Part 1 ; Impact of COVID-19 on the Economy

COVID-19 is having a 'deep impact' on Indian businesses, over the coming month's jobs are at high risk because firms are looking for some reduction in manpower. Further, it is added that already COVID-19 crisis has caused an unprecedented collapse in economic activities over the last few weeks. 

• As published in the Guardian,

The Tax reform in Australia including a GST increase and higher land tax will be needed to avoid the debt burden of the $214bn COVID-19 economic response falling on young people, an academic tax expert has warned.

• Reaping of desired aids on some of these measures announced in the press briefing, was a challenge for businesses – with the predominant one being the reconciliation of input tax credits.
• Further, the world is a very different place than it was a few weeks ago, with the world facing an unprecedented event and grappling with its ramifications. However, in light of these troubled times, it is best to look for things that are working well and helping us wade through the current crisis.
• Segments across e-commerce are helping ease anxieties by helping bring solutions both virtually as well as to your doorstep. These testing times are bringing to fore the accelerated adoption of online services and possibly creating a long-term behavioral change in the way people shop, consume media, health, get educated, or generally get things done.
• The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. The World Bank and rating agencies had initially downgraded India's growth for fiscal year 2021 with the lowest figures India has seen in three decades since India's economic liberalization in the 1990s.
• However after the announcement of the economic package in mid-May, India's GDP estimates were downgraded even more to negative figures, signalling a deep recession. On 26 May, CRISIL announced that this will perhaps be India's worst recession since independence. State Bank of India research estimates a contraction of over 40% in the GDP in Q1 FY21.
• Within a month, unemployment rose from 6.7% on 15 March to 26% on 19 April. During the lockdown, an estimated 14 crore (140 million) people lost employment.More than 45% of households across the nation have reported an income drop as compared to the previous year.
• The Indian economy was expected to lose over Rs. 32,000 crore (US$4.5 billion) every day during the first 21-days of complete lockdown, which was declared following the coronavirus outbreak.
• Under complete lockdown, less than a quarter of India's $2.8 trillion economic movement was functional.
• Up to 53% of businesses in the country were projected to be significantly affected. Supply chains have been put under stress with the lockdown restrictions in place; initially, there was a lack of clarity in streamlining what an "essential" is and what is not.Those in the informal sectors and daily wage groups are the most at risk.
• A large number of farmers around the country who grow perishables are also facing uncertainty.Various businesses such as hotels and airlines, are cutting salaries and laying off employees.
• Major companies in India such as Larsen & Toubro, Bharat Forge, UltraTech Cement, Grasim Industries, Aditya Birla Group,BHEL and Tata Motors have temporarily suspended or significantly reduced operations. Young startups have been impacted as funding has fallen.
• Fast-moving consumer goods companies in the country have significantly reduced operations and are focusing on essentials. Stock markets in India posted their worst loses in history on 23 March 2020.
• However, on 25 March, one day after a complete 21-day lockdown was announced by the Prime Minister, SENSEX and NIFTY posted their biggest gains in 11 years, adding a value of Rs. 4.7 lakh crore (US$66 billion) crore to investor wealth.
• According to an SBI research report,

The inoperability analysis for three sectors namely Transport, Tourism, and Hotels shows a significant impact on demand and hence output. "On an aggregate basis, we estimate that the impact of a 5 percent inoperability shock could be 90 basis point on GDP from Trade, Hotel, and Transport to Storage and Communication segment. It could be spread over 2019-20 and 2020-21, with a larger impact in the latter year.

Initial Impact

• International passenger capacity for India reduced by 89 per cent in April due to COVID-19: UN
• The International Civil Aviation Organisation said that by September, the world could have 1.2 billion fewer international air travellers, compared to regular originally planned or “business-as-usual”. Estimates by the organisation show a dramatic reduction in international passenger capacity for countries across the world between January and April
• The report further says on an average of 25 million and 300 million people use airplanes and trains, respectively each month. "A 10 percent reduction will lead to loss of revenue of Rs 3,500 crore on a monthly basis."
• Trade, hotels, transport, communication, and broadcasting were likely to generate Rs 33 lakh crore worth of value of services in the current financial year. This number might be revised downward, impacting GST collections from this segment.
• Impact on transport, tourism, and hotels further impacts sectors such as fuel minerals, electricity and water and rubber, plastic, coke, and petroleum products.
• All these would impact the GST collections immediately further squeezing the government's fiscal situation in the current financial year through finance ministry officials expects the impact of coronavirus to be visible only in the next financial year. The government had a GST collection target of Rs 1.25 lakh crore in March. That looks unlikely now. In February, the monthly GST collection was Rs 1.06 lakh crore against the revenue department's target of Rs 1.10 lakh crore.
• As per the central government's revised budget estimate, revenue from GST in the current financial year is likely to be Rs 6.12 lakh crore. Till January, the collection was around Rs 5 lakh crore.
• The coronavirus disease (COVID-19)-induced lockdown is likely to hit state finances harder than the central government’s in the financial year 2019-20 (FY20) and FY21.This is because indirect taxes on transport fuel, vehicle sales, alcohol, real estate transactions, electricity, and films & entertainment account for a bulk of state governments’ tax revenues. And most of these economic activities have either come to a complete halt or have reduced drastically in the past two weeks, resulting in a sharp dip in state revenues.
• In comparison, the central government largely relies on taxes on income, both personal & corporate, manufacturing and imports, where the decline has not been as sharp and there is a strong possibility of a rebound once lockdown is lifted. 
• “States’ revenues largely come from taxes on various transactions that are down adversely, affecting their revenues during the lockdown. In contrast, taxes on income and manufacturing account for a large part of central government finances,” said G Chokkalingam, founder and managing director of Economics Research & Advisory Services.
• Economists also expect states to take a haircut on revenues under the goods and services tax (GST) because of the lockdown’s impact on the sale of non-essential goods & services. 

“Nearly 80 percent of GST revenues come from taxes on non-essential goods and services such as consumer and electronic goods, fashion, and entertainment, while most essential items such as food and personal care are either tax-free or under lowest tax slab,” said Madan Sabnavis, head economist CARE Ratings.

• According to Reserve Bank of India’s data on state finances, GST was budgeted to account for 43 percent of states’ own tax revenues, while the rest was expected to come from non-GST taxes such as sales tax and value-added tax (VAT), state excise, stamp duty and registration fee, taxes on vehicle and electricity charges, among others. Given this, the analyst expects a sharp dip in state governments’ GST and non-GST revenues in March and April.
• Telecom The industry has also urged to exempt the levy of GST on license fees, SUC, and payment of spectrum acquired in auctions.

Neoteric Impacts

• The present situation is having a "high to very high" level impact on their business according to almost 72 per cent respondents. Further, 70 per cent of the surveyed firms are expecting a degrowth sales in the fiscal year 2020-21.
• In terms of trade, as per FICCI's report, In terms of trade, China is the world’s largest exporter and second-largest importer. It accounts for 13% of world exports and 11% of world imports.  
• Up to a large extent, it will impact the Indian industry. In imports, the dependence of India on China is huge. Of the top 20 products (at the two-digit of HS Code) that India imports from the world, China accounts for a significant share in most of them.
• India’s total electronic imports account for 45% of China. Around one-third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China? For automotive parts and fertilisers China’s share in India’s import is more than 25%. Around 65 to 70% of active pharmaceutical ingredients and around 90% of certain mobile phones come from China to India.
• Therefore, we can say that due to the current outbreak of coronavirus in China, the import dependence on China will have a significant impact on the Indian industry.
• In terms of export, China is India’s 3rd largest export partner and accounts for around 5% share. The impact may result in the following sectors namely organic chemicals, plastics, fish products, cotton, ores, etc.
• We also can’t ignore that most of the Indian companies are located in the eastern part of China. In China, about 72% of companies in India are located in cities like Shanghai, Beijing, provinces of Guangdong, Jiangsu, and Shandong. In various sectors, these companies work including Industrial manufacturing, manufacturing services, IT and BPO, Logistics, Chemicals, Airlines, and tourism.
• It has been seen that some sectors of India have been impacted by the outbreak of coronavirus in China including shipping, pharmaceuticals, automobiles, mobiles, electronics, textiles, etc. Also, a supply chain may affect some disruptions associates with industries and markets. Overall, the impact of coronavirus in the industry is moderate.

Let us have a look at the sector-wise impact on Indian industry

Chemical Industry

• Some chemical plants have been shut down in China. So there will be restrictions on shipments/logistics. It was found that 20% of the production has been impacted due to the disruption in raw material supply. China is a major supplier of Indigo that is required for denim. Business in India is likely to get affected so people securing their supplies. However, it is an opportunity. US and EU will try and diversify their markets. Some of the business can be diverted to India which can also be taken as an advantage.

Shipping Industry

• Coronavirus outbreak has impacted the business of cargo movement service providers. As per the sources, per day per vessel has declined by more than 75-80% in dry bulk trade.

Auto Industry

• Its impact on Indian companies will vary and depend upon the extent of the business with China. China’s business no doubt is affected. However, current levels of the inventory seem to be sufficient for the Indian industry. If the shutdown in China continues then it is expected to result in an 8-10% contraction of Indian auto manufacturing in 2020.

Pharmaceuticals Industry

• Despite being one of the top formulations of drug exporters in the world, the pharma industry of India relies heavily on import as of bulk drugs. Due to the coronavirus outbreak, it will also be impacted.

Textiles Industry

• Due to coronavirus outbreak, several garments/textile factories in China have halted operations that in turn affecting the exports of fabric, yarn and other raw materials from India.

Solar Power Sector: 

• Indian developers may face some shortfall of raw materials needed in solar panels/cells and limited stocks from China.

Electronics Industry

• The major supplier is China in electronics being a final product or raw material used in the electronic industry. India’s electronic industry may face supply disruptions, production, reduction impact on product prices due to heavy dependence on electronics component supply directly or indirectly and local manufacturing.

IT Industry 

• The New Year holidays in China has been extended due to coronavirus outbreak that adversely impacted the revenue and growth of Indian IT companies.

Tourism and Aviation 

• Due to the coronavirus outbreak, the inflow of tourists from China and from other East Asian regions to India will lose that will impact the tourism sector and revenue.

An outbreak of COVID-19 impacted the whole world and has been felt across industries. The outbreak is declared as a national emergency by the World Health Organisation. In India the three major contributors to GDP namely private consumption, investment and external trade will all get affected. World and Indian economy are attempting to mitigate the health risks of COVID-19 with the economic risks and necessary measures needed will be taken to improve it.Further, the Government has issued the various notifications in order to provide relief to the Taxpayers.

‘Consumer Behaviour’

The ongoing lockdown to combat Covid-19 has altered consumers’ purchase decisions — higher spends on health and hygiene products, adapting to limited product availability, and preferring home deliveries over store visits.

Data from Bizom, a SaaS startup for retailers, for the first 15 weeks of the year. The startup has been working with more than 350 top brands, including Coca-Cola, Cargill, Hershey’s, Molson Coors, Shell, and United Breweries. The data shows how Indians consumed food during the coronavirus lockdown, and how consumers and retailers from across the country reacted to the situation. (*Yourstory research)

1. Challenging times for brands Most brands have also taken a hit during the pandemic. Amazon India's biggest skincare brand Wow Skin Science, which used to receive 19,000 orders a day, has now seen its orders drop to less than 2,500 per day.

“We received 4,000 orders a day in the second week of April when we expected nothing at all, and we celebrated it. The orders have dropped to 2,000 per day now. The only saving grace is our US business, where we are getting aid from the government to retain our employees,” says Manish Chowdhary, co-founder of Wow Skin Science.

1. Lockdown, and the company is beginning to see a slight pick-up in activity, as well as several beneficial changes in customer behaviour. The lockdown order effectively forced people to switch to online shopping because of movement restrictions and social-distancing norms even for bare necessities such as vegetables and groceries. That, along with people re-evaluating their lifestyle choices with more free time on their hands, bodes well for online sellers.
2. While the coronavirus pandemic has increased sales of packaged food, personal care, and homecare products, it has certainly put pressure on the supply chain. Soon, there might be a shortage of these items if the government does not allow movement of trucks to wholesale and retail centres. As of May 3, the government has allowed the opening up of non-essential goods segment.
3. In the first 13 months, the goods and services tax (GST) Council has effected tax cuts on 384 goods and 68 services under the indirect tax system. The total estimated revenue loss to the exchequer from the rate cuts was pegged at Rs. 70,000 crores, according to the government. Mint analyses the GST rate cuts.
4. The rate cuts reflect changing consumer behavior. Items that were earlier considered a luxury, such as refrigerators and washing machines, are now a necessity for middle-class households.
5. GST has helped in improving collections with tax buoyancy pegged at 1.2, giving policymakers more room to cut rates.
6. Executives at automobile companies said their mass-market cars may see a spike in sales in a post-COVID-19 scenario. They argue that customers will shun shared cabs and public transport as the fear of the disease, a global pandemic that has killed thousands, lingers. Some car companies are expecting their affordable hatchbacks to do well as the middle-class consumer puts hygiene and safety above all else.
7. Others predicted hard times for online marketplaces for homestays, such as Airbnb, which have no direct control over the inventory listed on their platforms and, hence, on their hygiene. Consumers may shift to big branded hotels for their sanitation standards. “I feel the recovery of the shared and rental economy will be slower than established hospitality players," internet economy expert Sreedhar Prasad said in an interview.
8. Online grocery companies and e-commerce firms are also hoping that a massive shift will take place towards online shopping in India, as people will be wary of going to crowded shops and markets. With the ongoing 21-day countrywide lockdown announced by the government, malls, restaurants, cinema theatres, and retail shops, other than those providing essential goods, have downed their shutters.
9. Now, if the market at the Macro level can be organized and checked up by the government then possible GST rate cuts in necessary items may be done by the government. As the most important factor after the lockdown period is to manage production capacities and put various regulatory measures to balance between Supply and Demand.
10. Hopefully, the supply becomes better with time, and the world returns to normalcy. However, some would say that until the vaccine is found, our consumption would never be normal.

CA Navjot Singh

canavjotsinghbrar@gmail.com