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Why the Indian Economy Looks in Trouble

By Mohit Oberoi, CFA - Published 2 months ago - Last Updated 2 months ago 0 Comment
Why the Indian Economy Looks in Trouble
  • Indian stock markets also followed global markets higher in April. However, the pandemic has taken a toll on the Indian economy
  • The Indian government has extended the lockdown by another two weeks. The country has taken among the harshest measures to control the pandemic.

 

India and COVID-19 pandemic

The Indian government has increased the shutdown by another two weeks. While the United States and Europe are gradually easing the lockdowns, the Indian government has played it safe. While the country had previously opened some business activities, most of the economy is still shut to control the spread of the deadly virus.

 

Meanwhile, the lesson from Europe has been that consumers aren’t too excited to come out even as the lockdowns have been eased. While governments might ease the lockdown rules, the general public is still in fear. In my view, unless we get reasonably close to commercial medicine, the fear factor is here to stay.

Consumer behavior

Consumer behavior is bound to bound to change amid the health hazard. In the long run, we could see individuals saving more as I noted in a previous article. However, in the near-term, some industries would feel the pain even if the Indian government lifts the lockdown.

 

Let us look at the restaurant industry that employs over seven million people and has an annual turnover of over INR 4 lakh crore. The National Restaurant Association of India has warned that 40% of restaurants might close if the sector is not bailed out. We can argue the estimated figure is pumped up to get government support. But then, we need to ask our self, how many of us are going for a dine-in at a restaurant even if the government allows.

Economic impact

The same holds for the travel and tourism industry. According to a KPMG report, “The Indian tourism and hospitality industry is staring at a potential job loss of around 38 million, which is 70% of the total workforce.”

 

The aviation sector is in no good position either as we might see only essential travel unless mankind succeeds in finding a vaccine for COVID-19. Multiplexes would be the last thing on mind for entertainment as people would prefer OTT or the old television.

Domino effect

The slowdown in these sectors would add to the already slowing Indian economy. Job losses in the above-mentioned sectors coupled with possible job losses in other industries would lead to fewer disposable income and hence lower spending. While economists are predicting a slight growth in the Indian economy this year, the country would find itself lucky if the economy does not contract in the current fiscal year. The fact that major cities like New Delhi, Mumbai, Pune, Hyderabad, and Bengaluru are among the worst affected makes things even complicated. These cities account for the bulk of India’s economic activity.

 

The Indian government’s demonetization and haphazard implementation of the nationwide goods and services tax have already been a big blow to the unorganized sector and the small and medium industries that traditionally have been the backbone of the economy.

Where's the stimulus?

The Indian government has announced a fiscal package totaling 0.8% of the GDP. That’s possibly the lowest among major economies. The US government’s stimulus is already above 11% of the GDP and is counting. Many would argue that the Indian government has been frugal with its stimulus. But then, the already high combined debt of states and central government coupled with the off-balance sheet borrowings don’t give the Indian government the privilege of going on a gala stimulus spree.

 

Coming back to the recovery in economic activity, it would not depend on how soon the government opens the shutdowns but how soon we find a medicine. Till then, all the statistical models of GDP growth and death and infections are possibly not even worth following. Coming back to the Indian economy, a silver lining is a possible exodus of global companies from China to other Asian countries. That said, India has to do a lot to attract global manufacturing companies.

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