Industry Report

The Economic Impact of COVID-19 on

Different Sectors in India
May 2020

BY
Ananya Gaba
B. Sc. (Research) in Economics
Shiv Nadar University
Introduction & Background

After nearly 5 months since the onset of this global pandemic, 212 countries and
territories have been affected and the current death toll stands at nearly 2.4 lakh
deaths worldwide. COVID-19 is being termed a ‘black swan' because of its highly
unlikely and very economically impactful occurrence. We know that to produce
economic value, people need to meet each other, work together, and trade,
however, while organizations of some sectors like IT can survive on work from
home via telecommunication tools like Zoom and Microsoft, others have stagnated
completely. Businesses across the country are bearing the loss of revenue and
disrupted supply chains, as factories have shut down and services are closed. They
are operating in fear of the financial markets’ collapse, and considering the sluggish
economic growth in the previous fiscal year, the financial markets of a developing
country like India are bound to be volatile.

Global​ Market Response to Covid-19 (Source:​ Bloomberg, Yahoo Finance)​

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Sectors
The graph below shows the impact of COVID-19 on some sectors of the Indian Economy.
(Source: ​Deloitte)​

While the impact on most of the sector’s Indian economy has been more or less
consistent, the following are 4 sectors that have been impacted heavily for various
different reasons like ​supply chain disruption, stumped demand, seal in trade, lack
of workforce​, and many more.

MSME:
MSMEs, or micro, small and medium-sized businesses, form a significant part of
many economic sectors that need urgent attention. With sales and revenue at a
standstill and constant expenses such as salaries of employees, tax deposits, rent of
warehouses, and office spaces, among many others, MSMEs are struggling for
stability, and are unable to pay their creditors. MSMEs, the backbone of the Indian
economy, contribute to 30% of India’s GDP and nearly half of our exports.
The impact on MSMEs will also travel backward through the demand and supply
chain, affecting many other sectors like agriculture and manufacturing. Moreover,
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as the struggle to meet costs continues, around 50% of employees may lose their
job.
While these consequences are inevitable to a large extent, some measures by the
government are easing the hit to this sector by a margin. For example, the RBI has
given an interim on term loans and eased working capital financing. Also, many
emergency credit lines where MSMEs can avail a maximum loan amount of up to
INR 200 crore or 10 percent of the existing working capital limits have been
introduced. Another initiative by the government has been to extend the GST
payments date until June 2020.
Though the revenue streams of many MSMEs have stumped in this situation of
crisis, many companies are utilizing these days to upgrade the skill set of their
workforce and train their team on various productivity tools.

Automotive:
A few days ago, the automotive sector of the Indian Economy started Fiscal Year
21 reporting zero sales in all of April because the buyers are all on lockdown. The
auto sector was already facing a slowdown over the last year and a half, due to
structural reforms beginning with the Goods and Services Tax. This sector also
heavily relies on migrant labour, a lack of which hits the very long supply chain
deployed by this industry with a domino effect.
Apart from that, sealed trade too has a large impact on this sector. India is
moderately dependant on China for nearly 18% of its automobile components
imports and nearly 30% of its tyres imports. This number is even higher when it
comes to two-wheelers as more than four-fifths of the imported components in
two-wheelers are from China. In other segments such as buses, passenger vehicles,
and commercial vehicles, imports from China are approximately 20-25% of total
imports.
As of now, our inventories are adequate to temporarily keep the industry alive, but
lack critical components can hurt original equipment manufacturers. With the
world’s loss of trust in China, this could even create an opportunity for Indian
manufacturers to fill the void. While Indian manufacturers can start producing the

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parts locally, it can not happen on an immediate basis as it takes time for them to
recalibrate their supply chain. In this scenario of disruption in supply, the industry
could also look at sourcing them from other countries such as Germany, South
Korea, Japan, and Thailand. However, the change in procurement channels could
be more expensive and the supply could still be insufficient to meet the demand.

Consumer Products and Retail:

Fast Moving Consumer Goods:
As an immediate consequence of the lockdown, the demand and consumption of
FMCG and household products, such as food, groceries, and staples, health, and
hygiene products, increased massively due to panic buying by consumers, and so,
companies had to increase the supply.
However, with the current disruption in supply chain and manufacturing that the
companies are facing, there is a considerable slowdown in the production of these
commodities, while the inventories are still drying up.
Fast-moving consumer goods (FMCG) companies have been authorized for some
of their facilities and are in the process of resuming production, but with very
limited capacity, as the government has also moved to ease the supply of personal
hygiene products.
“With the easing in the supply chain, we expect inventory movement to return to
normal next week. However, the big challenge for FMCG companies is to resume
production and deal with the shortage of manpower," said Nitin Gupta, analyst,
FMCG, SBI Caps.

Consumer Durables and Electronics:

The impact of this pandemic is expected to be felt sharply in the consumer durable
sector due to our dependency on China for imports. India imports almost half of its
complete units of consumer durables from and a bulk of its consumer durables
components from China. While inventories can suffice, for now, we can expect the
impact of this to be felt in the form of a hike in prices. The situation is extremely

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unpredictable with respect to this sector and is expected to take almost a year to
show any signs of growth.

Tourism and Hospitality:

The Indian tourism and hospitality sector contributes to nearly one-tenth of the
GDP of India. It includes hotels, restaurants, tour and travel operators, conference
planners, etc. COVID 19 has contributed to one of India's worst downturns for the
travel and tourism industry. Considering the previously sluggish economy and
subdued growth over the past few years, the COVID 19 blow is pushing the sector
over the edge. With visas suspended and tourist attractions shut down indefinitely,
it is expected that the entire tourism value chain, which includes hotels,
restaurants, attractions, agents, and operators will face losses worth thousands of
crores. Moreover, without revenue generation, we can expect companies to have
no option but to restructure their workforce. Salary cuts and downsizing the
workforce too can be expected over the next three months.
The longer the COVID situation prolongs, the more chances there are of us
witnessing a complete halt in the sector’s operations, and this industry will not be
revived without the initial government support post-COVID-19.

Real Estate:
Real Estate accounts for a large proportion of the country’s GDP growth and
increase in employment. Had it not been for COVID-19, by 2025 the real estate
sector was expected to cause a 13% rise in GDP growth rate and employment was
expected to grow at a compounded rate of 5% by 2022. The Indian real estate
sector faced many challenges in the past, like disruptions of a liquidity crisis,
changes in the structural framework, and policy reforms.
Currently, as a result of this lockdown, building sites are shut down, construction
workers are idle, and industrial activity has come to a grinding halt, thereby
impacting property sales. The pandemic adversely hit developers’ cash flows and
project delivery capabilities and so they’ve deferred their new project launches
indefinitely.

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Niranjan Hiranandani, national president, NAREDCO, stated that “Salvaging Indian
realty, the second-largest employment generator is critical, not only from the GDP
growth perspective but also for employment generation, since the sector has a
multiplier effect on 250-plus allied industries.”
This health emergency caused the biggest global work from home revolution,
questioning the relevance of workspaces in a post-Coronavirus world, and so
co-working spaces, as well as co-living spaces like PGs, are expected to see a
decline in demand even after this situation blows over.
It has also resulted in the closure of malls, retail stores, and entertainment venues
like theatres and arcades, putting a hold on future commercial real estate.
As for housing sales, under normal circumstances, March is usually one of the
busiest months for property sales, however this year with the inventories stocked
and buyers stuck at their homes, research confirms that housing sales in nine major
cities of India dropped by 26% in the period between January-March 2020 (as
shown in the graph below by JLL India). Homebuyers are likely to put their
property purchase and sale decisions on hold as they wait for clarity on the security
of their jobs.

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Aftermath: Beyond COVID-19

Major Financial Institutions have lowered growth estimates for India by 0.5-1.5 percent
(Source: ​Deloitte​)

This disruption in economic activity has been a wake-up call for the tangible
impacts of such unforeseeable events. Dependency on imports (especially from
China) needs to be reduced and the supply has to be met locally. Another lesson to
be learned is to reduce overall business costs by converting fixed costs into
variable costs.

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 A report by KPMG mentioned seven ways in which the scenario could improve post the
emergence of COVID-19.

Another beneficial strategy would be to convert China’s loss into India’s gain. Now
that the world finds it difficult to trust China again, global companies will de-risk
themselves and look for alternate sourcing channels. China has been at the nerve
center of the export chain for a very long time, and now India has the chance to
pitch in.
It’s possible that the coronavirus threat eventually fades, as the Ebola, Zika, and
SARS have in the past. Nonetheless, the next devastating, unpredictable, and
intangible outbreak is only a matter of time​. ​The world we’ll be going into for the
next decade or so will be much different from the one we’ve been living in.

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References

● PTI. “PM Reviews Impact of COVID-19 on Economy; 2nd Stimulus in

Consideration.” ​The Economic Times​, Economic Times, 16 Apr. 2020,
www.economictimes.indiatimes​.

● Jaganmohan, Madhumitha. “India - Estimated Economic Impact of COVID-19 by

Sector 2020.” ​Statista​, 26 Apr. 2020,
www.statista.com/statistics/1107798/india-estimated-economic-impact-of-coron
avirus-by-sector/​.

● “Impact of COVID-19 on India's Economic Growth: Deloitte India: Consumer.”

Deloitte India,​ 18 Apr. 2020,
https://www2.deloitte.com/in/en/pages/consumer-business/articles/impact-of-co
vid-19-on-consumer-business-in-india.html

● BFSI Network. “COVID-19 and Its Impact on Indian Economy.” ​BFSIPost,​ 4 Apr.
2020, ​https://bfsi.eletsonline.com/covid-19-and-its-impact-on-indian-economy/​.

● Reuters Staff. “5 Charts That Show the Global Economic Impact of Coronavirus.”
World Economic Forum​,
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● Madaan, Sukhesh. “COVID-19 and Lockdown: Impact on MSMEs and Expectations

From Government.” ​Entrepreneur,​ 22 Apr. 2020,
www.entrepreneur.com/article/349635​.

● VAS Inc. “COVID-19 Effects on MSMEs.” ​The Hills Times​, The Hills Times, 16 Apr.
2020, ​www.thehillstimes.in/featured/covid-19-effects-on-msmes/​.

● Mukherji, Deb. “Coronavirus: Impact of the Pandemic on Indian Car Industry.”

YourStory.com,​ 1 May 2020,
https://yourstory.com/smbstory/coronavirus-pandemic-automobile-car-industry-impact

● “Potential Impact of COVID-19 on the Indian Economy” ​KPMG

https://home.kpmg/content/dam/kpmg/in/pdf/2020/04/potential-impact-of-covid-19-on-th
e-indian-economy.pdf
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● Tandon, Suneera. “Coronavirus Impact: FMCG Companies Run into Logistics Troubles.”
Livemint,​ 30 Mar. 2020,
www.livemint.com/industry/retail/fmcg-companies-run-into-logistics-troubles-11585602
719770.html​.

● Bhatia, Surbhi, and Pramit Bhattacharya. “The Economic Impact of Coronavirus and the
Response so Far, in Nine Charts.” ​Livemint,​ 16 Mar. 2020,
www.livemint.com/news/india/the-economic-impact-of-coronavirus-and-the-response-so
-far-in-nine-charts-11584334473089.html​.

● Mishra, Sunita. “Coronavirus Impact: Indian Property Market To Witness Tragic

Slowdown.” ​Housing News​, 5 May 2020,
housing.com/news/impact-of-coronavirus-on-indian-real-estate/

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