Impact of coronavirus on Indian economy: Another jolt to growth recovery

India's trade could face a massive USD 348 million hit due to disruptions caused by the coronavirus outbreak, of which the chemical sector is expected to take the biggest blow of USD 129 million.

The Indian economy has been experiencing significant slowdown over the past few quarters with the growth in third-quarter hitting 6-year low of 4.7 percent. A number of stimulus measures have been taken to revive economic growth but the new coronavirus pandemic has blurred the chanced of recovery in near to medium term.

The outbreak has presented fresh challenges for the Indian economy, causing a severely disruptive impact on both demand and supply-side elements and has the potential to derail India’s growth story. 

India's trade could face a massive USD 348 million hit due to disruptions caused by the coronavirus outbreak, of which the chemical sector is expected to take the biggest blow of USD 129 million, according to UNCTAD. Other sectors could also face big losses with the trade impact for textiles and apparel sector estimated at USD 64 million, the automotive sector at USD 34 million, electrical machinery at USD 12 million, leather products at USD 13 million, metals and metal products at USD 27 million and wood products and furniture at USD 15 million.

The Asian Development Bank said that the coronavirus outbreak could lead to a USD 387 million hit on the Indian economy in the 'best-case scenario' where the outbreak is contained in two months starting from late January when it intensified. While in a 'worst-case scenario', where precautionary behavior and restrictive policies are in place for 6 months, the economic hit could rise to USD 1.2 billion.

Demand Side Impact

Tourism, Hospitality, and Aviation are among the worst affected sectors that are facing the maximum brunt of the present crisis. Closing of cinema theatres and declining footfall in shopping complexes have affected the retail sector by impacting the consumption of both essential and discretionary items. Consumption is also getting impacted due to job losses and a decline in income levels of people particularly the daily wage earners due to slowing activity in several sectors including retail, construction, entertainment, etc.

With widespread fear and panic now increasing among people, the overall confidence level of consumers has dropped significantly, leading to the postponement of their purchasing decisions. Travel restrictions have severely impacted the transport sector. Hotels are seeing large scale cancellations not only from leisure travelers but even business travelers as conferences, seminars and workshops are getting canceled on a large scale. 

Impact on Indian stock market

Greater uncertainty about the future course and repercussion of Covid-19 have made the financial market extremely volatile, leading to huge market crashes and wealth erosion, which in turn is impacting consumption levels.

One of the major slides in the domestic equity markets was seen on March 12, when following the trend of the global equity markets, both the BSE Sensex and NSE Nifty crashed by more than 8 percent in a single day. The BSE Sensex dropped over 2,919 points – its biggest one-day fall in absolute terms while the NSE Nifty dropped by 868 points. An estimated Rs 10 lakh crore of market cap was reportedly wiped off due to this single-day fall.

On March 19, Indian equity markets again plunged to a new low. Sensex closed 581 points lower at 28,288 and Nifty fell 205 points to end at 8,263. Equity markets are likely to remain volatile in the future as well, further wealth erosion of investors is expected, according to FICCI. 

Supply Side Impact

On the supply side, the shutdown of factories and the resulting delay in the supply of goods from China has affected many Indian manufacturing sectors which source their intermediate and final product requirements from China.

Some sectors like automobiles, pharmaceuticals, electronics, chemical products are facing an imminent raw material and component shortage. This is hampering business sentiment and affecting investment and production schedules of companies.

Besides having a negative impact on imports of important raw materials, the slowdown in manufacturing activity in China and other markets of Asia, Europe, and the US is impacting India’s exports to these countries as well. 

Impact on International Trade

China has been a major market for many Indian products like seafood, petrochemicals, gems, and jewelry. The outbreak of coronavirus has adversely impacted exports of these items to China. For instance, the fisheries sector is anticipated to incur a loss of more than Rs 1,300 crore due to the fall in exports.

Similarly, India exports 36 percent of its diamonds to China. The cancellation of four major trade events between February and April is likely to cause an estimated loss of Rs 8,000-10,000 crore in terms of business opportunity for Jaipur alone. India also exports 34 percent of its petrochemicals to China. Due to export restrictions to China, petrochemical products are expected to see a price reduction.

(With inputs from FICCI's report titled Impact of Covid-19 on Indian Economy released on March 20.)