Coronavirus dashes hopes of economic recovery

A detailed industry survey and report released by the Federation of Indian Chambers of Commerce and Industry (FICCI) on Friday confirmed what many have been fearing—India Inc. expects a recession that will last a few months as a fallout of the Covid-19 pandemic.

According to the survey, conducted among 317 FICCI member companies between March 15 and March 19, 53% of the respondents said they expected a high to very high impact on their business, while another 28% indicated a moderate negative impact.

A whopping 73% of the companies confirmed that their order books had shrunk since the novel coronavirus outbreak spread across India; 35% of these firms reported increased inventory levels. Decreased demand and increasing inventory is bound to take a toll on the financials of companies across sectors like tourism, hospitality, aviation, consumer durables, automobiles, and media & entertainment.

About 81% of the respondents expect cash flow to suffer and 63% reported a disruption in supply chain. Many Indian companies are either dependent on import of raw material from China or export of finished products to mature markets such as Europe and the U.S. With all these regions reeling under the Covid-19 crisis—with markets practically shut down and people staying homebound—the toll on Indian business is likely to be severe. About 87.6% of the respondents believe that expected time to return to normalcy could range between three to six months.

Along with the survey, FICCI also released a detailed report outlining the expected extent of the economic slowdown, across business, sectors, and a long list of recommendations for the government. Apart from requesting citizens to practice social distancing and not step out of home unless absolutely needed, Prime Minister Narendra Modi, in his address to the nation on March 19, said that an economic taskforce would be set up under the supervision of finance minister Nirmala Sitharaman. This taskforce would look into ways and means of minimising the damage to the economy and figuring out ways to offer relief to battered businesses.

The FICCI report stated that the Covid-19 outbreak came at a time when the Indian economy had anyway slowed down (it grew at a six-year low of 4.7% in the third quarter of FY20) and an expected return to a higher growth rate in the fourth quarter was now impossible.

“The outbreak has presented fresh challenges to the Indian economy now, causing severe disruptive impact on both demand and supply side elements, which has the potential to derail the India growth story,” the report said.

According to the UNCTAD (United Nations Conference on Trade and Development), the impact on trade in India due to the coronavirus outbreak could be in the region of $348 million. The Asian Development Bank, in a similar exercise, pegged the personal consumption loss in India at between $387 million to $29.9 billion under different scenarios ranging from best-case to worst-case. OECD (Organisation for Economic Cooperation and Development) revised India’s projected GDP growth for FY21 downwards by 110 basis points to 5.1%.

The problem is that there is no end in sight when it comes to the cascading impact of the virus spread. Bain and Co.’s Situational Threat Report Index places the present situation at level 6, which denotes that markets and the public in multiple major nations were reacting strongly to the Covid-19 outbreak and it was time for businesses to activate first-level contingency measures.

In its report, FICCI has outlined a 29-point action plan for the government to consider in order to keep the economy going as best as possible. These include bringing down interest rates; provide special liquidity support for companies and financial services firms that need it; central bank intervention in the bond market to enhance credit flow; and substantial increase in public health spend. It also suggests cutting GST rates; short-term suspension of the insolvency process for hospitality and aviation firms; interest rate subvention for small and medium enterprises; and allowing additional deduction in personal income tax.

The industry body has recommended sector-specific measures such as reduction in airport charges and taxes levied on passengers in aviation; a 12-month deferment of statutory dues payable by hotels; relaxing the pricing formula for qualified institutional placements to energise primary capital markets; and extending the deadline for announcing audited financial results from May 31 to June 30 and extending the FY20 accounting period till April 30.