Potential Impact of COVID-19 on Indian Economy

This abstract tries to extract and present important features of the published KPMG report by the same
name dated April 2020. The report focuses on the impact of COVID-19 pandemic on different
businesses, estimates the losses in present and upcoming financial quarters and provides
recommendations to the Indian government on measures that can be taken to bring the economy back
on track. But most importantly at the end of the report it foresees seven ways in which business
landscape is going to evolve in future post the pandemic. This will give way to the ‘New Normal’ of the
future business practices.

Contents –

 A: Impact on the Global Economy

 B: Impact on the Indian Economy
 C: Sectoral Impact
 D: Beyond COVID-19; Embracing the ‘New Normal’

A: Impact on the Global Economy

The global economy was already under recession in 2019. Spread of COVID-19 will lead to a tremendous
demand shock across discretionary spend category. COVID-19 already led to the fall in Purchasing
Managers’ Index below the level of 50 in China in Feb ’20 which indicates recessionary conditions. It is
anticipated that the March PMI will reflect growing economic stress on both services and
manufacturing.
Elevated debt levels make social distancing costlier

Countries with high debt markets may experience a significant strain. Already outflows from high-grade,
high-yield and municipal bonds have been high in past couple of months which has led to the fall of
share markets across the globe. This may lead to a domino effect like the crisis experienced in 2008 and
another global slowdown.

There will be potential economic spillovers to the rest of the world from China

Today, China makes up for 16% of world GDP against 4% during the outbreak of SARS. This will have a
global impact due to linkages through financial markets, import and export trades. It will have a cyclical
impact as shown –

Foreign currencies will get weaker

A rush to safe haven assets such as US Dollar, Yen and Euro has caused currencies of other countries to
weaken which hurts borrowers all over the world.
B: Impact on the Indian Economy

The three major contributors to the Indian Economy – Private consumption, Investment and External
Trade are most likely to get affected.

There can be three potential scenarios –

Scenario 1: Quick retraction across the globe including India; by end April to mid-May. India’s growth
rate in 2020-21 may be in range of 5.3-5.7%

Scenario 2: While India is able to control COVID-19 spread, there is significant global recession. Expected
range of India’s growth rate may be 4-4.5%

Scenario 3: COVID-19 proliferates within India and lockdown gets extended; global recession. India’s
growth rate may fall below 3%

Demand side Impact

Abrupt stop of urban activity could lead to steep fall in consumption of non-essential goods. The impact
will be more severe of the 21-day lockdown affects the supply chain of essential items.

Around 37% of Indian workforce in Urban India work in Informal sector who will face uncertain income
following the stall of urban activities.

Supply side Impact

Imports will be heavily affected. Especially since Chinese goods are the top imported goods in India
standing at 13.7% of the total. However due to stockpiling practice of Indian firms may lead to a
temporary insulation from a supply shock.
C: Sectoral Impact

The report peeks into the disruptions in the following major business sectors in India and provides us
insights into the current and potential impact on the industry and Key policy recommendations in the
future to bail them out

 Apparel and textiles

 Auto and auto components
 Aviation and Tourism
 Building and Construction
 Chemicals and Petrochemicals
 Consumer, retail and Internet business
 Education and Skilling
 Financial Services
 Food and Agriculture
 Metals and Mining
 MSMEs
 Oil and Gas
 Pharmaceuticals
 Power
 Telecom
 Transport and Logistics

We will discuss few of these sectors here

Automobile and Auto Component Sector

Contribution – 9.4% to the GDP

1. Supply fluctuation category: High

2. Demand fluctuation category: High
3. Cash flows will tighten up
4. As consumer purchasing power goes down so does the demand of passenger vehicles
5. With the shutdown of non-essential services, demand of commercial vehicles will plummet
6. Auto components sourcing may get dearer due to disturbance in global supply chain

Key Policy Recommendations –

Short Term Long Term

Tax booster in form of GST rate cuts to boost Extend the BS-6 deadline by at least a quarter
demand
Deferment of GST payments to improve liquidity GST rate cut for ICE-powered vehicles
Reduction in Interest rates on delayed payment
for 3 months
Rate cut by RBI resulting in lower interest rates
for retail customers
Building and Construction

Contribution – 13% to GDP by 2025

1. Supply side variability: High

2. Demand side variability: High
3. Housing sector is expected to see muted demand
4. Existing demand for commercial real estate may get curtailed or postponed to Q2
5. Hospitality sector is the earliest and one of the heavily impacted industry due to COVID-19
6. Logistics and Warehousing sector is also impacted but is expected to bounce back
7. Fresh equity investments will slow down
8. Key Policy Recommendations –

Short Term Long Term

GST/Tax holiday for one year for
tourism/hospitality sector
No interest repayment for 3 months for
developers then extending it to 12 months
Reduction in Interest rates on delayed payment
for 3 months
Relaxation for project delays in residential
segment (RERA compliance) for a max 6 months
Lending rate for projects should be below repo
rates

Consumer, Retail and Internet business

Contribution of Retail – 10% of GDP, 8% of employment

E-commerce market size – USD 64 Billion (by 2027)

1. Supply side variation: Low to High

2. Demand side variation: Mostly unknown
3. Consumers may tend to over-stock essential items which may lead to a slight flip of sales of
FMCG companies
4. Supply chain may weaken due to lockdown and may lead to stock outs
5. E-commerce will face challenge and may see a dip in growth
6. Going forward it is expected that companies will try to build new distribution channels with
‘direct to customer’ in focus
D: Beyond COVID-19; Embracing the ‘New Normal’

The impact of COVID-19 in transforming business practices will be huge. It has redefined our definition
of a VUCA world to a whole new level. Several businesses are expected to perish in this period and those
who will not modify themselves will slowly die out in the New Normal. There will be some undeniable
permanent structural changes that we are looking at, some of them maybe:

1. Companies will try to localize their supply chains especially of essentials and for sectors that are
seen as strategically important
2. Most of the companies have opted to work remotely and their employees are now working
‘online’. While some of these trends were already in motion, the pandemic has certainly put a
fast-forward to the process. Now even brick and mortar companies will face the challenge to go
digital
3. The situation has again proved that, ‘Cash is King’. Companies will move forward to become
more financially prudent and conserve cash
4. Companies will focus on reducing business costs. One of the biggest ways to that is to reduce
fixed costs by converting it to variable costs wherever feasible
5. Moving forward, countries and companies have realized the importance of building sensing
capabilities through ‘digital control towers’, ‘digital twins’ and the ability to process both
structured and unstructured data
6. Companies will look forward to build resilient supply chains with wider distribution channels
and a bigger set of reliable suppliers
7. Policies will need to evolve faster than the market and policymakers will need to be more
responsive, inclusive and agile