An Analysis of Coronavirus outbreak: How would a Prolonged shutdown affect the Indian Market?
Blog: NASSCOM Official Blog
The Covid-19 has now fully embedded in the economic system if not the society to a great extent. The government has ordered a shutdown across the country as a preventive measure, which will soon affect each individual directly as well as indirectly.
Based on what has happened in other nations, it can be inferred that nothing much can be done and that the economic effects will be much more serious depending on how long the virus proliferates. At best, the government and central bank will try to relieve misery but cannot provide a solution and the economic impact would be profound.
Let’s understand the effect that the dangerous virus has on every sector:
The GDP growth and growth would be on the bed rest
At a very specific point, a single day of a full shutdown involving zero production of goods and services includes around Rs 50,000 crore of real GDP and thus a 10-day shutdown will be Rs 5 lakh crore or 3.4 percent of GDP, i.e., from around Rs 146 lakh crore in the financial year 2020 to Rs 141 lakh crore.
The bank could show a sign of weakness
All sector indexes showed signs of weakness as investor sentiments remain jittery due to the lockdown caused by subdued business activity. Banking stocks showed signs of weakness in early trade following the announcement by the RBI cuts repo rate by a fresh 75 basis points. Auto stocks have also fallen, as the sector remains concerned about Covid-19’s overall economic impact.
Production could be slowed down
With all the restrictions imposed on the movement of products and trade on wholesale markets, there is a real fear of distorting farm output numbers and adversely affecting farmers ‘incomes. This is possibly the biggest challenge as farmers faced lower prices during the Kharif harvest, resulting in lower off take on the wholesale markets. Consequently, this business will also face a collateral impact from the shutdown due to the precautionary steps being taken across the country to prevent Covid-19 from spreading.
Shortage of supplies from all short of manufacturing industries
Manufacturing Industry would face a double threat. Second, there would be significant inconsistencies in the supply chain not only when dealing with foreign parties but also in the domestic sector, which involves both big corporations and small and medium-sized firms. While the shutdown has not been enforced for all products as goods need to be manufactured for customers, the absence of raw materials will cause shortages in the supply of end products.
Impact on service industry and employment
In the last few years when investment activity was dormant, service has been the driving force for the Indian economy. These include aviation, hotels, restaurants, tourism, retail shopping malls, and entertainment, particularly where the operation has come to zero. This essentially means the entire physical communications sector has ceased to work. The loss of revenue will signify a sharp decline in GDP.
The issue of jobs and stopping the services meant immediate layoffs or substantial reductions in employee wages. The second area would relate to the banking sector.
Efforts by the RBI could improve liquidity in the system and can benefit if borrowers are present. Right now it is not liquidity or interest cost which are concerns as economic activity has come to a standstill. On the other side, the government is leaving no stone unturned but we don’t know how much more we have to see with this pandemic.
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