Our generation has probably not witnessed a worse crisis in its lifetime. A tragedy of this magnitude & scale was unimaginable sometime back, but the second Covid wave has brought a tsunami of destruction along with it.
The number of daily infections (3.5lakhs) & deaths (2500) may be much higher than reported, looking at the cremations and obituaries in newspapers (which are daily showing 10-12 x normal). So the picture is very grim and most experts agree that the peak is yet to come !!
Apart from a humanitarian crisis, I think this "Black Swan" event has a potential to spell doom for the Indian economy. I have jotted down a few points I think can adversely affect our economy.
1. The humanitarian crisis
With a death rate of appx 7.3/1000 till 2020, india had approximately 35,000 deaths everyday. Covid second wave's officially reported death figures are about 2500/day but i think we all agree that the real picture on ground is much worse and actual figures may range from 15-20 thousand deaths per day.
From a personal experience I can share that many of these Covid-induced deaths were owners of small & medium businesses, many of them the only bread earners of their family.
This humanitarian crisis can quickly turn into an economic one due to :-
(a) Business closures - Many small businesses, which have no one else to run them would unfortunately shut.
(b) NPAs and defaults - although small businesses have very less formal bank debt but many tragic businesses succumbing due to factor (a) above may lead to defaulting on their creditors, who supply them goods & services. This can lead to a chain reaction & affect the cash flow across the supply chain in near to medium term.
Overall bank NPAs are also bound to shoot up.
(c) Reduced business Efficiency - since most small businesses are owner dependent & not system dependent, even if there are others to manage, things can get very difficult and take a lot of time to normalise for them since the owner's traits and relationship with labour, suppliers, customers and bankers would be difficult to replicate.
(d) demand destruction - overall demand for goods & services can take a hit in short term. For a family that may have lost a dear one, limping back to normal consumption pattern may be long & painful :(
2. The political crisis
Many of you would agree with me that the current situation is to BJP what the Anna Hazare movement was to the Congress & ultimately paved way for BJP to come to power. The popularity of our PM has dipped to an all-time low, owing to his engagement in Bengal rallies & arrangement of Khumbh in Haridwar, instead of taking proper measures to stop the pandemic.
We don't know what exactly would it turn out to be for BJP, till UP goes to elections next year, may be they can do some damage control given how short - lived voter's memory is, but they would really have to struggle to attain power and may be look for coalition politics again, because those who have lost someone will definitely owe a grudge! And opposition would leave no stone unturned in cashing on this disaster & pin down the Central Govt.
Political instability can lead to economic instability since many bold and flagship programs of current regime can be done away with by the new one - recently launched PLI scheme, divestment program etc. Even if there is no change in Govt, the current regime can adopt many populist measures for achieving an image makeover. Whatever the case is, the challenge for the BJP-led alliance would be tougher than ever in the coming State elections next year!
3. A nation under Lockdown
Last year's lockdown for 2 months made our GDP fall close to 20%. Although, the Govt has not adopted such stringent lockdowns yet, but with the crisis spiraling out of control and this time people voluntarily staying indoors out of fear, the effect on economy can be disastrous!
Big businesses such as Mobility (aviation, automobile & logistics), hospitality, infrastructure, Retail, entertainment & many more are the direct losers. Many small businesses such as MSME manufacturers (most of their customers having reduced or temporarily suspended business activities), restaurants and many consumer oriented business can be damaged severely and again as seen last year, the reverse migration of labour to their native villages, has put a spanner to production in many units, those which are willing to operate.
Other than effect on business financials, during the lockdown, overall economic activity & consumption reduces drastically and unemployment becomes very high, it went from 6% to high double digits during the last one & was just coming back to normal in Feb.
On top of it, we don't yet know how many regions would go under prolonged lockdowns to contain the pandemic.
4. Inflation & Debt
High inflation is perhaps the biggest enemy of a stable and growing economy. The inflation trajectory has already been upward since the last lockdown, we can only pray that our financial institutions do their best to keep it under check because that following factors can lead to higher inflation in present scenario
(a) supply side restrictions - with many regions under formal & informal lockdown as mentioned earlier, the supply chains are disrupted across industries, and sourcing for some material has become very difficult & comes at a higher price than earlier. This reduces purchasing power for an average household.
(b) Metal prices - almost all Metals , be it Steel, Copper, base metals are trading at their all-time high currently, due to international prices. These metals are used as raw materials in industries such as real estate, automobile, electrical components, capital goods and can have a cascading effect on general retail & wholesale prices inflation index in India.
Not just metals, a rally in oil & petrochemicals since last year, has led to many consumer industries such as small PVC pipe & garment manufacturers to shut shop. Even if they don't shut down completely, it is a huge strain on their working capital & margins.
(c) Low interest rates & loose monetary policy
An immediate response from almost all governments during an economic crisis is to offer stimulus to the economy by reducing Interest rates that would enable people & businesses to borrow at low interest rates and buy goods & services or invest in expansion or upgradation of infrastructure. This policy does provide respite in the short term but can lead to increased inflation on the flip side. There is a very high chance that the government would be forced to stick to this policy in the forseeable future & it needs to be seen what steps can they take to control inflation which would be definitely a by-product.
(d) High debt
High Borrowing by Govt (both state & central institutions) to fund the expenditure deficit which is expected to be high both on account of reduced revenues and increased health expenditure (cost of vaccination, setting up health infrastructure, paying up insurance money) would mean an additional risk of Sovereign credit rating to be downgraded for India which has happened earlier also.
Reality vs Stock Markets??
The stock markets, which are a forward indicator of economic performance, have been rising by 1% daily for the third day in a row today. Nifty is close to an all-time high even when March has seen Foreign investors taking out their money in bulk.
Although many sectors have been posting very good financial results since quarter 2 of FY21 such as Pharma, IT, Steel companies, Banks etc but don't you think such exuberance looks a bit too overstretched? The number of companies' shares tradng at their all-time highs may have been fuelled due to a global liquidity induced by the panic.
I may be irrational or too pessimistic right now seeing all that's good around and may not be looking at the big picture in its totality and may be Rakesh Jhunjhunwala was right last week when he said that "the second covid wave would just be a temporary blip".
But i have a habit of listening to my hunch and have offloaded 25-30% of my equity portfolio.
