Impact of COVID-19 on Indian Economy and Road Ahead for Corporate Sector
The Indian economy is witnessing a significant slowdown, with GDP growth at 4.7% in Q3 2019-20, its lowest in nearly seven years. The COVID-19 outbreak has compounded the challenges and could send the economy hurtling toward a recession
COVID-19 cases in the country have been rising rapidly. The Indian government has taken several steps to flatten the curve, such as imposing a nationwide lockdown for 21 days and a complete ban on travel. The importance of these measures notwithstanding, they have brought down the economy on its knees, impacting both overall consumption and investments.
This has prompted several rating agencies to revise downward their FY 2020 GDP growth estimate for India in the range of 2.1–4.0%.
Tedious road ahead for travel & tourism and entertainment
The travel & tourism industry was one of the first sectors to be affected by the outbreak, and most likely will also be the hardest hit. The Indian Association of Tour Operators (IATO) estimates the hotel, travel and aviation sectors to incur losses of up to Rs 8,500 crores due to travel restrictions imposed on foreign tourists.
The drop in numbers is already affecting several small and mid-sized players in the tour operating and ticketing space. Liquidity crunch would most likely result in significant job losses in the next few months.
Cancellation of tickets, refunds and low utilization rate of airlines have made matters worse for the already distressed aviation industry in the midst of a cash crunch. The industry association is seeking relief in the form of tax cuts, deferment of GST payment, the addition of jet fuel under GST, reduction in airport charges, a temporary cut in excise duty on jet fuel, and other financial aid to cushion the impact.
The Events and Entertainment Management Association (EEMA) has requested for aid to support its 60 million employees in the wake of postponement or cancellation of all major national events due to the pandemic. The industry has a huge section of blue-collared workers on daily wages, whose livelihood is at risk due to the nationwide lockdown.
The popular movie industry is not behind. All major releases and shooting of films have been put on hold. The Indian cinema industry will likely face a loss of ~INR200–250 crores over the next 2–3 months.
With social distancing becoming a norm, at least for the next few months, both travel & tourism and entertainment sectors are not expected to recover soon. Furthermore, unemployment and fall in income levels would aggravate the situation.
Auto industry to witness massive revenue loss due to disruption in supply chain globally
The automotive sector is feeling the pinch too. In passenger cars alone, the lockdown is estimated to have reduced production by ~240,000 units (~10% of total annual production). Each day of loss of production is causing the industry a loss of over INR2,300 crores in revenue on average, aggregating to over INR48,700 crores (~2% of total automotive industry revenue) over 21 days.
After the lockdown is lifted, financial compulsions and low sentiment may drive roughly 35–40% of consumers to defer their vehicle purchase decisions for the next six months (until September 2020). Hence, annual sales of light motor vehicles and motorcycles are estimated to fall by ~4.2 million units in 2020.
The spread of the pandemic globally had a whiplash effect across the supply chain. Automotive manufacturers in India depend highly on auto components imported from COVID-19-affected countries such as China, Germany and South Korea. This factor too will adversely impact production.
Low asset utilization rate in logistics and ports
With the movement of people/passengers restricted amid the lockdown, revenues have taken a hit in the railways, bus, airline, and cab segments of the transportation sector.
In essential commodities, the Indian government has taken various measures for swift movement of freight across the country. However, players in the logistics sector are struggling to service needs as supply chains across industries have been disrupted. Furthermore, output in factories has decreased drastically and fewer trucks are on the road. Due to the unavailability of staff, last-mile storage and distribution are also suffering.
Activity at seaports has ceased with a decline in export-import trade. Other issues affecting the sector are slow custom clearance, the inability of clearing and forwarding (C&F) agents to ply the required cargo from ports to CFS/ICD, and time-consuming manual stuffing and de-stuffing of containers and documentation/cargo handling.
Rail freight has been affected as the demand and supply of high volume bulk cargo items (such as imported coal for power plants or iron ore exported via rail to various ports in India for steel mills in China) are subdued.
Road freight: According to IFTRT, ~50% of the 50 Lakh trucks are off the road due to the unavailability of drivers who fear being stranded as road-side services (restaurants, repair shops) have been crippled.
The impact on the sector would be long-term, reflected in the decline in revenue due to the low utilization of assets. Cash flows and working capital of firms in these businesses will also remain strained.
FMCG and retail players on a war footing; foodservice and institutional business decimated
Since the imposition of the nationwide lockdown, FMCG companies and retailers are dealing with challenges primarily around three highly interconnected issues: surge in demand & depletion of inventory, reduction in workforce, and supply chain disruption.
Panic-induced stockpiling meant supermarket shelves were getting empty faster than they could be replenished. Both traditional and modern retailers bore the brunt, with the likes of DMart, Big Bazaar and Nature’s Basket eventually having to reduce working hours, put limits on the purchase of essential items (like eggs, milk, flour, etc.), or in some cases, even close down for a few days. E-commerce operations of major brick & mortar retailers as well as Amazon and Flipkart were not spared either.
As retailers struggle to deliver orders, innovative delivery models are emerging. Some examples are Big Basket and Flipkart tying up with Uber and Swiggy for last-mile delivery of essential items, Zomato launching Zomato Market service to deliver groceries from retail stores, and ITC partnering with Domino’s Pizza for zero contact delivery of Aashirvaad brand of atta and spices.
The lockdown has led to the migration of workers to their homes in rural areas, causing a shortage of labourers and, thereby, disruption of supply chains. To contain the impact, some retailers (GROFERS and Spencer’s Retail) are adopting reverse supply chain mechanism, i.e., sending own trucks and workers to pick goods from distribution centers, while others (DMart and Metro Cash & Carry) are offering additional incentives (INR400–500 per day) to their workers.
The decision of FMCG players such as HUL, Godrej, and ITC to restart production of essentials goods at select plants, albeit at reduced utilization rates, is a welcome step. However, they need to prepare better to address issues likely to emerge in the medium term.
Restrictions on travel and hospitality services have wreaked havoc on the bulk institutional sales and foodservice businesses of these FMCG companies.
Way Forward: Implications for Companies
The pandemic has paralyzed economies, compelling businesses to re-evaluate their strategies. Companies will need to build their financial muscle and focus on developing a lean structure to stir through the uncertain business environment.
The global nature of the outbreak, coupled with its high intensity and long duration, is expected to change the business landscape by way of shift in trade flows, investments and consumption patterns. Hence, the priority for businesses should be to draft a comprehensive action and recovery plan to mitigate the risks and address the main challenges.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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