Covid-19: The Effect on an Economy
As the world feared Covid-19 effect since December 2019, India has been on front foot in terms of predicting the impact of epidemic and protecting its citizens. Every precaution was taken by authorities to curb the spread that started from China and affected the world, especially the Western Countries. Indian impact was delayed as compared to the world, but slowly, the effects started to show on Indian Markets when on 27th Feb, Nifty broke it crucial support of 11508. On 5th March, when there was a sudden spike in active cases of Covid-19 (+22 cases in a day), Nifty broke its 11000 level and from there, markets witness a freefall and the bears entered the markets.
Every sector has been affected thoroughly by this pandemic. Certain sectors have taken a deep hit in terms of returns generated, although some sectors have also recovered quickly after some news. Here is the effect of Coronavirus on Major Sectors of the National Stock Exchange.
Disclaimer: All data is as of 31st March 2020
1) Bank and Financial Services ( 36.51% Weightage of Nifty 50)
The sector that constitutes highest to Nifty 50 has been affected the most during Covid-19. As the fear of virus spread rose as of early 2020, people began to pile up cash and bought gold as safe sources of investment. Retail customers will shift their savings from small lenders to large lenders such as HDFC Bank and Kotak Mahindra Bank. What hit big to the financial sector was increase in NPAs and Credit Costs that was bought by the lockdown. PSU banks already had a large exposure to corporate financing which was already in negative, but now, due to the Covid-19, the retail banking business was also hit as their customers had now money to pay back their EMI on time.
2) IT Sector (15.03% Weightage of Nifty 50)
Indian IT sector has been playing a major role in the growth Indian Economy. IT sector has been providing employment and has key business in International Markets. USA is biggest IT client for India in the world. At present, Coronavirus has affected USA the worst. USA has registered 455000+ cases of Covid-19. Indian IT multinational companies such TCS and Infosys have big multinational companies as their clients. Some of the TCS clients include Cisco, Vodafone, WallMart, Nokia, Royal Bank of Scotland, British Telecom, SBI, Experian, Tata McGraw Hill, JP Morgan and Citibank. The IT Sector won’t be much profitable on its domestic business as compared to its international businesses.
3) FMCG/Consumer Goods (14.46% Weightage of Nifty 50)
This sector is not the unaffected one, but is surely the least affected one. FMCG stocks were also facing the issues what rest others were dealing with, but as soon the Prime Minister announced the complete lockdown of India, the sector spiked up. FMCG sector stocks have almost recovered what they had gone through during the first two months of 2020. When an entire country gets locked down at home for 21 days, all they need is groceries. Since the companies keep inventory of at least 2 months, they could supply the demands of consumers, hence keeping the business tight and running.
On 23rd March 2020, the PM of India announced a lockdown of 21 days and from there, the FMCG recovered quickly.
4) Oil and Gas Sector (12.44% Weightage of Nifty 50)
Nifty Energy stocks faced the heat of pandemic as Crude Rates were falling down. The rates were falling down following China’s lockdown. China, being the largest importer of crude, stopped buying Crude which caused excess supply in the market. As rates were falling, the bottom was hit which was around $19 per barrel. Lower Crude price could be a better sign for Indian economy but there was no demand for crude because of the arising fear of Covid-19. Since the lockdown started, almost everyone stayed at home, which resulted in no demand for Petrol and Diesel, a product of crude oil.
5) Automobile (4.53% Weightage of Nifty 50)
Probably the worst hit sector of Indian Markets. Auto sector was already having its negative growth rate due to the economic slowdown during the year 2019 and this negative growth was further pushed by Covid-19. Auto Companies have inventory filled but no buyers for their products as everyone is looking forward to manage their cash. Another problem for Auto Companies is their BS IV vehicles which have gone unsold. For eg. Hero MotoCorp has 1.5 lakh units of unsold BS IV inventory. Also, China shutting down its factories have bought concerns for Indian Auto Companies as most of the parts for the automobile comes from China.
As we can see here, the bigger box shows the economic slowdown period where Auto Sector was facing hardships. This was around August 2018 to November 2019. After the slowdown, what came next was Covid-19 Pandemic, which took the Auto Sector to a free fall since December 2019.
6) Pharma, Metal, Realty and Media Sector
Nifty Realty and Metal stocks were also down during this year. As there were no buyer for properties, realty stocks fell down. Also, world’s leading importer of Steel, the USA and European Union could not stop the mass spreading of Covid-19, which affected Indian Metal Sector. India ranks second in crude steel producing in the world after China. Pharma and Media stocks showed slowdown effect, but a short recovery was witnessed in them after the Prime Minister of India announced a 21 days lockdown and India also started to test the vaccines of Covid-19. Pharma stocks have witnessed a short rally after demand in they were given approval for vaccine testing. Hydroxychloroquine has shown positive effects on Coronavirus. India is the largest producer of Hydroxychloroquine and has now started to export to countries in need. Power Stocks such as Powergrid, Torrent Power and NHPC also showed some improvements in their prices after the lockdown was imposed. Telecommunication stocks such as Idea and Bharti Airtel have also shown slight improvements in prices after lockdown.
Steps that can be taken for revival of Economy
As every economist says, the next two months, i.e May and June will be crucial for the Indian Economy as Sale and Festive Season will start. Businesses and Government will closely monitor the amount of sales. As of now, the consumer has been drained out and has practically has no cash in hand. Government should pump cash into hands of people. Reduction in rate of interest for loans will encourage consumers to buy durable goods. Auto sector needs this boost to revive itself. RBI’s loan moratorium could be benefitable for borrowers in terms of flexibility of personal finance. Although, the rate of interest which would be charged for using the benefit is pushing back borrowers from opting it. RBI should look into it and restrict banks from charging interest. RBI could reduce repo rate or infuse cash to banks so that banks may not face any cash imbalance due to loan moratorium. Further tax relief from government will also help to boost economy. As Government plans to borrow more from markets, spending more on revenue projects should be done. This would generate both employment and bring income to government. The Centre should also compensate for the unorganized sector living on daily wages. Businesses which have fired or suspended their employees, Government should share their burden. NBFCs should be provided with additional liquidity so that lending could be kept going on. Healthcare should be focused more on next year’s budget so that India could be prepared for further pandemics. Government should push its Make-In-India initiative, as it could be the right time for global companies to invest in India and India being the next Manufacturing Hub. MSME loans could be delayed or relieved as they are badly affected after slowdown and now Covid-19.
Companies affected post Covid-19
- Financial Sector
Big Private lenders such as HDFC Bank and ICICI bank would show positive growth after Covid-19 as the retail consumers will borrow more and also start depositing in banks. However, PSU Banks which hav a good amount of Corporate Exposure, would still go through the effect of Covid-19 for the next 5-6 months in order to completely revive itself.
Bad loans and NPAs would be a major concern for banks. From a banking perspective, travel, which forms 2.2 per cent of all loans and small business lending that accounts for 5.4 per cent will be the hardest hit, along with sectors such as auto that depend on inputs from China.
- IT Sector
Post Covid-19, IT sector would see a major positive impact on its business. Following its multinational business model and currency fluctuations, big IT business such as TCS, Infosys and Wipro will be major boost. These large caps will carry the entire IT sector and boost the overall performance.
- FMCG and Consumer Durable Goods
If the government implemented financial stimulus shows its effects positively, FMCG and Consumer Goods will see boost in the next two to three months as the festive season would kickstart and consumers would buy more goods. Supply will be increased due to increase in demand, which will profit the businesses. Currently, FMCG stocks are performing vey well due to the lockdown effect.
- Pharma and Health Insurance Sector
Covid-19 has bought a major boost to Pharma sector. All companies are in effect to find the vaccine to coronavirus. They are also producing medicines which are in shortage and other medicines which are exported to other countries such as Hydroxychloroquine. Post Covid-19, people will start buying health insurances to protect themselves and their family in case of future epidemics or problems. This will boost health insurance sector. The insurance sector of India is under explored, therefore, it has a huge potential to grow for the second most populated country in the world.
- Auto Sector
Auto Sector would still continue to grow slow for atleast 6 months post Covid-19. People would prefer to transport via public transport or through cab services like OLA and Uber. Buying a vehicle would mean heavy cash outflow from a retail point of view. People won’t prefer to spend huge chunk of their money or buy additional loan to buy cars. Manufacturing halt in China is also a problem for Auto Sector as most parts come from China.
- Tourism and Hotels
Tourism and Hotels business will be on low point for atleast a year. People won’t spend their savings for travelling both in domestic and international. Around 70% of Indian tourism sector is affected badly. Tourism and Hotels sector could grow positively after May 2021. Aviation sector will also show less or no growth due to reduction in tourism.
- Oil and Gas Sector
Constant falling crude prices at global markets could bring positive impacts to Indian Economy as India majorly imports most of its oil from other countries.
- Agriculture and Transport
India’s primary sector, Agriculture, would see a tremendous growth due to increase in demand of food. As more people are staying at home, they are consuming more. Also for the unorganized people, government is buying additional agricultural products from its pocket which leads to additional demand in the agriculture sector.
What companies should do post Covid-19 for revival?
For any company in any sector, it is important to get back on track. Since the companies have hit the bottom low during the pandemic, they should now borrow money from markets for a medium horizon period and multiply their workforce. Efficiency should be increased. The companies should analyze the consumer trend and manufacture accordingly. Interest for loans would be deducted by the banks, so MSME can borrow from banks as well. Companies should try to manufacture goods locally to generate employment for local people. Focus on core competencies should be an objective for business rather than diversification. Companies should realize that this is the right time to get loyal customers because everyone is scattered by the pandemic effect. Loyal customers are always the greatest asset of the company. Banks should give loans to individual retailers at low rate of interest without high margin to infuse liquidity. Cash in customer’s hand is very important for revival of economy.
What can Citizens and Consumers do for the revival of the economy?
People should understand that the Covid-19 pandemic has hit world economy very hard. Every country has suffered more or less equally. In this situation, India’s homegrown companies have an opportunity to expand. If people will buy the goods manufactured by these companies, it will ultimately benefit their own country as more employment will be generated. People should invest in markets by buying shares of good listed companies and avoid relying just on gold. This will be beneficial for both the investor and the business. Panic buying and selling should be avoided and investors should be aware of all news related to markets. Citizens should focus more on educational services so that more creativity and innovation can take place. Employees should join Indian Companies or try to improve the quality of work at the current company. Timely payment of taxes can also help in boosting the economy. BUY INDIAN should always be priority. People should also start their own business so as to earn profit and generate employment.
It could be said that Covid-19 has bought India a great opportunity to expand on global level. Companies have started to move out of China. India has the strength of labor and demography. India would grow at a faster rate than the rest of the world once Covid-19 pandemic comes to an end.
Nifty 50 has touched its bottom. Buying Mutual funds SIP in small amounts or investing directly in large cap stocks in small amounts would generate good profit in the next one and half year.
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