Even as India’s economy has been battling a deceleration for the past many months, the COVID-19 outbreak has only added to the overall slowdown. The nationwide 21-day lockdown has brought economic activity to a standstill and is set to adversely impact both consumption and investment.
The latest report by KPMG has said that private consumption, investment and external trade—the main drivers of GDP—will get affected due to COVID-19.
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The KPMG report has explained the economic effects of coronavirus using three scenarios.
- First Scenario: The GDP growth of India and the world will get into the recovery mode only sometime in mid-May after the closures end. The economy will be able to then work on sustaining higher levels of growth. India’s growth for 2020-21 may be in range of 5.3 to 5.7%.
- Second Scenario: India is able to control COVID-19 spread but there is a significant global recession. In this case, India will find it tough to sustain its current levels of Real GDP growth which is around 4.7 %. India’s growth could go down to the 4-4.5 percent range.
- Third Scenario: This is the worst-case scenario where COVID-19 spreads within India and lockdown gets extended while there is a global recession. This will be a double whammy as it will not only disrupt the domestic economy but also cause destruction on a global scale. India’s growth rate may fall below 3 percent then.
Let’s take a look at the key sectors of the Indian economy and the impact of this crisis on them:
- First and foremost, the informal economy which constitutes over 90% of the economy will suffer the most due to lack of cash inflows. The government’s fiscal stimulus plan may help in riding over the crisis to some extent. About 37% of regular wage/salaried employees in India are informal workers who will face the brunt of this pandemic.
- The construction and real estate sector which contributes about 8% of the total GDP, may suffer as demand for new projects would be stopped. New launches may be postponed in a sector that is already suffering due to the NBFC crisis and economic slowdown. Industries such as cement, steel, hospitality and retail etc will suffer due to this halt.
- The Food and Agriculture sector may also be impacted as various food processing industries remain shut. However, since this sector comes under essential services during the lockdown the effect is likely to be recovered due to the increased demand.
- Exports will definitely suffer as many tariffs and non-tariff barriers are strengthened and economies look inward. With a sharp decline in global demand and many nations resorting to a travel ban the impact on exports is going to be difficult to revive from.
- The banking and financial sector which is already under pressure will further suffer due to delayed repayment of loans as announced by the RBI. However, the demand for cash can incentivise financial market.
- The apparels and textiles sector which is one of the main provider of employment opportunities will see a decline in growth due to the outbreak. The sector may decline by 10-12% in the current quarter while the cotton prices have been reduced to 3%. India is the main exporter of textiles around the world. With the lack of raw materials from China and the government’s ban on industrial textiles, the sector will find it tough to come back to normal.