Continuing from last week (see here
and here),
I would like to share some of my random thoughts on what this outbreak of
COVID-19 could potentially mean for India, particularly in the short to medium
term.
The present state of affairs
India is in the state of total lock down since past 3 weeks. In
this period about 40-45% of the overall economic activities which are exempted
from the lock down stipulations are only working. Presently it is estimated
that it may take 3-6 months before the economy could return to the pre March
level of activity.
It is important to note that the Indian economy had been
consistently slowing down for past 3 years, especially due to the impact of
demonetization (November 2016) and GST (July 2017). Unusual weather pattern
have resulted in wide divergence in the regional economic performances. The
rural stress in the regions that suffered from poor weather (flood, drought,
etc) has been elevated; even though the overall farm sector growth recorded
decent performance.
It is widely accepted that after discounting for the elevated
government sector consumption and fiscal support to the rural sector (loan
waivers, cash subsidy payments etc), the GDP growth of India had been
significantly below par. The growth rate of almost all key components (savings,
investment, private consumption etc.) of the economy has declined.
Besides, the second half of FY20 had witnessed widespread
disruptions due to protests against implementation of Citizenship Amendment Act
and some related matter. Thus, pre-March situation was not good enough; and
here in the best case we are looking at reaching that "not good enough"
situation in next 2-3 quarter, provided the virus is contained soon and
lockdown does not need to be extended beyond 3rd May 2020.
The GDP growth estimates of various agencies for FY20 and FY21
now range between 3.5% to 4.7% and 0% to 4.2% respectively.
Challenge to make a fresh start
A large number of businesses, especially MSMEs, are facing
serious challenges. For them it is not 40-50days of break. For many of them it
would be like starting the business all over again with little capital and poor
credit score. These businesses are staring at material discontinuity losses and
cash flow problems, besides demand issues. Exporters in particular are in deep
trouble as their overseas payments are stuck, future demand outlook is heavily
clouded, inventory obsolescence risk is high, and expenses continue.
This would directly reflect on (i) employment conditions, (ii)
economic growth, and (iii) asset quality of lenders. Indirectly, it may
adversely impact (a) economic factors like discretionary consumption, savings,
tax collection, and (b) social factors like number of people below poverty
line, socio-economic inequalities, cases of petty crimes and non-compliance,
mental health of people due to elevated stress & anxiety levels, physical
health of people suffering from diabetes, hypertension, obesity etc.
It is natural to celebrate the fresh air in cities, clean water
in rivers, lakes and sea, peacocks on terraces, deer on roads. Many of the
children and youth in cities may have never experienced nature like this. But
once the lock down is lifted we will have to deal with materially increased
population of rodents and insects which are harmful for our health and
inventories in shops, godowns, restaurants, etc.
Global challenges
India shall face multiple global challenges in the aftermath of
COVID-19 outbreak. Poor export demand for traditional Indian products like
textile & leather, automobile, gems & jewelry etc., lesser employment
opportunities for young professionals, poor capital flows especially for
startups etc are some of the obvious economic challenges.
The worst however could be the change in global outlook for the
process of globalization itself. The developed nations which are bearing the
worst impact of COVID-19 in terms of human losses, may be inclined towards
closing (or narrowing) their borders to international trade and labor movement.
If the belief that COVID-19 spread is a consequence of Chinese
irresponsibility or conspiracy, sustains, we may see substantial rise in
geopolitical tension and trade & currency conflicts which have already
impacted the global economy meaningfully in past three years.
In any case, if all goes well, it would be reasonable to expect
travel restrictions and fear amongst travelers also.
The opportunity
Shift of global
supply chain away from China
Post COVID-19,
it is possible that China may be regarded as an irresponsible power, and
may not be accepted as a major global leader or supplier. In particular, the
mistrust between US and China may increase manifolds. We may likely see a
Sino-China cold war that may last for many years, or may be decades.
The global supply chain presently relies heavily on China for
components as well as manufacturing services. There is strong possibility that
the businesses in developed economies may seek to establish manufacturing
and/or sourcing facilities in other countries to reduce their reliance on
China. Japan government for example has already announced incentives for
shifting factories from China.
The window of this opportunity shall remain open for only a
short while, as the competition is really tough with tens of Asian countries
competing with each other to avail this opportunity. We would need to move
really fast if we actually want to turn this crisis into a massive opportunity
that could support India's economic growth for next couple of decades at least.
Investment in
health infrastructure
The outbreak of
COVID-19 has exposed gaps in the global healthcare infrastructure and
protocols. I am confident that post COVID-19 containment the world will embark
on an unprecedented investment mission to improve health infrastructure and
protocols.
Many Indian
businesses, especially the companies engaged in IT services, CRAM services,
telemedicine and diagnostic services etc. shall have opportunity of gigantic
proportion knocking on their doors.
Improvement
in domestic health infrastructure
Incorporating
the learnings from efforts to contain COVID-19, and existing programs &
schemes for public health, sanitation, personal hygiene, etc., the government
has the opportunity to materially improve the healthcare infrastructure in the
country.
It may consider
merging all such schemes & programs into a mega national mission. to ensure
adequate healthcare facilities to all citizens through public and PPP ventures,
total sanitation, comprehensive garbage management, preventing littering of all
sorts, management of epidemics, seasonal diseases etc.
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