Impact of COVID-19 on various sectors.
Impact of COVID-19 on a few of the sectors related to finance and business have been discussed.
Implications on Capital Markets, Global Oil Market and its Impact on India
Coronavirus fears have sent shock waves across global financial markets. Indian capital markets are envisaging a funds flow to Western capital markets, owing to rate cuts and fall in the stock markets the world over. Foreign Portfolio Investors (FPIs) have withdrawn huge amounts from India—`247.76 billion from equity markets and `140.50 billion from debt markets in a short span of 13 days, that is, from 1 to 13 of March 2020. There will be a lot of volatility in the capital markets in the next 6 months, owing to rapid flow of capital from one market to another in the world.
A historic drop in demand for oil has dropped the crude oil prices to an 18 year low of US$22 per barrel, in March from US$65 per barrel in January. Some estimates have pegged a saving of US$7–8 billion for India for every US$5 a barrel fall in crude oil prices. A fall in crude oil prices may cut India’s current account deficit, which was 1.55 of GDP in 2019–2020. But the capital outflows from India may exceed the potential saving in the current account deficit. INR to USD average exchange rate has been `70.4 per US dollar, but it is already quoting near the psychological barrier of `75 per US dollar. If capital outflows from India continue, rupee (INR) may depreciate further in the coming days.
Policy and Programme Implications
Fiscal and Monetary Measures
Coronavirus pandemic demands coordinated fiscal and monetary policy measures to deal with it. The fiscal measures include paying the healthcare bill raised by the pandemic. Providing for masks, gloves, testing kits, personal protection equipment, ventilators, ICU beds, quarantine wards, medicines and other equipment would mean a huge increase in healthcare spending. Public spending on healthcare in India is 1.1 per cent of GDP. It is likely to increase in the current fiscal year. The government has declared a relief package of `1,700 billion, it will be used to make cash transfers to the poor and vulnerable sections of the society. The sectors that are affected the most, that is, MSMEs and the farms, will be supported by another relief package which will be announced soon. Tourism and those sectors which are integrated with global supply chains will require support. Tax revenues will also drop due to recession. Fiscal receipts could drop by at least 2 per cent of GDP. All these fiscal measures will increase fiscal deficit by 1–1.5 per cent, which is currently at 3.2 per cent, as predicted by economists.
The crisis emerging from the coronavirus spread will pull down investment and consumption demand. Conventionally, the demand side components of GDP account for 72.1 per cent consumption, out of which government consumption is barely 11.9 per cent. An anxiety-induced reluctance to spend is the main threat to economic growth rate. The government will have to increase the spending in order to boost demand. Support to different sectors will have to be given as a measure to boost investment demand. Repo Rate has been reduced by 75 basis points, as part of a loose monetary policy. The federal reserve had cut its interest rate by 1 percentage point and decided to keep it in the range of 0–0.25 per cent in the USA. Monetary policy is less effective in dealing with a pandemic because the problem is not liquidity alone. The disruption of economic activity and the uncertainty of future bring down the investment sentiment. An anxiety-induced frugality among firms and investors wipes out the investment demand.
Impact on Start-Ups and Micro, Small and Medium Enterprises
Micro, Small and Medium enterprises, which have created more than 90 per cent of the jobs in India, employing over 114 million people and contributing 30 per cent of the GDP, are at the risk of having a severe cash crunch if the lockdown is extended to 8 weeks. Many of these MSMEs have loan obligations and monthly EMIs to pay. Many of them might just disappear if their cash cycle is disturbed because of the lockdown, with fixed costs dangling over them in such a situation. They need a moratorium for loan repayments. RBI has released funds to non-banking financial corporations, some of whom provide finance to MSMEs. In addition to that, movement of perishable goods is hampered and thus, these businesses stare at huge losses. India cannot have a real and sustainable growth without having a thriving MSME sector. The COVID-19 crisis will also test the resilience of start-ups in India. Start-ups have to rely on cross-border fund raising. Several founders are seeing their businesses grinding to a halt. Receivables are spiralling and they have to undertake painful cost-reduction measures in their ventures. Government will have to make funds available to this sector, as venture capital firms may take a little longer to come and support because of the restricted global capital flows.
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