Abu Dhabi, UAEThursday 28 May 2020

India's unprecedented virus lockdown will have consequence for already struggling economy

The government has already rolled out aid package and RBI has cut key rates but smaller businesses need more help to survive the shutdown

Indian paramilitary soldiers walk near a closed market during a government-imposed nationwide lockdown as a preventive measure against the Covid-19 in Srinagar. EPA
Indian paramilitary soldiers walk near a closed market during a government-imposed nationwide lockdown as a preventive measure against the Covid-19 in Srinagar. EPA

Prashant Gupta owns a grocery shop in Mumbai, one of the the few stores that are allowed to stay open during a three-week nationwide lockdown in India as it tries to stem the spread of the deadly coronavirus. But Mr Gupta fears he cannot continue to operate for much longer in the absence of supplies.

“I may have to close by Monday,” he says, pulling down the tea towel which he uses as makeshift mask to cover his mouth and nose. “I'm not getting any deliveries from my suppliers."

Even if he manages to get hold of some supplies such as pulses, he may not be able to buy them for his customers as "the prices have shot up", he adds.

Many of his normally fully-stocked shelves are empty, as people panic bought, with the lockdown coming into effect just hours after it was announced. The country's prime minister Narendra Modi assured the nation that access to essential supplies would not stop, but many do not want to take the risk of being without food and medicines.

Our initial estimates suggest that about 75 per cent of the economy is shut down [during the three-week lockdown], resulting in a direct output loss of 4.5 per cent

-Sonal Varma, managing director and chief economist at Nomura

Pharmacies, along with stores such as Mr Gupta's, are among those that are permitted to remain open. Offices across Mumbai, India's bustling, fast-paced financial capital, have closed, forcing employees to work from home – only permitted to step out to buy essential supplies.

Roads that are normally heaving with traffic are almost empty. Daily labourers - largely migrants - are left without work. Some stranded in the city have resorted to walking hundreds of kilometres to try and get back to their families in villages as trains, considered the lifeline of Mumbai, and the country, have been suspended.

Mumbai, the country's financial capital, is not alone in this predicament. Economic activity in the rest of Asia's third-largest economy has also come to a halt as more than 1.3 billion people face an unprecedented lockdown.

With the outbreak hammering international trade and pushing the global economy into recession this year, Moody's Investors Services on Friday cut in half its growth forecast for India for this year. Moody's now expect Indian economy to expand 2.5 per cent, down from an earlier estimate of 5.3 per cent.

The pandemic has come at a extremely challenging time for India. Even before the outbreak, the country's GDP growth had slowed to a seven-year low of 4.7 per cent in the quarter to the end of December.

“Our initial estimates suggest that about 75 per cent of the economy is shut down [during the three-week lockdown], resulting in a direct output loss of 4.5 per cent,” says Sonal Varma, managing director and chief economist at Japanese investment bank Nomura.

“Additionally, there will be indirect effects ... a high risk that the livelihoods of the predominantly unorganised workforce will be hit and a sharp increase in corporate and banking sector stress, which are likely to further weigh on growth.”

The biggest worry for economists is the impact of the lockdown on smaller businesses. Traders, retailers and small industries and shop owners in India, who account for the bulk of economic activity in India, will have no income at least for three weeks, a substantial dent to their finances.

“Clearly, for the first time in living memory, many industries and small businesses will be running on zero revenues for close to a month,” says Sunil Tirumala, the head of research and equity strategy at Emkay Global Financial Services, based in Mumbai. “Even the opening-up after the lockdown is likely to be measured, lest a 'second wave' hits.”

Small businesses in particular have been hit in recent years by the impact of demonetisation, when the Indian government banned the two highest value bank notes overnight in 2016, followed by the introduction of a new goods and services tax the following year. But some experts say that the coronavirus impact is an even greater test and many businesses will not be able to survive.

“The share of the unorganised sector [in India's economy] is high, and this segment was still emerging from the back-to-back shocks of demonetisation and GST [goods and services tax],” says Mr Tirumala. “The shutdown could push them to the brink.”

The lockdown is a necessary evil and its economic cost is what India has to bear, as not properly stemming the spread of the virus could be more disastrous, derailing the economy in the longer run. The country's public healthcare infrastructure is already overstretched. The number of confirmed Covid-19 cases in the country have crossed 900 but there are fears that the numbers could be much higher. Although India has increased the number of tests it is conducting for the virus, it still has one of the lowest testing rates in the world.

“With the lockdown in effect, the majority of industrial production has come to an indefinite halt, bringing down the export volumes,” - Sanjay Bhatia, the co-founder and chief executive of Freightwalla

The state of Maharashtra, of which Mumbai is the capital, has the highest number of confirmed cases.

Restaurant manager, Kevin, who was out buying groceries ahead of the lockdown said his restaurant has already shuttered up, and he was worried about his own job. It is likely the eatery will have to lay off some of its workers to cut costs.

“I'm working from home,” he says. “But there's not much I can do at home. The restaurant obviously isn't doing any business and we're still paying our staff. It's a loss.”

While the restaurant business cannot adapt to the "work from home" model, most others are trying to embrace it.

Samir Jain, the co-founder, Green Gold Animation and Merchandising, that owns a hugely-popular animated character in India, Chhota Bheem, says the company has had to shut its factory. But his firm had “already made preparations since early March and created a backup system to work from home”.

Freightwalla, a digital logistics company, says its employees are working from home, and there are no plans to cut jobs yet.

“With the lockdown in effect, the majority of industrial production has come to an indefinite halt, bringing down the export volumes,” says Sanjay Bhatia, the co-founder and chief executive of Freightwalla, based in Mumbai.

“This has adversely affected the entire trade industry. The situation is becoming more sensitive with each passing day.”

Rajesh Neelakanta, the executive director and chief executive at BVC Logistics, sees a massive impact on jobs in the sector.

“Livelihood of a major portion of the logistics industry .... [will be] impacted,” he says. “We too are facing a huge employment loss situation during and in the immediate aftermath of the lockdown.”

Unclear guidelines have created a lot of confusion about which sectors and industries are allowed to operate in the lockdown.

“Part of the logistics industry dealing with food products, food items, personal hygiene and household products, pharma and medical equipment is, technically, allowed to operate,” says Mr Neelakanta.

However, feedback from his industry peers says otherwise.

"In some cities, the authorities have clamped down on all kinds of movement, while in most others, restrictive movement is allowed.”

labourers and daily-wage employees who live from hand-to-mouth are probably the worst affected by the lockdown. India's Finance Minister Nirmala Sitharaman announced a $22.5 billion (Dh82.6bn) relief package, largely aimed at the poor, which provides free food, and some cash handouts.

The Reserve Bank of India (RBI), stepped in on Friday to help alleviate financial distress for businesses and households. It announced an emergency interest rate cut, a hefty 0.75 per cent drop on the benchmark rate, and a three month moratorium on loan repayments.

The RBI measures were welcomed by business and industry leaders.

“Overall, they gave more than what was expected and assured to resort to more measures if the situation worsen” says Dhiraj Relli, managing director and chief executive at HDFC Securities. “The impact of these measures on the economic growth could take some time to fructify [though].”

There are, however, some who want policymakers to do more to help the businesses. .

“At this juncture, the government should set up a coronavirus distress fund for micro, small and medium-sized businesses,” says Sanjay Aggarwal, the senior vice president at lobby group, the PHD Chamber of Commerce and Industry.

Help is most needed for the worst-hit sectors such as travel and tourism, aviation, leather goods, textiles, hospitality and electronics among others, he adds.

Updated: April 2, 2020 05:52 PM

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