help the Japanese companies to move production from China to other countries. Apple, Microsoft, Google look to move production away from China. Korean companies are keen to move out of China and relocate to India. In addition, more than 1,000 foreign firms mull production in India and 300 are actively pursuing the plan as 'Exit China' mantra is gathering momentum. India should make it easy for the Japanese and other companies to come to India rather than them going to Malaysia, Vietnam, Thailand or elsewhere.
Challenges in Grabbing opportunity
Moving component manufacturing outside of China will be difficult given the complexities and how long it would take to build capacity in another country.
Even though there is a perceived backlash against China, India too will have to reach out a helping hand for companies that are looking to move base from China. The government should speed up disposal of matters, simplify compliances, keep the taxation laws simple and consistent, accelerate Labour Law reforms, make easy and quick land allotments to prospective companies, ensure availability of electricity power and water and ease telecom licences to promote 5G infrastructure, improve speed of internet. The government will also have to promote PPP partnerships to strengthen infrastructure. Large scale implementation of Government projects in partnership with Private sector will ensure faster infrastructure growth and also help large number of companies that are directly or indirectly dependent on Government projects / policies. In short, India should make it very easy for companies that are seeking to relocate from China. The above measures will woo the companies in establishing their production base in India rather than any other country.
The Bright Spots in India
There are also a lot of green shoots and positivity even in this period of pandemic and lockdown in India. Over 200,000 jobs have been advertised by a range of employers in the past four weeks. Over 25% of these were posted just in the last week. The recruiters include top national and international companies and firms. Around 80,000 of these openings are entry-level positions. In the flurry of news about job losses, salary cuts / deferments, there have also been a few private companies that have hiked salary for its India staff. The guidance given by some of the top IT companies also has been encouraging. Also the news of Facebook buying a 9.9% stake in Reliance Jio for $5.7 billion (Rs 43,574 crore), the telecom unit of Reliance Industries Ltd (RIL) in a deal that gives the social media giant a firm foothold in a fast-growing massive market of India is also highly encouraging.
All this augurs well for India, and speaks about the confidence people have in its capabilities. If India plays its cards well, it can be the single largest country to recover quickly, and be on the fast-track to boost its economy. The current lockdown has locked the Indian economy inside a cocoon right now. But it is about to break free and when it does, it has the potential to transform itself into a beautiful butterfly that will be the centre of the worlds revival.
About the author:
CMA Amit Apte is a practicing Cost Accountant and director of Levare Consultants Pvt. Ltd., a firm that specializes in offering End to End Accounting, Payroll Processing, Finance, Costing, GST and Taxation Solutions. The Consulting firm is located at Pune, India.