As COVID-19 is pushing us in lockdown and most likely an extended lockdown, it also gives opportunity to reflect on micro and macro issues, how the impact will trickle through different layers and what could be steps to restart the economic activity on large scale. I’m writing this when global death toll from COVID-19 is around 85000.
Talking about post COVID-19 economy and possible steps for recovering from current situation, answer lies in Keynesian Theory of Economics. Government will have to take major initiatives to boost demand cycle – and it will begin with core sectors. It will most likely double down on its large scale infrastructure development projects and use MNREGA / other such mechanisms to kick start economic activity and the demand cycle.
These activities will have immediate positive effect of job creation at bottom of pyramid. It also creates infrastructure assets across spectrum. Government can fund these infrastructure projects through relatively cheap money available from various sources incl. Sovereign Wealth Funds across globe. Money supply will be much cheaper now than it was earlier.
The timing couldn’t be any better for nation like India to complete it’s much lagged development on infrastructure and relatively at lower cost. Given any large scale infrastructure projects takes few years to complete – time-cycle wise, its suits perfectly.
National infrastructure development initiatives will immediately absorb the jobless people from bottom of pyramid and money will flow directly in their hands through DBT routes. This money flow will drive up consumption demand (in short term at least for essential FMCG sectors – food & kapada aur thoda makaan) and in medium to long term for many other allied sectors and find its way to these sectors.
All such infrastructure development initiatives will have immediate positive ripple effect to sectors such as cement, steel, other core sectors related to such development. Once the economic flywheel starts rotating, jobs can be created in organized as well as unorganized sectors too as all type of hands would be needed in this pursuit. Organized services sector will also see economic uptick as all projects will need all types of engineers, designers, architects as well as other professionals to support the work.
Government has demonstrated its prowess to use digital technologies incl. analytics to ensure effectiveness in macro initiatives. Technology solutions will be leveraged across board to ensure stringent oversight quality as assets being created instead of using MNREGA schemes like drain on economy. Such aspects will also keep the fiscal discipline.
Above activities will drive demand to automotive (partially) and domestic logistics sector which will be come back on its feet.
Farm sector will be back on toes anyway because 130 Crore have to eat daily & surplus to be shipped to other nations. Prices may & should moderate across board for items which keep inflation / Consumer Price Index (CPI) in check. This will have positive impact on overall value chain relating to farm sector to rise from the slumber though may not be as it was before COVID-19. This will drive economic activity in related field viz. chemicals & fertilizers, packaging, distribution sector of farm produce. With overall lower demand, farm produce may see over-supply in some categories. Here, Government will face major challenge to keep the support price which will have drag on exchequer.
Real Estate will face longest drag. If “work from home” concept is even 50% successful, they will see premature closures of long term leases on commercial space as demand for such space may vanish immediately. New unfinished projects will have a massive challenge to find new takers. With significantly lower economic activity across board, commercial space market will see over-supply for a longer period of time. Investors in unfinished projects will face maximum heat as returns are not in sight and pricing structure after moderate recoveries may not bring back rentals to higher bracket.
If current scenario in Global oil industry continues, prices may not see easing in near term. Crude storage capacity across globe is expected to come to end sooner given Russia, KSA, US etc are going head to head. It’s a separate discussion all together about Global Oil Industry, but whatever is happening is surely helping India to keep its BOP in check coupled with lower demand. As nation, India is lucky to see crude price fallen to current levelsas the country is dealing with COVID-19 crisis. As economic activity restarts across the spectrum, demand for petro products will go up too. This will give some support the Government through additional revenues from levies on diesel, petrol etc. to partially offset low direct / indirect tax collections due to overall low demand. With recent amendments, Government now has the requisite power to generate some revenues.
Interest rates will see easing because of low demand for credit in medium term. In addition, Government & RBI will also wish that credit growth starts sooner. Credit growth in long term will depend how India and other parts of globe would see recovery over two year horizon. It’s highly unlikely corporate will explore new projects in next two to three years. They will instead focus more on optimal utilization of existing capacities. Capacity additions can also come from M&A route.
Banks will have most challenging time as it navigates through crucial situations on whether or not to write down loans / advances / existing credit facilities – or – give a longer rope through debt restructuring. They will certainly go with debt restructuring instead of getting into new wave of NPAs. Very soon they will be dealing with numerous debt restructuring cases impacting their projected earnings. NBFCs providing unsecured credit will have no other option than to extend repayment schedule with hope that money comes back.
Airlines are under huge debts & losses any way. They (sector) will need some external support. Operating on lower load factors will lead to more losses. Most likely, airlines will come up with domestic code-share arrangements to optimize operations. Due to reduced scale of operations, unused / grounded aircraft will be returned to leasing companies. Demand revival will take more than a year or two. Reduced scale of airlines operations will have major impact on airports as it derived it’s revenues directly from airlines and passengers. Reduced scale of operations by airlines will have ripple effect on round handling services sector, retail & commercial as well as overall eco-system linked with aviation sector. This sector too will witness significant job-losses. Likewise, travel & tourism will also go through toughest time with lost revenues and job losses.
With significantly lower GDP growth rate, coupled with uncertainty on global front, Corporate India across board will have no choice than to reduce jobs or salaries or combination of both.
In short to medium term, all of these will put stress on Government finances. In comparison with times before COVID-19, reduction in economic activity may have visible impact on Government finances leading to rejig of priorities on overall expenditures. This will lead to deferral of some welfare schemes. Globally, current scenario is much broad-based than the 2008 US financial sector centric crisis. Back then the issue arose from specific country and others had ripple effect. This crisis is each country’s own crisis and it’s linked with human lives. Governments across globe will most likely re-implement learning from 2008 crisis & print more money (direct monetization of fiscal deficit) to fund their own schemes. In relative terms all currencies will be devalued.
For companies, the immediate challenge is to look at right sizing its resources vis-à-vis drawing up the business plan for near future. So, as long term corporate strategies will be drawn up by companies, one will have to carefully assess direction of these macro aspects as much as medium term aspects of the markets. Companies with deep pockets & healthy balance sheets will witness never before opportunity for acquisitions due to reduced valuations. However, management will have to carefully assess value it may derive from synergy of operations from such acquisition.
For citizens, life certainly be challenging in short to medium term. But, once the nation is out of inertia of zero activity – which it will – it will be relatively much easier to keep up the momentum and keep doing course correction. Recovery may not be ‘V’ shaped but eventually it will come.
Given there is global effort being done to find vaccine to deal with this. Eventually it will pass.
*Other non-economic global macro aspects which will have significant impact on future*:
As global the death toll due to COVID-19 is about to touch / cross 100,000, countries may soon seek accountability for such human and economic loss across globe. As everyone knows, its very difficult – except that there will be allegations, counter allegations and political posturing. It will be challenging to fix accountability of such pandemic in future, given we are part of connected world & society.
It’s impossible for world to keep taking large scale economic shocks all the time. With current geo-political developments, unified global response for such challenges seems difficult. In that case, will world witness major shake-up in global bodies like NATO, G20, UN and others in that list?
It will be critical to see impact of all these aspects on global pecking order and eventually on the economy of countries which has to do a fine balancing and yet conserve resources, own economy and energy as it navigates through it.
COVID-19 will have lasting impact on businesses go-forward which will trickle through these layers over period. It surely will be interesting discourse in times to come from all quarters – domestic as well as global. Let’s all stay tuned & enjoy the ride as we travel through these times and witness how it unfolds in front of us. May be history in creation!
#COVID19 #India #MacroEconomics #Strategy
Additionally, if we analyze non-economics side, deaths are happening even today for multiple reasons other than Covid-19. One also needs to look at such reasons and it’s mortality rate vis-a-vis Covid-19.
Like everyone is concern about abrupt shut down in economy, fact that Covid-19 mutation is happening faster is also truly worrying. World will endure the impact of this for a very long time.
Simply put, if the virus mutation is happening at faster rate than any of the earlier ones, the vaccines will also have to keep evolving to deal with this menace. It is not clear yet if there will always be a catch up game for medical fraternity – and – there will be new virus from COVID-19 family to hound global humanity. So, does it mean that citizens across the globe will be pushed on path of vaccines – either precautionary or as treatment?
It brings us to set of some larger questions. There can many more aspects one can deliberate as every element of our lifestyle is impacted today. Let’s cover some and as readers you are free to add more through your responses:
– Is vaccine the only way to deal with such problems in future?
– Can lifestyle incl. dietary changes boost immunity to deal with such health issues? Or lower the chances of contraction?
– Will it not become routine activity like downloading new antivirus for our computers – where humans will be mandated to take specific doses of vaccines intermittently?
– Shouldn’t countries shift focus of wider discussion on “immunity” of own citizens instead of only relying on vaccines?
– How will the dialogue play out between media houses, intellects in that domain, Government policy makers, culture influencers, sector representatives & wider citizenry?
Current transient times are perfect to discuss what’s good for citizens in long term so it improves their immunity for sustainable future. India being youngest nation with average age much lower than many developed nations, it has much at stake. Any major economic shock will have direct impact on jobs as well as footing massive healthcare bill for second largest population in the globe, both of which will prove extremely costly for the nation.
So, will countries and esp. India witness new programs which will be targeted to improve & strengthen “immunity” aspect of its citizens? What will those programs be? How will they be implemented? What will be the ingredients of those programs for successful results? How will local & global healthcare as well as fast food related sectors / affiliates / allied lobby / media etc. counter or support such thoughts / narratives?
Interesting times ahead, with slightly long journey to full recovery. Enjoy the ride. #StayHomeStaySafe #InThisTogether
Note: It’s an article summarizing possible understanding on what is happening. Views given above are not professional advice in any manner. I sincerely request readers to consult further so they can decide suitable next steps for themselves or their organizations.
