Top 5 Sectors to be Affected in India due to Covid-19

The world is now stuck on the edge of Covid-19 and it may flip to a kafkaesque future any moment. The world-wide lockdown and restrictions have brought the economy, production and movement of goods to a stand-still. The country wide lock down in India has been extended till 3rd May and normalcy still is a distant future. As per Barclays Research, the loss of output due to shuttered factories and closed offices works out to about $26 billion per week which amount to Rs 12 lakh crore for a 6-week lock-down. As per World Bank, India’s economy is expected to grow at 1.5% to 2.8% in 2020-21 fiscal year. This will be the slowest growth rate since 1991 economic reforms.

This is my 2nd article on Covid-19 and will focus on top 5 sectors that might get heavily affected due to Covid-19 pandemic. This one took almost a week to complete due to the time limitations at my side, but I hope this will give the reader a brief insight at least. The numbers are not validated as these are fetched from multiple sources and had been brought to single baseline of Indian rupee. Suggest you to use own judgment wherever required.

1.      Travel and hospitality sector: Hospitality sector will be the most affected sector due to the pandemic.

• The coronavirus pandemic would have a debilitating impact on India’s tourism sector with the industry estimating an overall loss of Rs 5 lakh crore(as per The national federation of 10 tourism, travel and hospitality organisations of India, FAITH).
• Of the total losses, the organised sector in the industry -- branded hotels, tour operators, travel agencies which are the mainstay of the sector – may be hit the hardest with an estimated loss of around Rs 1.58 lakh crore, according to Confederation of Indian Industry estimates.
• Indian Association of Tour Operators(IATO) estimates hotel, aviation and travel sector may incus loss of about Rs 8500 crore due to travel restrictions imposed on foreign tourists.
• The industry body has said that branded hotel groups are set to lose as much as Rs 1.10 lakh crore, online travel agencies Rs 4,312 crore, tour operators (inbound and domestic) Rs 25,000 crore, adventure tour operators Rs nearly 19,000 crore and cruise tourism Rs 419 crore.
• As per the World Economic Forum (WEF), the coronavirus pandemic is putting up to 50 million jobs in the global travel and tourism sector at risk. Of the 50 million jobs that could be lost, around 30 million would be in Asia.

Outbound and inbound travel to India is going to be at all time low. Out of 43 million employed in this sector, almost 70% might see an impact on their jobs partially or fully. Once the lock-down is lifted, it will still take another 4-5 months for people to travel comfortably. The hotel bookings, activity and event bookings and packages bookings will see a hit and year 2020 will reflect the lowest leisure bookings in last one decade or so. Dining out and restaurant business also will see a dip in the customer turn out and revenue generation. 

2. Aviation Sector: Aviation and airline industry is going to be the second most affected due to Covid-19. This being the summer vacation period and pick travel time has just made the misery worse. As per aviation consultancy firm Centre for Asia Pacific Aviation (CAPA), India’s aviation industry is expected to post losses of $3-3.6 billion(approx. Rs 25 thousand crore) in the June quarter because of covid-19, with airlines sharing the bulk of the hit. Airlines might have to bear almost 70% of the hit. The 40-day long lock down across countries and ban on international flights will result in below additional cost:

• Cancellation cost of the scheduled flights(Though most airlines are giving credit shell to ensure cash liquidity and customer retention, but recent notice by government to refund full to the customers might be a big blow for the industry.)
• Staff cost (Though most operating on reduced staffs and some have mandated Non-paid leaves for their staffs, still 40 days is a long period on the operational cost front.)
• Airport charges (For holding up the flights during lockdown)
• One time maintenance cost of flights while resume of service
• Uncertain date of operational resumption (As the date is uncertain, so first few days after the operation resume, the industry might see less bookings and might have to operate at reduced capacity
• Borrowing cost(Due to future liquidity crunch, the airlines will have to borrow cash and it will add additional lending cost.)

A snapshot of the demand recovery curve by BCG for the aviation sector

3. Automotive sector: The high dependency on China for auto parts and accessories might affect automotive sector heavily. Disruption in Chinese parts exports (25% import from China) and manufacturing interruptions across Europe and rest of the world will heavily impact the sector. A few other negative side of the 40-days lock-down are:

• Reduction in demand
• Low after sales service
• Liquidity crunch for manufacturers
• Disrupted supply chain

40 million people are employed across the sector in India. Shut down of assembly units and supply chain gives these people no other option. Vehicle sales in India fell to almost half in March from a year earlier due to the lockdown and will fall harder in April as the industry has almost been at a complete standstill since 24th March.

• According to SIAM’s estimates, the domestic automotive industry is losing Rs 2,300 crore in production turnover for every day of closure. That amounts to Rs 92 thousand crore for a 40-days lockdown.
• Further, with BS-VI sales mandated from 10 days after lockdown ends, dealers face significant burden to liquidate unsold BS-IV inventory, worth Rs 6,300 Crore.

4.      Financial and banking sector: With a recession just knocking at the door, if time like this is not governed rightly by the central bodies of the financial sector, it might lead to a catastrophic hazard for the nation. The below risks must be addressed with proper mitigation plan.

• Operational risk
• Financial risk
• Regulatory compliance risk
• Cyber threats and Frauds
• Liquidity Risk
• Credit Risk
• Market risk

There is a high chance of worsening of credit risk and increase of bad loans and NPAs. The market also might show a sporadic trend. 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% 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. The major issue will be not having enough cash and increasing liquidity risk. Smaller private banks might get hit heavily and this might lead to further consolidation and merger of banks. The resilience of banks' asset quality in 2020 will depend on the success of governments' and regulators' policy responses.

The RBI in its seventh bi-monthly monetary policy announced on March 27, reduced the repo rate by 75 basis points to 4.40 per cent. It announced to provide Rs 3.74 lakh crore liquidity to banks through reduction in cash reserve ratio, by conducting targeted long term repos operations (TLTRO) and by increasing the limit for marginal standing facility (MSF) to 3%.

If banks and capital markets firms respond well to these unprecedented challenges, they will not only help society, but also increase trust and the reputation of the banking industry in the long run. Some of the areas the sector need to invest in are revisions to the operating model, acceleration of digital transformation, organizational agility and increased focus on cyber security. Digital payments and digital banking might see a large jump in near future. A number of regulations are expected on the banking industry way of remote working and cyber safety.

5.      Real estate Sector: National real Estate Development Council has estimated the loss in at 1 lakh crore on a conservative basis for 21 days. For 40-days, it may exceed 2.5 lakh crore. Developers anticipate increase in raw material cost, but they may not be able to pass that on to buyers in the current market situation. With production in China going down, the prices of imported items like steel and iron products, technical construction equipment as well as plastic and fiber elements may rise, increasing costs and reducing profit margins for developers in India. There might be a job loss of around 30% in the sector and labour force might get heavily affected due to lockdown and social distancing norms. Real estate sales might drop in next 3-4 months. Liquidity crunch will be an issue for the sector.

The other major affected sectors are:

Insurance Sector: As claim ratio is expected to go high due to normal life abruption during 40-days lockdown. As a result, the premium might increase for future insurance policies.

Oil and Gas: Petrol and alcohol are two major sources of revenue for the government. The 40-day lockdown gas brought the movement to a stand-still and petrol consumption to minimal. In US, recently crude oil future price has dropped negative due to the drop in demand and holding cost of the oil producers. The negative finish meant the holder of a long position would be required to pay someone to take that contract off their hands. A sharp V-shaped recovery following emergence from lockdown that causes a surge in demand could change the picture in future. Though in India, a similar impact is highly unlikely, but there will be a huge revenue loss to government. All those effort of the government on holding onto the price when barrel price has dropped to approx. $20 globally will all go in vain.

Steel Manufacturing: Due to 40-days shut down across country, production is stopped. While resuming the production, a thorough maintenance will be required of the production line due to long shutdowns. Here are a few factors that are going to affect Steel manufacturing

• Wastage of Chemicals due to shutdown of production line
• Zero output for 40 days
• High maintenance while resuming production
• Disrupted power distribution
• Supply chain network(both inbound and outbound)
• Dependency on external countries

Fertilizer & Pharmaceutical Sector: China is a major import source for India amounting to almost 70% among the Covid-19 infected nations. In India, almost 31% of the Fertilizer segment and almost 38% organic chemicals are imported from China. China also a major source of pharmaceutical ingredients for India. Change in trade practices will impact the above segment heavily.

Education and Skilling: 2020 batch might face a similar scenario to 2009 batch with market downturn and high unemployment rate. This will impact the sector the below mentioned ways.

• Cancellation of Job offer, placements, internships
• Higher unemployment
• Delayed course structure
• More online / digital learning
• Constraints in digital content, technology and delivery platforms
• New admissions to be impacted

Add-Ons:

In case of a recession in India, it will mostly follow a U-shaped curve to recover from the economy shock.

Here is a report by McKinsey on the industries and jobs that are going to be most affected. Though the below trend refers to US, for India also a similar pattern is expected. 

Hope you liked the article. Thank you for making it till here. Let me know in comment what do you think the after-effects of Covid-19 for India and which sectors and jobs will be most affected? 

#covid19 #impactonindianeconomy #covid19impact #affectedsectors #Indianeconomy

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References:

Websites:

• https://www.livemint.com/
• https://economictimes.indiatimes.com/
• https://www.businesstimes.com.sg/
• https://www2.deloitte.com/global/en/pages/about-deloitte/articles/covid-19-insights-collection-by-sectors.html?icid=covid-19_article-nav-collection-by-sectors
• https://hbr.org/

Articles:

• Potential impact of covid-19 on the Indian economy by KPMG, Apr 2020
• Lives and livelihoods: Assessing the near-term impact of COVID-19 on US workers by McKinsey, Apr 2020
• Impact of Covid-19 on Indian Economy by FICCI, Mar 2020
• Understanding the sector impact of COVID-19 on Real estate sector by Deloitte, Mar 2020
• Understanding the sector impact of COVID-19 on Automotive Sector by Deloitte, Mar 2020
• Understanding the sector impact of COVID-19 on Banking and Capital Markets by Deloitte, Mar 2020