To tackle the ongoing COVID-19 pandemic the Indian government has taken several steps to flatten the curve, such as imposing a nationwide lockdown along with a complete ban on travel. The importance of these measures notwithstanding, they have brought down the economy on its knees, impacting both overall consumption and investments.

This has prompted several rating agencies to revise downward their FY 2020 GDP growth estimate for India in the range of 2.1–4.0%.The Indian economy is witnessing a significant slowdown, with GDP growth at 4.7% in Q3 2019-20, its lowest in nearly seven years. The COVID-19 outbreak has compounded the challenges and could send the economy hurtling toward a recession.

It is obvious that when the global economy is on a slowdown mode no emerging economy can grow at its normal pace. Moreover, the Indian economy was grappling with its own issues and COVID-19 made the matters worse.

India’s GDP has been on a consistent decline after peaking out at 7.9 in Q4 of FY 2018 to 4.5 in Q2 of FY 2020. The industry was facing demand problems, due to which business houses were reluctant to undertake capex plans, unemployment was at its peak and exports which were consistently down for several months.

A Glance at India’s GDP Growth in the Past Years

CountryGDP Growth in 2017 (in %)GDP Growth in 2018 (in %)GDP Growth in 2019 (in %)

The impact of the slowing economy was augmented by the pandemic which led to a contraction of around 35 percent in March as all geographical boundaries across the world were closed due to lockdown. Hence, going forward, some individual sectors of the economy can take a big hit. Let’s know more about each sector below.

Sector-wise Impact

A significant spike in Non Performing Assets for Banking and Finance

Bankers and analysts expect a significant spike in NPAs going ahead. Banks in the country are likely to witness a spike in their non-performing assets ratio by 1.9% and credit cost ratios by 130 basis point in 2020, following the economic slowdown on account of COVID-19 crisis

 The pain may not be visible immediately since the Reserve Bank of India (RBI) has extended regulatory relaxations. But, that cushion won’t be around for long.

The moratorium period will end soon and companies and individual borrowers will have to resume repayments from June. With no business happening, workforce availability remaining an issue and rampant pay cuts, it is doubtful how many borrowers will have repayment capacity, according to experts.

According to a report by ICRA, about 328 companies have sought moratorium from banks. That tells us about their financial position.

It is quite obvious that we are not going to see improvement anytime soon. The worst part is that there is no assessment on the likely impact, according to banking experts.

After a prolonged bad loan clean-up exercise, Indian banks’ total gross NPAs stood at Rs 7.97 lakh crore as of December-end compared to Rs 8.02  lakh crore a year ago.

Uncertain Times

Banks are already giving distress signals to investors. On April 28, the mood at Axis Bank’s media conference call after the bank’s Q4 results was that of high caution. There was no clear guidance from top management on what lies ahead.

If you look out of the window, all you can see is that the economic activities have come to a standstill. 

What caught analysts by surprise was the unexpected Rs.3,000 crore (out of the Rs.7,730 crore total provisions) provisions set aside to cover the likely impact of COVID-19. The signal was clear.

Not just Axis, most other banks expect the likelihood of slippages this year due to the debilitating impact of COVID-19. Private banks like HDFC Bank and ICICI Bank have presented a relatively optimistic scenario while large state-run banks are largely silent on future outlook.

It is almost certain that the industry will see a big spike in bad loans. A number of companies are feeling the heat. This stress is not reflecting so far because of the present RBI relaxations such as moratorium on loan payments. But, once this is lifted, the real picture will emerge, as per banking experts. 

According to RBI’s credit growth data, there was a spike in bank lending in March, particularly in the last fortnight of March in some sectors like non-banking finance companies and industries. But, analysts said some of this growth could be due to earlier sanctions. Still, the overall growth largely remains subdued on a YoY basis.

RBI’s  Measures So Far

The central bank has announced a slew of measures to help banks and borrowers tide over this crisis. In the first round of measures, RBI announced a 75 basis point rate cut, liquidity measures to the tune of Rs 3.74 lakh crore, including a targeted long term repo operation (TLTRO) worth Rs 1 lakh crore, deferment of interest on working capital facilities and three month moratorium for all term loans extended by lending institutions. In the second round, it announced TLTRO 2.0 worth Rs 50,000 crore, specifically targeting small companies.

No Buyers for Stressed Assets?

The last credit cycle for banks had seen a sharp surge in bad loans. Indian banks are at the end of a prolonged NPAs clean-up cycle. The hidden stock of bad loans buried deep in the balance sheets, accumulated over the years of the easy money era, prompted the RBI to initiate an Asset Quality Review (AQR) in 2015. By now, that process is almost over with banks having disclosed most of the problematic large corporate accounts. Many large cases of corporate loan defaults have been pushed to the Insolvency and Bankruptcy Code (IBC) court for quicker resolution.

But, with the economic activities reduced to nil, it is highly unlikely that there will be buyers for stressed assets, bankers said. In the last round, certain large deals such as Rs.35,000 crore Tata Steel-Bhushan helped bankers recoup some losses.

Among the loan categories, fresh loans given to companies including those given to small and medium enterprises (SMEs) face risk if the cash flows of companies remain under pressure, thus impacting their loan repayment ability, bankers said.

Tedious Road Ahead for Travel &  Tourism and Entertainment

The travel & tourism industry was one of the first sectors to be affected by the outbreak, and most likely will also be the hardest hit. The Indian Association of Tour Operators (IATO) estimates the hotel, travel and aviation sectors to incur losses of up to Rs 8,500 crores due to travel restrictions imposed on foreign tourists.

The drop in numbers is already affecting several small and mid-sized players in the tour operating and ticketing space. Liquidity crunch would most likely result in significant job losses in the next few months. 

Cancellation of tickets, refunds and low utilization rate of airlines have made matters worse for the already distressed aviation industry in the midst of a cash crunch. The industry association is seeking relief in the form of tax cuts, deferment of GST payment, the addition of jet fuel under GST, reduction in airport charges, a temporary cut in excise duty on jet fuel, and other financial aid to cushion the impact.

The Events and Entertainment Management Association (EEMA) has requested for aid to support its 60 million employees in the wake of postponement or cancellation of all major national events due to the pandemic. The industry has a huge section of blue-collared workers on daily wages, whose livelihood is at risk due to the nationwide lockdown.

The popular movie industry is not behind. All major releases and shooting of films have been put on hold. The Indian cinema industry will likely face a loss of Rs.200–250 crores over the next 2–3 months.

With social distancing becoming a norm, at least for the next few months, both travel & tourism and entertainment sectors are not expected to recover soon. Furthermore, unemployment and fall in income levels would aggravate the situation.     

Auto Industry to Witness Massive Revenue Loss Due to Disruption in Supply Chain Globally

The automotive sector is feeling the pinch too. In passenger cars alone, the lockdown is estimated to have reduced production by 240,000 units (10% of total annual production). Each day of loss of production is causing the industry a loss of over Rs.2,300 crores in revenue on average, aggregating to over Rs.48,700 crores (2% of total automotive industry revenue) over 21 days.

After the lockdown is lifted, financial compulsions and low sentiment may drive roughly 35–40% of consumers to defer their vehicle purchase decisions for the next six months (until September 2020). Hence, annual sales of light motor vehicles and motorcycles are estimated to fall by 4.2 million units in 2020.

The spread of the pandemic globally had a whiplash effect across the supply chain. Automotive manufacturers in India depend highly on auto components imported from COVID-19-affected countries such as China, Germany and South Korea. This factor too will adversely impact production.

Low Asset Utilization Rate in Logistics and Ports

With the movement of people/passengers restricted amid the lockdown, revenues have taken a hit in the railways, bus, airline, and cab segments of the transportation sector.

In essential commodities, the Indian government has taken various measures for swift movement of freight across the country. However, players in the logistics sector are struggling to service needs as supply chains across industries have been disrupted. Furthermore, output in factories has decreased dramatically and fewer trucks are on the road. Due to the unavailability of staff, last-mile storage and distribution are also suffering.

Activity at seaports has ceased with a decline in export-import trade. Other issues affecting the sector are slow custom clearance, the inability of clearing and forwarding (C&F) agents to play the required cargo from ports to CFS/ICD, and time-consuming manual stuffing and de-stuffing of containers and documentation/cargo handling.

Rail freight has been affected as the demand and supply of high volume bulk cargo items (such as imported coal for power plants or iron ore exported via rail to various ports in India for steel mills in China) are subdued.

Road freight: According to IFTRT, 50% of the 50 Lakh trucks are off the road due to the unavailability of drivers who fear being stranded as road-side services (restaurants, repair shops) have been crippled.

The impact on the sector would be long-term, reflected in the decline in revenue due to the low utilization of assets. Cash flows and working capital of firms in these businesses will also remain strained.

FMCG and Retail Players on a War Footing; Foodservice and Institutional Business Decimated

Since the imposition of the nationwide lockdown, FMCG companies and retailers are dealing with challenges primarily around three highly interconnected issues: surge in demand & depletion of inventory, reduction in workforce, and supply chain disruption.

Panic-induced stockpiling meant supermarket shelves were getting empty faster than they could be replenished. Both traditional and modern retailers bore the brunt, with the likes of DMart, Big Bazaar and Nature’s Basket eventually having to reduce working hours, put limits on the purchase of essential items (like eggs, milk, flour, etc.), or in some cases, even close down for a few days. E-commerce operations of major brick & mortar retailers as well as Amazon and Flipkart were not spared either.

As retailers struggle to deliver orders, innovative delivery models are emerging. Some examples are Big Basket and Flipkart tying up with Uber and Swiggy for last-mile delivery of essential items, Zomato launching Zomato Market service to deliver groceries from retail stores, and ITC partnering with Domino’s Pizza for zero contact delivery of Aashirvaad brand of atta and spices.

The lockdown has led to the migration of workers to their homes in rural areas, causing a shortage of labourers and, thereby, disruption of supply chains. To contain the impact, some retailers (GROFERS and Spencer’s Retail) are adopting reverse supply chain mechanism, i.e., sending their own trucks and workers to pick goods from distribution centers, while others (DMart and Metro Cash & Carry) are offering additional incentives (Rs.400–500 per day) to their workers.

The decision of FMCG players such as HUL, Godrej, and ITC to restart production of essential goods at select plants, albeit at reduced utilization rates, is a welcome step. However, they need to prepare better to address issues likely to emerge in the medium term.

Restrictions on travel and hospitality services have wreaked havoc on the bulk institutional sales and foodservice businesses of these FMCG companies.

Way Forward: Implications for Companies

The pandemic has paralyzed economies, compelling businesses to re-evaluate their strategies. Companies will need to build their financial muscle and focus on developing a lean structure to stir through the uncertain business environment.

The global nature of the outbreak, coupled with its high intensity and long duration, is expected to change the business landscape by way of shift in trade flows, investments and consumption patterns. Hence, the priority for businesses should be to draft a comprehensive action and recovery plan to mitigate the risks and address the main challenges.

Conclusion: An outbreak of COVID-19 impacted the whole world and has been felt across industries. The outbreak is declared as a national emergency by the World Health Organisation. In India, the three major contributors to GDP namely private consumption, investment and external trade will all get affected. World and Indian economy are attempting to mitigate the health risks of COVID-19 with the economic risks and necessary measures needed will be taken to improve it.